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As filed with the Securities and Exchange Commission on November 16, 2007

Registration No. 333-            

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

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Xinyuan Real Estate Co., Ltd.

(Exact name of registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

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Cayman Islands		1520		Not Applicable
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

No. 18 Xinyuan Road

Zhengzhou, Henan 450011

People’s Republic of China

(86) 371 6565 1600

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

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CT Corporation System

111 Eighth Avenue

New York, New York 10011

(212) 664-1666

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

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Copies to:

 

Scott Clemens, Esq. Baker & McKenzie LLP Suite 3401, China World Tower 2, China World Trade Center, 1 Jianguomenwai Dajie, Beijing 100004, PRC		Roslyn Tom, Esq. Baker & McKenzie LLP 1114 Avenue of the Americas New York, NY 10036		Matthew Bersani, Esq. Shearman & Sterling LLP 12/F, Gloucester Tower The Landmark 15 Queen’s Road Central Central Hong Kong, PRC

 

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Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨            

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨             

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨             

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering.  ¨             

 

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CALCULATION OF REGISTRATION FEE

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Title of each class of securities to be registered		Proposed Maximum Aggregate Offering Price(3)			Amount of Registration Fee
Common shares, par value $0.0001 per common share(1)(2)		$	299,500,000		$	9,195

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(1)

American depositary shares issuable upon deposit of the common shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-                     ). Each American depositary share represents                      common shares.

(2)

Includes common shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes common shares that may be purchased by the underwriters pursuant to an over-allotment option. These common shares are not being registered for the purpose of sales outside the United States.

(3)

Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated                     , 2007

American Depositary Shares

Xinyuan Real Estate Co., Ltd.

Representing              Common Shares

 

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This is our initial public offering. We are offering                      American depositary shares, or ADSs. Each ADS represents
                     of our common shares, par value US$0.0001 per share.

We expect the public offering price to be between US$             and US$             per ADS. Currently no public market exists for the ADSs or our common shares. Our ADSs have been approved for listing on the New York Stock Exchange under the symbol “XIN.”

Investing in the ADSs involves risks that are described in the “ Risk Factors” section beginning on page 11 of this prospectus.

 

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		Per ADS		Total
Public offering price		$		$
Underwriting discount		$		$
Proceeds to us before expenses		$		$

The underwriters may also purchase up to an additional              ADSs from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The ADSs will be ready for delivery on or about                     , 2007.

 

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Merrill Lynch & Co.

 

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Deutsche Bank Securities		Allen & Company LLC

The date of this prospectus is                     , 2007.

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TABLE OF CONTENTS

		Page
Prospectus Summary		1
Our Summary Consolidated Financial and Operating Data		9
Risk Factors		11
Special Note Regarding Forward-Looking Statements		32
Use of Proceeds		33
Dividend Policy		34
Exchange Rates		35
Capitalization		36
Dilution		38
Selected Consolidated Financial and Operating Data		40
Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
Our Industry		80
Our Corporate History and Structure		87
Business		89
Regulation		110
Management		124
Principal Shareholders		133
Related Party Transactions		135
Description of Share Capital		139
Description of American Depositary Shares		145
Shares Eligible for Future Sale		155
Description of Debt and Equity-Linked Securities		157
Taxation		161
Underwriting		165
Enforceability of Civil Liabilities		173
Expenses Relating to this Offering		174
Legal Matters		174
Experts		174
Where You Can Find Additional Information		175
Index to Consolidated Financial Statements		F-1

 

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You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

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RISK FACTORS

An investment in our ADSs involves significant risks. You should consider carefully all the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Our business, results of operations, financial condition or prospects could be adversely affected if any of these risks actually occur. As a result, the market price of our ADSs could decline and you could lose all or part of your investment. The risks described below are those known to us and that we currently believe may materially affect us.

Risks Relating to Our Business

If we are unable to successfully manage our expansion into other Tier II cities, we will not be able to execute our business plan.

Historically, our business and operations have been concentrated in Zhengzhou. Since 2006, we have been expanding our residential property development operations into other Tier II cities, including Chengdu in Sichuan Province, Hefei in Anhui Province, Jinan in Shandong Province and Suzhou in Jiangsu Province. We plan to expand into other Tier II cities as suitable opportunities arise. The development of real estate projects outside Zhengzhou will impose significant demands on our management and other operational resources. Moreover, we will face additional competition, and will need to establish brand recognition and market acceptance for our developments, in these new markets. Each of these Tier II cities has its own market conditions, customer requirements and local regulations related to the real estate industry. If we are unable to successfully develop and sell projects outside Zhengzhou, our future growth may be limited and we may not generate adequate returns to cover our investments in these Tier II cities. In addition, as we expand our operations to Tier II cities with higher land prices, our costs may increase, which may lead to a decrease in our profit margin.

We require substantial capital resources to fund our land use rights acquisition and property developments, which may not be available.

Property development is capital intensive. To date, we have funded our projects primarily through bank borrowings, shareholder loans, proceeds from sales and pre-sales of our properties and proceeds from issuance of equity and debt securities. Our ability to secure sufficient financing for land use rights acquisition and property development depends on a number of factors that are beyond our control, including market conditions in the capital markets, investors’ perception of our securities, lenders’ perceptions of our creditworthiness, the PRC economy and the PRC government regulations that affect the availability and cost of financing for real estate companies.

Various PRC regulations restrict our ability to raise capital through external financing and other methods, including, without limitation, the following:

 

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we cannot pre-sell uncompleted residential units in a project prior to achieving certain development milestones specified in related regulations;

 

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PRC banks are prohibited from extending loans to real estate companies to fund the purchase of land use rights;

 

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we cannot borrow from a PRC bank for a particular project unless we fund at least 35% of the total investment amount of that project from our own capital;

 

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we cannot borrow from a PRC bank for a particular project if we do not obtain the land use rights certificate for that project;

 

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property developers are strictly restricted from using the proceeds from a loan obtained from a local bank to fund property developments outside the region where that bank is located; and

 

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PRC banks are prohibited from accepting properties that have been vacant for more than three years as collateral for loans.

In addition, the People’s Bank of China, or the PBOC, has increased the reserve requirement ratio for commercial banks several times since July 5, 2006, raising it from 7.5% as of that date to the current 12.0%. The reserve requirement ratio refers to the amount of funds that banks must hold in reserve against deposits made by their customers. These increases in the reserve requirement ratio have reduced the amount of commercial bank credit available to businesses in China, including us.

The PRC government may introduce other measures that limit our access to additional capital. For instance, on July 10, 2007, State Administration of Foreign Exchange, or SAFE, issued a circular restricting a foreign invested property developer’s ability to raise capital through foreign debt, if such developer is established after June 1, 2007 or increases its registered capital after June 1, 2007. Under this circular, our ability to utilize the proceeds of this offering to provide funding to our PRC operations is significantly limited. We cannot assure you that we will be able to obtain sufficient funding to finance intended purchases of land use rights, develop future projects or meet other capital needs as and when required at a commercially reasonable cost or at all. Failure to obtain adequate funding at a commercially reasonable cost may limit our ability to commence new projects or to continue the development of existing projects or may increase our borrowing costs.

We may be unable to acquire desired development sites at commercially reasonable costs.

Our revenue depends on the completion and sale of our projects, which in turn depends on our ability to acquire development sites. Our land use rights costs are a major component of our cost of real estate sales and increases in such costs could diminish our gross margin. In China, the PRC government controls the supply of land and regulates land sales and transfers in the secondary market. As a result, the policies of the PRC government, including those related to land supply and urban planning, affect our ability to acquire, and our costs of acquiring, land use rights for our projects. In recent years, the government has introduced various measures in attempts to moderate investment in the property market in China. Although we believe that these measures are generally targeted at the luxury property market and speculative purchases of land and properties, we cannot assure you that the PRC government will not introduce other measures in the future that adversely affect our ability to obtain land for development. We currently acquire our development sites primarily by bidding for government land. Under current regulations, land use rights acquired from government authorities for commercial and residential development purposes must be purchased through a public tender, auction or listing-for-sale. Competition in these bidding processes has resulted in higher land use rights costs for us. Land use rights costs as a percentage of our cost of revenue have increased from 22.8% in 2004 to 30.0% in 2006. In the nine months ended September 30, 2007, land use rights costs as a percentage of our cost of revenue was 37.2%. We expect that our land use rights costs may continue to increase in the future, which may lead to a decrease in our profit margin. In addition, we may not successfully obtain desired development sites due to the increasingly intense competition in the bidding processes. We may also need to acquire land use rights through acquisition, which could increase our costs. Moreover, the supply of potential development sites in any given city will diminish over time and we may find it increasingly difficult to identify and acquire attractive development sites at commercially reasonable costs in the future.

Our level of indebtedness could have an adverse effect on our financial condition, diminish our ability to raise additional capital to fund our operations and limit our ability to explore business opportunities.

As of September 30, 2007, the outstanding balance of our total indebtedness amounted to US$262.8 million. Our level of indebtedness could have an adverse effect on us. For example, it could:

 

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require us to dedicate a large portion of our cash flow from operations to fund payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

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increase our vulnerability to adverse general economic or industry conditions;

 

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limit our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;

 

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limit our ability to raise additional debt or equity capital in the future or increase the cost of such funding;

 

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restrict us from making strategic acquisitions or exploring business opportunities; and

 

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make it more difficult for us to satisfy our obligations with respect to our debt.

Our current debt indentures contain certain financial and operating covenants that restrict our ability to pay dividends, raise further debt and take other corporate actions.

In April 2007, we issued US$75 million of floating rate notes and US$25 million of convertible notes and entered into related indentures. These indentures contain a number of significant restrictive covenants. These covenants restrict, among other things, our ability and the ability of our subsidiaries to incur additional debt or guarantee, make restricted payments, pay dividends or distributions on our or our subsidiaries’ capital stock, repurchase our or our subsidiaries’ capital stock, pay subordinated indebtedness, make or repay inter-company loans or advances or sell or transfer property or assets, sell our subsidiaries’ capital stock, enter into non-ordinary course business transactions, sell assets, make investments, merge or consolidate with another company, and engage in any business other than related businesses. See “Description of Debt and Equity-Linked Securities.”

As a result of the foregoing, our ability to pay dividends or other distributions on our common shares and the ADSs may be limited. These covenants may also restrict our ability to raise additional capital in the future through bank borrowings and debt and equity issuances or to engage in some transactions that we expect to be of benefit to us.

Our floating rate notes and convertible notes are secured by the mortgage of our shares in our wholly owned Cayman subsidiary, which indirectly holds all of our assets and operations in China. If we default under the notes, the holders may enforce their claims against these shares, which could cause us to lose control or ownership of our assets and operations in China. In addition, our floating rate notes and convertible notes are also secured by (i) the pledge of all of the Cayman subsidiary’s shares in Xinyuan (China) Real Estate, Ltd., or the WFOE, which we have submitted to the PRC regulatory authority, and (ii) the pledge of a loan from the Cayman subsidiary to the WFOE.

Our financing costs are subject to changes in interest rates.

The rate of interest payable on our floating rate notes varies according to the six-month LIBOR. In addition, the rates of our long-term bank loans are adjustable based on the range of 95% to 110% of the PBOC benchmark rate. As of September 30, 2007, the principal amount of our aggregate outstanding variable rate debt was US$215 million. A hypothetical 1% increase in annual interest rates would increase our interest expenses by approximately US$2.15 million based on our debt level at September 30, 2007.

We rely on third-party contractors.

Substantially all of our project construction and related work are outsourced to third-party contractors. We are exposed to risks that the performance of our contractors may not meet our standards or specifications. Negligence or poor work quality by any contractors may result in defects in our buildings or residential units, which could in turn cause us to suffer financial losses, harm our reputation or expose us to third-party claims. We work with multiple contractors on different projects and we cannot guarantee that we can effectively monitor their work at all times. Although our construction and other contracts contain provisions designed to protect us, we may be unable to successfully enforce these rights and, even if we are able to successfully enforce these rights, the third-party contractor may not have sufficient financial resources to compensate us. Moreover, the contractors may undertake projects from other property developers, engage in risky undertakings or encounter financial or other difficulties, such as supply shortages, labor disputes or work accidents, which may cause delays in the completion of our property projects or increases in our costs.

We may be unable to complete our property developments on time or at all.

The progress and costs for a development project can be adversely affected by many factors, including, without limitation:

 

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delays in obtaining necessary licenses, permits or approvals from government agencies or authorities;

 

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shortages of materials, equipment, contractors and skilled labor;

 

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disputes with our third-party contractors;

 

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failure by our third-party contractors to comply with our designs, specifications or standards;

 

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difficult geological situations or other geotechnical issues;

 

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onsite labor disputes or work accidents; and

 

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natural catastrophes or adverse weather conditions.

Any construction delays, or failure to complete a project according to our planned specifications or budget, may delay our property sales, which could harm our revenues, cash flows and our reputation.

Under PRC laws and regulations and our pre-sale contracts, we are required to compensate purchasers for late delivery or failure to complete our pre-sold units. For the five years ended December 31, 2006, we paid an aggregate amount of RMB1.4 million (US$166,710) of compensation to our customers due to late delivery. If the delay extends beyond the contractually specified period, the purchasers may become entitled to terminate the pre-sale contracts and claim damages. Proceeds from pre-sale of our properties are an important source of financing for our property developments. Under PRC laws, we are not permitted to commence pre-sales until we have completed certain stages of the construction process for a project. Consequently, a significant delay in the construction of a project could restrict our ability to pre-sell our properties, which could extend the recovery period for our capital outlay. This, in turn, could have an adverse effect on our cash flow, business and financial position.

Changes of laws and regulations with respect to pre-sales may adversely affect our cash flow position and performance.

We depend on cash flows from pre-sale of properties as an important source of funding for our property projects and servicing our indebtedness. Under current PRC laws and regulations, property developers must fulfill certain conditions before they can commence pre-sale of the relevant properties and may only use pre-sale proceeds to finance the construction of the specific developments. On August 5, 2005, PBOC issued a report entitled “2004 Real Estate Financing Report,” in which it recommended that the practice of pre-selling uncompleted properties be discontinued because, according to the report, such activity creates significant market risks and generates transactional irregularities. This and other PBOC recommendations have not been adopted by the PRC government and have no enforceability. However, there can be no assurance that the PRC government will not ban the practice of pre-selling uncompleted properties or implement further restrictions on the pre-sale of properties, such as imposing additional conditions for a pre-sale permit or further restrictions on the use of pre-sale proceeds. Any such measure will adversely affect our cash flow position and force us to seek alternative sources of funding for much of our property development business.

We provide guarantees for the mortgage loans of our customers which expose us to risks of default by our customers.

We pre-sell properties before actual completion and, in accordance with industry practice, our customers’ mortgage banks require us to guarantee our customers’ mortgage loans. Typically, we provide guarantees to PRC banks with respect to loans procured by the purchasers of our properties for the total mortgage loan amount until the completion of the registration of the mortgage with the relevant mortgage registration authorities, which generally occurs within six to 12 months after the purchasers take possession of the relevant properties. In line with what we believe to be industry practice, we rely on the credit evaluation conducted by mortgagee banks and do not conduct our own independent credit checks on our customers. The mortgagee banks typically require us to maintain, as restricted cash, 3% to 10% of the mortgage proceeds paid to us as security for our obligations under such guarantees. If a purchaser defaults on its payment obligations during the term of our guarantee, the mortgagee bank may deduct the delinquent mortgage payment from the security deposit. If the delinquent mortgage payments exceed the security deposit, the banks may require us to pay the excess amount. If multiple purchasers default on their payment obligations at around the same time, we will be required to make

 

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significant payments to the banks to satisfy our guarantee obligations. If we are unable to resell the properties underlying defaulted mortgages on a timely basis or at prices higher than the amounts of our guarantees and related expenses, we will suffer financial losses. For the five years ended December 31, 2006, we experienced certain defaults on mortgage loans by our customers in an aggregate principal amount of RMB1.5 million (US$187,542).

As of December 31, 2004, 2005 and 2006 and September 30, 2007, our outstanding guarantees in respect of our customers’ mortgage loans amounted to US$17.8 million, US$37.9 million, US$62.4 million and US$172.5 million, respectively. If substantial defaults by our customers occur and we are called upon to honor our guarantees, our financial condition and results of operations will be materially adversely affected.

Our results of operations may fluctuate from period to period.

Our results of operations tend to fluctuate from period to period. The number of properties that we can develop or complete during any particular period is limited due to the substantial capital required for land acquisition and construction, as well as the lengthy development periods required before positive cash flows may be generated. In addition, several properties that we have developed or that are under development are large scale and are developed in multiple phases over the course of one to several years. The selling prices of the residential units in larger scale property developments tend to change over time, which may impact our sales proceeds and, accordingly, our revenues for any given period.

The recognition of our real estate revenue and costs relies upon our estimation of total project sales value and costs.

We recognize our real estate revenue based on the full accrual method and the percentage of completion method depending on the estimated project construction period. Under both methods, revenue and costs are calculated based on an estimation of total project costs and total project revenue, which are revised on a regular basis as the work progresses. Any material deviation between actual and estimated total project sales and costs may result in an increase, a reduction or an elimination of reported revenues or costs from period to period, which will affect our net income.

We may be required to pay additional corporate income taxes in China.

Based on the current levy method applied by the Zhengzhou local tax bureau, our subsidiaries in Zhengzhou are paying corporate income tax, or CIT, on a deemed profit basis, where taxable income is deemed to be 12% or 14% of cash receipts, regardless of actual income generated in that year. According to PRC tax regulations, the deemed profit basis should only be applicable to companies that are unable to keep accounting books or whose accounts are incomplete and inaccurate. These circumstances do not apply to us and, accordingly, we may be subject to corporate income tax at the rate of 33% on our actual taxable income. We have made provision for the full amount of applicable CIT estimated in accordance with the relevant PRC tax laws and regulations, but we pay CIT each year as required by the local tax authorities. We cannot guarantee that we will not be required to pay additional taxes in accordance with the PRC tax laws and regulations or that our accrued deferred tax liabilities will be sufficient to cover any additional CIT payments we will be required to pay in the future with respect to past financial periods.

The newly enacted PRC Corporate Income Tax Law could affect tax exemptions on dividends received by us and our shareholders and increase our corporate income tax rate.

We are incorporated under the laws of the Cayman Islands. As a foreign legal person, dividends derived from our business operations in the PRC are currently not subject to income tax under PRC law. However, we cannot assure you that such dividends will continue to be exempt from PRC income tax. Under the newly enacted PRC Corporate Income Tax Law which will take effect from January 1, 2008, if we are deemed a non-PRC tax resident enterprise without an office or premises in the PRC, withholding tax at the rate of 20% will be applicable to dividends paid by us, unless the tax is entitled to reduction or elimination in accordance with any future PRC

 

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laws or regulations or an applicable tax treaty between the PRC and the Cayman Islands. As of the date of this prospectus, the Cayman Islands has not entered into any such tax treaties with the PRC. The newly enacted PRC Corporate Income Tax Law is also unclear as to how such tax reduction or elimination would be implemented.

In addition, the newly enacted PRC Corporate Income Tax Law provides that, if an enterprise incorporated outside the PRC has its “de facto management organization” located within the PRC, such enterprise may be recognized as a PRC tax resident enterprise and thus may be subject to corporate income tax at the rate of 25% on its worldwide income. However, the newly enacted PRC Corporate Income Tax Law does not define the term “de facto management organization.” A substantial number of our management are located in the PRC. If a substantial number of our management continue to be located in the PRC after the effective date of the newly enacted PRC Corporate Income Tax Law, we may be deemed a PRC tax resident and therefore subject to a corporate income tax rate of 25% on our worldwide income (including dividend income received from our subsidiaries). The newly enacted PRC Corporate Income Tax Law also provides that dividends received by a qualified PRC tax resident from another PRC tax resident are exempt from corporate income tax. However, given the short history of this law, it remains unclear as to the detailed qualification requirements for such exemption and whether the dividends that we receive from our PRC subsidiaries will be exempt from corporate income tax if we are recognized as a PRC tax resident.

The relevant PRC tax authorities may challenge the basis on which we have been paying our land appreciation tax obligations and our results of operations and cash flows may be affected.

Under PRC laws and regulations, our PRC subsidiaries engaging in property development are subject to land appreciation tax, or LAT, which is levied by the local tax authorities. All taxable gains from the sale or transfer of land use rights, buildings and their attached facilities in the PRC are subject to LAT at progressive rates ranging from 30% to 60%. Exemptions are available for the sale of ordinary residential properties if the appreciation values do not exceed certain thresholds specified in the relevant tax laws. Gains from the sale of commercial properties are not eligible for this exemption.

The Zhengzhou city local tax authority did not impose the LAT on real estate companies until September 2004. Since September 2004, it has levied the LAT at the rates of 0.8% or 1% against total cash receipts from our sales of our residential properties and certain retail premises located in our developments, respectively, rather than according to the progressive rates. Accordingly we recognized LAT in prior years as an expense based on the rate of 0.8% or 1%, as applicable, of cash receipts imposed by the local tax authority. On December 28, 2006, the State Administration of Taxation issued the Notice on Administration of the Settlement of Land Appreciation Tax of Property Development Enterprises, or the LAT Notice, which became effective on February 1, 2007. The LAT Notice sets forth, among other things, methods of calculating LAT and a time frame for settlement of LAT. We have accrued all LAT payable on our property sales and transfers in accordance with the progressive rates specified in relevant tax laws, less amounts previously paid under the levy method applied by relevant local tax authorities. However, provisioning for LAT requires our management to use a significant amount of judgment with respect to, among other things, the anticipated total proceeds to be derived from the sale of the entire phase of the project or the entire project, the total appreciation of land value and the various deductible items. If the LAT provisions we have made are substantially lower than the actual LAT amounts assessed by the tax authorities in the future, our results of operations and cash flows will be materially and adversely affected.

We rely on our key management members.

We depend on the services provided by key management members. Competition for management talent is intense in the property development sector. In particular, we are highly dependent on Mr. Yong Zhang, our founder, Chairman and Chief Executive Officer, and Mr. Longgen Zhang, our Chief Financial Officer. We do not maintain key employee insurance. In the event that we lose the services of any key management member, we may be unable to identify and recruit suitable successors in a timely manner or at all, which will adversely affect our business and operations. Moreover, we need to employ and retain more management personnel to support our

 

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expansion into other Tier II cities on a much larger geographical scale. If we cannot attract and retain suitable human resources, especially at the management level, our business and future growth will be adversely affected.

Grants of employee share options and other share-based compensation could adversely affect our net income.

In August 2007, we adopted an equity incentive plan for our directors, management, employees and consultants under which we granted share options and restricted share awards for the purchase of up to 6,802,495 common shares. In November 2007, we adopted a long term incentive plan for our directors, management and key employees under which we are authorized to grant options, restricted shares, restricted stock units, stock appreciation rights and other stock-based awards for the purchase of up to 10 million common shares. As a result of the grant of options and awards under these plans, we expect to incur share-based compensation expenses in future periods. We may adopt additional equity incentive plans in the future. We have adopted Statement of Financial Accounting Standard No. 123(R) for the accounting treatment of our share-based compensation. We account for compensation costs for all stock-based awards using a fair-value based method and recognize expenses in our consolidated statement of operations in accordance with U.S. GAAP, which may reduce our net income.

Increases in the price of raw materials may increase our cost of sales and reduce our earnings.

Our third-party contractors are responsible for procuring almost all of the raw materials used in our project developments. Our construction contracts typically provide for fixed or capped payments, but the payments are subject to changes in government-suggested steel prices. The increase in steel prices could result in an increase in our construction cost. In 2006, for instance, the average price of steel increased approximately 4%, which in turn increased our cost. In addition, the increases in the price of raw materials, such as cement, concrete blocks and bricks, in the long run could be passed on to us by our contractors, which will increase our construction cost. Any such cost increase could reduce our earnings to the extent we are unable to pass these increased costs to our customers.

If we do not maintain good relationships with our joint venture partners, our results of operations may be adversely affected.

One of our project companies, Jiantou Xinyuan, is a joint venture established under PRC law. We hold a 45% equity interest in Jiantou Xinyuan, with 50% held by Zhengzhou General Construction Investment Company and the remaining 5% held by Zhengzhou Jiantou Project Consulting Co., Ltd. As of September 30, 2007, Jiantou Xinyuan had completed International City Garden I and was in the process of developing International City Garden II, City Mansion and International Plaza. These four projects have an aggregate GFA of 473,895 square meters. We hold only a minority interest in Jiantou Xinyuan and do not have full control over its operations. We may not be able to control the quality of products produced by Jiantou Xinyuan. Under the joint venture contract, we and other shareholders agree to share the profits according to our respective equity interests in Jiantou Xinyuan, but we require the consent of our joint venture partners before we can cause the joint ventures to distribute profits to the shareholders, including us. Furthermore, our joint venture partners and the joint venture themselves may hold different views or have different interests from ours, and therefore may compete in the same market with us, in which case our interest and future development may be materially adversely affected.

If we do not maintain good relationships with our institutional shareholders, our business and operations may be adversely affected.

Our institutional shareholders, Blue Ridge China and Equity International, have substantial ownership of our shares. Blue Ridge China owns 25.75% of our outstanding share capital as of the date of this prospectus and will own approximately         % of our outstanding share capital upon completion of this offering. Equity International owns 17.17% of our outstanding share capital as of the date of this prospectus and will own approximately         % of our outstanding share capital upon completion of this offering. Each of Blue Ridge

 

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China and Equity International has appointed one director to our board. While Blue Ridge China’s and EI’s rights to appoint directors to our board will be terminated upon completion of this offering, the two directors designated by them (Yue (Justin) Tang and Christopher J. Fiegen) will remain our directors until their resignation or removal. If we do not maintain a good relationship with either Blue Ridge China or Equity International, that could have an adverse effect on us.

We are a holding company that depends on dividend payments from our subsidiaries for funding.

We are a holding company established in the Cayman Islands and operate all of our business and operations through our subsidiaries in China. Therefore, our ability to pay dividends to our shareholders and to service our indebtedness depends upon dividends that we receive from our subsidiaries in China. If our subsidiaries incur indebtedness or losses, such indebtedness or loss may impair their ability to pay dividends or other distributions to us. As a result, our ability to pay dividends and to service our indebtedness will be restricted. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Each of our PRC subsidiaries, including wholly foreign-owned enterprises and domestic companies, is required to set aside at least 10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves or statutory capital reserve fund until the accumulative amount of such reserves reaches 50.0% of its respective registered capital. As of September 30, 2007, our restricted reserves amounted to US$4.1 million, and our accumulated profits that were unrestricted and were available for distribution amounted to US$57.5 million. On November 13, 2007, we modified the Series A preference shares which resulted in recording a deemed dividend that will eliminate the accumulated profits of US$57.5 million as at September 30, 2007. Our restricted reserves are not distributable as cash dividends. The indentures for our floating rate notes and convertible notes contain restrictions on our subsidiaries’ ability to pay dividends. In addition, restrictive covenants in bank credit facilities, joint venture agreements or other agreements that we or our subsidiaries may enter into in the future may also restrict the ability of our subsidiaries to make contributions to us and our ability to receive distributions. Therefore, these restrictions on the availability and usage of our major source of funding may impact our ability to pay dividends to our shareholders and to service our indebtedness.

Any unauthorized use of our brand or trademark may adversely affect our business.

We own trademarks for “ ”, in the form of Chinese characters and our company logo. We rely on the PRC intellectual property and anti-unfair competition laws and contractual restrictions to protect brand name and trademarks. We believe our brand, trademarks and other intellectual property rights are important to our success. Any unauthorized use of our brand, trademarks and other intellectual property rights could harm our competitive advantages and business. Historically, China has not protected intellectual property rights to the same extent as the United States or the Cayman Islands, and infringement of intellectual property rights continues to pose a serious risk of doing business in China. Monitoring and preventing unauthorized use is difficult. The measures we take to protect our intellectual property rights may not be adequate. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to adequately protect our brand, trademarks and other intellectual property rights, our reputation may be harmed and our business may be adversely affected.

We may be subject to additional payments of statutory employee benefits.

According to PRC central government and local regulations, we are required to pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing insurance for all employees, to designated government agents. We pay statutory employee benefits based on the local government pre-set contribution ratio, while we accrue provisions for unpaid employee benefits based on relevant central government regulations. We cannot be certain that such accrued amount will be sufficient to meet any additional employee benefits payments that we are required to pay in the future. In addition, we have underpaid certain employee benefits based on the local government pre-set ratio in the past. We may need to settle the underpaid amount plus late payment interest, and may also be subject to fines or penalties for the underpayment, which may have a material adverse effect on our financial condition.

 

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We do not have insurance to cover potential losses and claims.

We do not have insurance coverage against potential losses or damages with respect to our properties before their delivery to customers, nor do we maintain insurance coverage against liability from tortious acts or other personal injuries on our project sites. Although we require our contractors to carry insurance, we believe most of our contractors do not comply with this requirement. Our contractors may not be sufficiently insured themselves or have the financial ability to absorb any losses that arise with respect to our projects or pay our claims. In addition, there are certain types of losses, such as losses due to earthquakes, which are currently uninsurable in China. While we believe that our practice is in line with the general practice in the PRC property development industry, there may be instances when we will have to internalize losses, damages and liabilities because of the lack of insurance coverage, which may in turn adversely affect our financial condition and results of operations.

We may fail to obtain, or may experience material delays in obtaining necessary government approvals for any major property development, which will adversely affect our business.

The real estate industry is strictly regulated by the PRC government. Property developers in China must abide by various laws and regulations, including implementation rules promulgated by local governments to enforce these laws and regulations. Before commencing, and during the course of, development of a property project, we need to apply for various licenses, permits, certificates and approvals, including land use rights certificates, construction site planning permits, construction work planning permits, construction permits, pre-sale permits and completion acceptance certificates. We need to satisfy various requirements to obtain these certificates and permits. To date, we have not encountered serious delays or difficulties in the process of applying for these certificates and permits, but we cannot guarantee that we will not encounter serious delays or difficulties in the future. In the event that we fail to obtain the necessary governmental approvals for any of our major property projects, or a serious delay occurs in the government’s examination and approval progress, we may not be able to maintain our development schedule and our business and cash flows may be adversely affected.

We may forfeit land to the PRC government if we fail to comply with procedural requirements applicable to land grants from the government or the terms of the land use rights grant contracts.

According to the relevant PRC regulations, if we fail to develop a property project according to the terms of the land use rights grant contract, including those relating to the payment of land premiums, specified use of the land and the time for commencement and completion of the property development, the PRC government may issue a warning, may impose a penalty or may order us to forfeit the land. Specifically, under current PRC law, if we fail to commence development within one year after the commencement date stipulated in the land use rights grant contract, the relevant PRC land bureau may issue a warning notice to us and impose an idle land fee on the land of up to 20% of the land premium. If we fail to commence development within two years, the land will be subject to forfeiture to the PRC government, unless the delay in development is caused by government actions or force majeure. Even if the commencement of the land development is compliant with the land use rights grant contract, if the developed GFA on the land is less than one-third of the total GFA of the project or the total capital invested is less than one-fourth of the total investment of the project and the suspension of the development of the land continues for more than one year without government approval, the land will also be treated as idle land and be subject to penalty or forfeiture. We cannot assure you that circumstances leading to significant delays in our development schedule or forfeiture of land will not arise in the future. If we forfeit land, we will not only lose the opportunity to develop the property projects on such land, but may also lose all past investments in such land, including land premiums paid and development costs incurred.

Any non-compliant GFA of our uncompleted and future property developments will be subject to governmental approval and additional payments.

The local government authorities inspect property developments after their completion and issue the completion acceptance certificates if the developments are in compliance with the relevant laws and regulations.

 

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If the total constructed GFA of a property development exceeds the GFA originally authorized in the relevant land grant contracts or construction permit, or if the completed property contains built-up areas that do not conform with the plan authorized by the construction permit, the property developer may be required to pay additional amounts or take corrective actions with respect to such non-compliant GFA before a completion acceptance certificate can be issued to the property development.

We have obtained completion acceptance certificates for all of our completed properties as of September 30, 2007. However, we cannot be certain that local government authorities will not find the total constructed GFA upon completion of our existing projects under development or any future property developments to exceed the relevant authorized GFA. Any such non-compliance could lead to additional payments or penalty, which would adversely affect our financial condition.

We may not be able to continue obtaining qualification certificates, which will adversely affect our business.

Real estate developers in the PRC must obtain a formal qualification certificate in order to carry on a property development business in the PRC. According to the PRC regulations on qualification of property developers issued in 2000, a newly established property developer must first apply for a temporary qualification certificate with a one-year validity, which can be renewed for not more than two years. If, however, the newly established property developer fails to commence a property development project within the one-year period during which the temporary qualification certificate is in effect, it will not be allowed to renew its temporary qualification certificate. All qualification certificates are subject to renewal on an annual basis. Under government regulations, developers must fulfill all statutory requirements before they may obtain or renew their qualification certificates. In accordance with the provisions of the rules on the administration of qualifications, the real estate developer qualifications are classified into four classes and the approval system for each class is tiered. The approval for Class I Qualification is subject to examination by the construction authority under the State Council, that is, the central government, and the procedure for approval of developers for Class II Qualification or lower qualifications is administered by the construction authorities at the provincial-level of government. A real estate developer may only engage in the development and sale of real estate within its approved scope of business. For instance, a Class I developer is not restricted to the scale of real estate projects to be developed and may undertake real estate development projects anywhere in the country, while a Class II or below developer may undertake projects with construction area of less than 250,000 square meters per project. See “Regulation—Regulations on Qualifications of Developer.”

There can be no assurance that some of our project companies that are in the process of applying for proper qualification certificates will be able to obtain such certificates timely to commence their planned real estate projects development on schedule. There can be no further assurance that we and our project companies will continue to be able to extend or renew the qualification certificates or be able to successfully upgrade the current qualification class to a higher qualification. If we or our project companies are unable to obtain or renew qualification certificates, the PRC government will refuse to issue pre-sale and other permits necessary for the conduct of the property development business, and our results of operations, financial condition and cash flows will be adversely affected.

Our failure to assist our customers in applying for property ownership certificates in a timely manner may lead to compensatory liabilities to our customers.

We are required to meet various requirements within 90 days after delivery of property, or such other period contracted with our customers, in order for our customers to apply for their property ownership certificates, including passing various governmental clearances, formalities and procedures. Under our sales contract, we are liable for any delay in the submission of the required documents as a result of our failure to meet such requirements, and are required to compensate our customers for delays. In the case of serious delays on one or more property projects, we may be required to pay significant compensation to our customers and our reputation may be adversely affected.

 

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We may become involved in legal and other proceedings from time to time and may suffer significant liabilities or other losses as a result.

We have in the past, and may in future, become involved in disputes with various parties relating to the acquisition of land use rights, the development and sale of our properties or other aspects of our business and operations. These disputes may lead to legal or other proceedings and may result in substantial costs and diversion of resources and management’s attention. For example, our acquisition and development of a site in Zhengzhou in 2004 was delayed because the vendor failed to transfer the land use rights to us as agreed under our contract, despite a deposit we paid. We brought legal proceedings against the vendor to enforce our rights, which were finally determined in our favor in November 2006. Disputes and legal and other proceedings may require substantial time and expense to resolve, which could divert valuable resources, such as management time and working capital, delay our planned projects and increase our costs. Third parties that are found liable to us may not have the resources to compensate us for our incurred costs and damages. We could also be required to pay significant costs and damages if we do not prevail in any such disputes or proceedings. In addition, we may have disagreements with regulatory bodies in the course of our operations, which may subject us to administrative proceedings and unfavorable decrees that result in pecuniary liabilities and cause delays to our property developments.

We are subject to potential environmental liability.

We are subject to a variety of laws and regulations concerning the protection of health and the environment. The particular environmental laws and regulations that apply to any given development site vary significantly according to the site’s location and environmental condition, the present and former uses of the site and the nature of the adjoining properties. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance and other costs and can prohibit or severely restrict project development activity in environmentally-sensitive regions or areas. Although the environmental investigations conducted by local environmental authorities have not revealed any environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations to date, it is possible that these investigations did not reveal all environmental liabilities and that there are material environmental liabilities of which we are unaware. We cannot assure you that future environmental investigations will not reveal material environmental liability. Also, we cannot assure you that the PRC government will not change the existing laws and regulations or impose additional or stricter laws or regulations, the compliance of which may cause us to incur significant capital expenditure. See “Business—Environmental Matters.”

If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

We will be subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of the company’s internal controls over financial reporting. These requirements will first apply to our annual report on Form 20-F for the first full fiscal year subsequent to our listing. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting is effective, our independent registered public accounting firm may still issue a report that is qualified or adverse if it believes that the design or implementation of our internal controls is not effective, or if it interprets the relevant requirements differently from us.

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. We have begun the process of improving our internal controls over financial reporting. For example, in the course of auditing our consolidated financial statements as of and for the year ended December 31, 2006, our auditors recommended that our key accounting

 

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personnel be provided with training on the application of U.S. GAAP to improve the quality of our financial reporting. Based on such recommendation, we have hired additional staff with U.S. GAAP experience. We plan to complete a review of our internal controls and remedy any weaknesses or deficiencies in time to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs. Furthermore, we anticipate that we will incur considerable costs and devote significant management time and efforts and other resources to comply with Section 404 of the Sarbanes-Oxley Act.

Risk Relating to the Residential Property Industry in China

We are heavily dependent on the performance of the residential property market in China, which is at a relatively early development stage.

The residential property industry in the PRC is still in a relatively early stage of development. Although demand for residential property in the PRC has been growing rapidly in recent years, such growth is often coupled with volatility in market conditions and fluctuation in property prices. It is extremely difficult to predict how much and when demand will develop, as many social, political, economic, legal and other factors, most of which are beyond our control, may affect the development of the market. The level of uncertainty is increased by the limited availability of accurate financial and market information as well as the overall low level of transparency in the PRC, especially in Tier II cities which have lagged in progress in these aspects when compared to Tier I cities.

The lack of a liquid secondary market for residential property may discourage investors from acquiring new properties. The limited amount of property mortgage financing available to PRC individuals may further inhibit demand for residential developments.

We face intense competition from other real estate developers.

The property industry in the PRC is highly competitive. In the Tier II cities we focus on, local and regional property developers are our major competitors, and an increasing number of large state-owned and private national property developers have started entering these markets. Many of our competitors, especially the state-owned and private national property developers, are well capitalized and have greater financial, marketing and other resources than we have. Some also have larger land banks, greater economies of scale, broader name recognition, a longer track record and more established relationships in certain markets. In addition, the PRC government’s recent measures designed to reduce land supply further increased competition for land among property developers.

Competition among property developers may result in increased costs for the acquisition of land for development, increased costs for raw materials, shortages of skilled contractors, oversupply of properties, decrease in property prices in certain parts of the PRC, a slowdown in the rate at which new property developments will be approved and/or reviewed by the relevant government authorities and an increase in administrative costs for hiring or retaining qualified personnel, any of which may adversely affect our business and financial condition. Furthermore, property developers that are better capitalized than we are may be more competitive in acquiring land through the auction process. If we cannot respond to changes in market conditions as promptly and effectively as our competitors, or effectively compete for land acquisition through the auction systems and acquire other factors of production, our business and financial condition will be adversely affected.

In addition, risk of property over-supply is increasing in parts of China, where property investment, trading and speculation have become overly active. We are exposed to the risk that in the event of actual or perceived over-supply, property prices may fall drastically, and our revenue and profitability will be adversely affected.

 

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The PRC government may adopt further measures to curtail the overheating of the property sector.

Along with the economic growth in China, investments in the property sectors have increased significantly in the past few years. In response to concerns over the scale of the increase in property investments, the PRC government has introduced policies to curtail property development. We believe the following regulations, among others, significantly affect the property industry in China.

In May 2006, the Ministry of Construction, National Development and Reform Commission, or the NDRC, PBOC and other relevant PRC government authorities jointly issued the Opinions on Adjusting the Housing Supply Structure and Stabilizing the Property Prices, which introduced measures to limit resources allocated to the luxury residential market. For instances, the new measures require that at least 70% of a residential project must consist of units with a GFA of less than 90 square meters per unit, and the minimum amount of down payment was increased from 20% to 30% of the purchase price of the underlying property if it has a unit GFA of 90 square meters or more. In September 2007, PBOC and China Banking Regulatory Commission issued the Circular on Strengthening the Management of Commercial Real Estate Credit Facilities, which increased the minimum down payment for any purchase of second or subsequent residential property to 40% of the purchase price if the purchaser had obtained a bank loan to finance the purchase of his or her first property.

In July 2006, the Ministry of Construction, the Ministry of Commerce, NDRC, PBOC, the State Administration for Industry and Commerce and SAFE issued Opinions on Regulating the Entry and Administration of Foreign Investment in Real Property Market, which impose significant requirements on foreign investment in the PRC real estate sector. For instance, these opinions set forth requirements of registered capital of a foreign invested real property enterprise as well as thresholds for a foreign invested real property enterprise to borrow domestic or overseas loans. In addition, since June 2007, a foreign invested real property enterprise approved by local authorities is required to register such approvals with the Ministry of Commerce.

The PRC government’s restrictive regulations and measures to curtail the overheating of the property sector could increase our operating costs in adapting to these regulations and measures, limit our access to capital resources or even restrict our business operations. We cannot be certain that the PRC government will not issue additional and more stringent regulations or measures, which could further slow down property development in China and adversely affect our business and prospects.

Our sales will be affected if mortgage financing becomes more costly or otherwise becomes less attractive.

Substantially all purchasers of our residential properties rely on mortgages to fund their purchases. An increase in interest rates may significantly increase the cost of mortgage financing, thus affecting the affordability of residential properties. In 2007, PBOC raised the lending rates five times. The benchmark lending rate for loans with a term of over five years, which affects mortgage rates, has been increased to 7.83%. The PRC government and commercial banks may also increase the down payment requirement, impose other conditions or otherwise change the regulatory framework in a manner that would make mortgage financing unavailable or unattractive to potential property purchasers. Under current PRC laws and regulations, purchasers of residential properties generally must pay at least 20% of the purchase price of the properties before they can finance their purchases through mortgages. In May 2006, the PRC government increased the minimum amount of down payment to 30% of the purchase price of the underlying property if such property has a unit GFA of 90 square meters or more. In September 2007, the minimum down payment for any purchase of second or subsequent residential property was increased to 40% of the purchase price if the purchaser had obtained a bank loan to finance the purchase of his or her first property. Moreover, the interest rate for bank loans of such purchase shall not be less than 110% of the PBOC benchmark rate of the same term and category. For further purchases of properties, there would be upward adjustments on the minimum down payment and interest rate for any bank loan. In addition, mortgagee banks may not lend to any individual borrower if the monthly repayment of the anticipated mortgage loan would exceed 50% of the individual borrower’s monthly income or if the total debt service of the individual borrower would exceed 55% of such individual’s monthly income. If the availability or attractiveness of mortgage financing is reduced or

 

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limited, many of our prospective customers may not be able to purchase our properties and, as a result, our business, liquidity and results of operations could be adversely affected.

In line with industry practice, we provide guarantees to PRC banks with respect to loans procured by the purchasers of our properties for the total amount of mortgage loans. Such guarantees expire upon the completion of the registration of the mortgage with the relevant mortgage registration authorities. If there are changes in laws, regulations, policies and practices that would prohibit property developers from providing guarantees to banks in respect of mortgages offered to property purchasers and as a result, banks would not accept any alternative guarantees by third parties, or if no third party is available or willing in the market to provide such guarantees, it may become more difficult for property purchasers to obtain mortgages from banks and other financial institutions during sales and pre-sales of its properties. Such difficulties in financing could result in a substantially lower rate of sale and pre-sale of our properties, which would adversely affect our cash flow, financial condition and results of operations. We are not aware of any impending changes in laws, regulations, policies or practices which will prohibit such practice in China. However, there can be no assurance that such changes in laws, regulations, policies or practices will not occur in China in the future.

Risks Relating to China

PRC economic, political and social conditions as well as government policies can affect our business.

The PRC economy differs from the economies of most developed countries in many aspects, including:

 

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political structure;

 

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degree of government involvement;

 

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degree of development;

 

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level and control of capital reinvestment;

 

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control of foreign exchange; and

 

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allocation of resources.

The PRC economy has been transitioning from a centrally planned economy to a more market-oriented economy. For more than two decades, the PRC government has implemented economic reform measures emphasizing utilization of market forces in the development of the PRC economy. Although we believe these reforms will have a positive effect on China’s overall and long-term development, we cannot predict whether changes in the PRC economic, political and social conditions, laws, regulations and policies will have any adverse effect on our current or future business, financial condition or results of operations.

Changes in foreign exchange regulations may adversely affect our results of operations.

We currently receive all of our revenues in RMB. The PRC government regulates the conversion between RMB and foreign currencies. Over the years, the government has significantly reduced its control over routine foreign exchange transactions under current accounts, including trade and service related foreign exchange transactions, payment of dividends and service of foreign debt. However, foreign exchange transactions by our PRC subsidiaries under capital accounts continue to be subject to significant foreign exchange controls and require the approval of, or registration with, PRC governmental authorities. There can be no assurance that these PRC laws and regulations on foreign investment will not cast uncertainties on our financing and operating plans in China. Under current foreign exchange regulations in China, subject to the relevant registration at SAFE, we will be able to pay dividends in foreign currencies, without prior approval from SAFE, by complying with certain procedural requirements. However, there can be no assurance that the current PRC foreign exchange policies regarding debt service and payment of dividends in foreign currencies will continue in the future. Changes in PRC foreign exchange policies might have a negative impact on our ability to

 

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service our foreign currency-denominated indebtedness and to distribute dividends to our shareholders in foreign currencies.

Fluctuations in the value of RMB will affect the amount of our non-RMB debt service in RMB terms and affect the value of, and dividends payable on, our ADSs in foreign currency terms.

The value of RMB depends, to a large extent, on China’s domestic and international economic, financial and political developments and government policies, as well as the currency’s supply and demand in the local and international markets. For over 10 years from 1994, the conversion of RMB into foreign currencies, including the U.S. dollar, was based on exchange rates set and published daily by People’s Bank of China in light of the previous day’s inter-bank foreign exchange market rates in China and the then current exchange rates on the global financial markets. The official exchange rate for the conversion of RMB into the U.S. dollar was largely stable until July 2005. On July 21, 2005, People’s Bank of China revalued RMB by reference to a basket of foreign currencies, including the U.S. dollar. As a result, the value of RMB appreciated by 2% on that day. Since then, the PRC central bank has allowed the official RMB exchange rate to float against a basket of foreign currencies. There can be no assurance that such exchange rate will not fluctuate widely against the U.S. dollar or any other foreign currency in the future. Fluctuation of the value of RMB will affect the amount of our non-RMB debt service in RMB terms since we have to convert RMB into non-RMB currencies to service our foreign debt, including our floating rate and convertible notes. Since our income and profits are denominated in RMB, any appreciation of RMB will also increase the value of, and any dividends payable on, our ADSs in foreign currency terms. Conversely, any depreciation of RMB will decrease the value of, and any dividends payable on, our ADSs in foreign currency terms.

Interpretation of PRC laws and regulations involves uncertainty.

Our core business is conducted within China and is governed by PRC laws and regulations. The PRC legal system is based on written statutes, and prior court decisions can only be used as a reference. Since 1979, the PRC government has promulgated laws and regulations in relation to economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, with a view to developing a comprehensive system of commercial law, including laws relating to property ownership and development. However, due to the fact that these laws and regulations have not been fully developed, and because of the limited volume of published cases and the non-binding nature of prior court decisions, interpretation of PRC laws and regulations involves a degree of uncertainty. Some of these laws may be changed without being immediately published or may be amended with retroactive effect. Depending on the government agency or how an application or case is presented to such agency, we may receive less favorable interpretations of laws and regulations than our competitors, particularly if a competitor has long been established in the locality of, and has developed a relationship with, such agency. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. All these uncertainties may cause difficulties in the enforcement of our land use rights, entitlements under its permits, and other statutory and contractual rights and interests.

The PRC national and regional economies may be adversely affected by a recurrence of epidemic.

Certain areas of China, including the Tier II cities where we operate, are susceptible to epidemics such as Severe Acute Respiratory Syndrome, or SARS, or avian influenza. A recurrence of SARS, avian influenza or any epidemic in these cities or other areas of China could result in material disruptions to our property developments, which in turn could materially and adversely affect our financial condition and results of operations.

Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise adversely affect us.

SAFE issued a public notice in October 2005, requiring PRC residents to register with the local SAFE branch before establishing or acquiring the control of any company outside of China for the purpose of financing

 

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that offshore company with assets or equity interest in a PRC company. PRC residents that are shareholders of offshore special purpose companies established before November 1, 2005 were required to conduct the overseas investment registration with the local SAFE branch before March 31, 2006, and once the special purpose vehicle has a major capital change event (including overseas equity or convertible bonds financing), the residents must conduct a registration relating to the change within 30 days of occurrence of the event. On May 29, 2007, the SAFE issued an additional notice, clarifying some outstanding issues and providing standard operating procedures for implementing the prior notice. According to the new notice, SAFE sets up seven schedules that track registration requirements for offshore fundraising and roundtrip investments.

We have already urged our shareholders who are PRC residents to make the necessary applications and filings as required under these notices and other related rules. However, as a result of uncertainty concerning the reconciliation of these notices with other approval or registration requirements, it remains unclear how these notices, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements. However, we cannot provide any assurances that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by these notices or other related rules. The failure or inability of our PRC resident shareholders to make any required registrations or comply with other requirements may subject such shareholders to fines and legal sanctions and may also limit our ability to contribute additional capital into or provide loans to (including using the proceeds from this offering) our PRC subsidiaries, limit our PRC subsidiaries’ ability to pay dividends or otherwise distribute profits to us, or otherwise adversely affect us.

We may face PRC regulatory risks relating to our equity incentive plan and long term incentive plan.

On March 28, 2007, the SAFE promulgated the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rules. Under the Stock Option Rules, PRC citizens who are granted stock options and other types of stock-based awards by an overseas publicly-listed company are required, through an agent of the overseas publicly-listed company, generally its PRC subsidiary or a financial institution, to obtain approval from the local SAFE branch. We and our PRC directors, management employees and consultants who have been granted share options and other awards under our equity incentive plan and our long term incentive plan will be subject to the Stock Option Rules when we become a U.S.-listed company. If we, or any of these persons, fail to comply with the relevant rules or requirements, we may be subject to penalties, such as fines. Furthermore, prior to this offering, we are required to file our equity incentive plan and our long term incentive plan with the relevant foreign exchange authority. If we fail to comply with these rules, we may be subject to the relevant penalties and may become subject to more stringent review and approval processes with respect to our foreign exchange activities, such as our PRC subsidiaries’ dividend payment to us or borrowing foreign currency loans, all of which may adversely affect our business and financial condition.

Risks Relating to our ADSs and this Offering

There has been no public market for our common shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our common shares or ADSs. Our ADSs have been approved for listing on the New York Stock Exchange. Our common shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

The initial public offering price for our ADSs will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ADSs after the initial public offering. An

 

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active trading market for our ADSs may not develop and the market price of our ADSs may decline below the initial public offering price.

The market price for our ADSs may be volatile.

The market price for our ADSs may be volatile and subject to wide fluctuations in response to factors such as actual or anticipated fluctuations in our quarterly operating results, changes in financial estimates by securities research analysts, changes in the economic performance or market valuations of other real estate developers, announcements by us or our competitors of material acquisitions, strategic partnerships, joint ventures or capital commitments, fluctuations of exchange rates between RMB and the U.S. dollar, release of lock-up or other transfer restrictions on our outstanding shares or ADSs, and economic or political conditions in China. In addition, the performance, and fluctuation in market prices, of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes of our ADSs. Furthermore, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.

You will experience immediate and substantial dilution in the net tangible book value of ADSs purchased.

The initial public offering price per ADS will be substantially higher than the net tangible book value per ADS prior to the offering. Consequently, when you purchase ADSs in the offering at the assumed initial public offering price of US$            , the midpoint of the estimated range of the initial public offering price, you will incur immediate dilution of US$             per ADS. See “Dilution.” In addition, you may experience further dilution to the extent that additional common shares are issued upon the exercise of options, warrants and further options we may grant from time to time, and the conversion of our convertible notes.

We may raise additional capital through the sale of additional equity or debt securities, which could result in additional dilution to our shareholders, or impose upon us additional financial obligations.

We may require additional cash resources to finance our continued growth or other future developments, including any investments or acquisitions we may decide to pursue. The amount and timing of such additional financing needs will vary principally depending on the timing of our property developments, investments and/or acquisitions, and the amount of cash flow from our operations. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities. The sale of additional equity securities, including additional warrants, could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations, including our ability to pay dividends or redeem stock. We cannot guarantee that financing will be available in amounts or on terms acceptable to us, if at all.

Substantial future sales or the perception of sales of our ADSs in the public market could cause the price of our ADSs to decline.

Sales of our ADSs or common shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have              common shares outstanding, including              common shares represented by              ADSs, assuming the underwriters do not exercise the over-allotment option. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. The remaining common shares outstanding after this offering will be available for sale, upon the expiration of the applicable lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rule 144 under the Securities Act. See “Shares Eligible for Future Sale” and “Underwriting” for a detailed description of the lock-up restrictions. Any or all of these shares may be released prior to expiration of the lock-up period at the discretion of the lead underwriter for this offering. To the

 

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extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our ADSs could decline.

In addition, certain holders of our common shares will have the right to cause us to register the sale of certain number of shares under the Securities Act, subject to a 180-day lock-up period in connection with this offering. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our ADSs to decline.

The interests of our existing shareholders may not be aligned with the interests of our other shareholders.

Mr. Yong Zhang, chairman of our board of directors and chief executive officer, together with his spouse, Ms. Yuyan Yang, who is a shareholder of us, currently beneficially owns 55.37% of our outstanding share capital and will beneficially own approximately             % of our outstanding share capital upon completion of this offering. Accordingly, they have substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. In addition, our institutional shareholders, Blue Ridge China and Equity International, also have substantial ownership of our shares. Blue Ridge China owns 25.75% of our outstanding share capital as of the date of this prospectus and will own approximately             % of our outstanding share capital upon completion of this offering. Equity International owns 17.17% of our outstanding share capital as of the date of this prospectus and will own approximately             % of our outstanding share capital upon completion of this offering. This concentration of ownership may result in actions being taken even if opposed by our other shareholders, including those who purchase ADSs in this offering. In addition, it may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs.

Compliance with new rules and regulations applicable to companies publicly listed in the United States is costly and complex and any failure by us to comply with these requirements on an ongoing basis could negatively affect investor confidence in us and cause the market price of our ADSs to decrease.

In addition to Section 404, the Sarbanes-Oxley Act also mandates, among other things, that companies adopt new corporate governance measures, imposes comprehensive reporting and disclosure requirements, sets stricter independence and financial expertise standards for audit committee members, and imposes increased civil and criminal penalties for companies, their chief executive officers, chief financial officers and directors for securities law violations. For example, in response to the Sarbanes-Oxley Act, the New York Stock Exchange has adopted additional comprehensive rules and regulations relating to corporate governance. We expect these new laws, rules and regulations will increase the scope, complexity and cost of our corporate governance and future reporting and disclosure practices. Our current and future compliance efforts will continue to require significant management attention. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. In addition, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers to fill critical positions within our company. Any failure by us to comply with these requirements on an ongoing basis could negatively affect investor confidence in us, cause the market price of our ADSs to decrease or even result in the delisting of our ADSs from the New York Stock Exchange.

You may not have the same voting rights as the holders of our common shares and may not receive voting materials in time to be able to exercise your right to vote.

Except as described in this prospectus and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching

 

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to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. As soon as practicable after the depositary receives from us a notice of a shareholders’ meeting, the depositary will distribute to registered holders of ADRs a notice stating (a) such information as is contained in such notice and any solicitation materials, (b) that each registered holder on the record date set for such purpose will, subject to any applicable provisions of Cayman Island law, be entitled to instruct the depositary as to the exercise of the voting rights and (c) the manner in which such instructions may be given, including instructions to give a discretionary proxy to a person designated by us. The depositary will not itself exercise any voting discretion in respect of any shares nor will it provide any instructions with respect to the shares represented by any ADSs for which voting instructions were not timely and properly received. There can be no guarantee that registered holders of ADRs will receive the notice described above with sufficient time to enable them to return any voting instructions to the depositary in a timely manner. To the extent you hold your ADSs through a bank, broker or other nominee, you will be relying upon such institutions with respect to voting matters.

You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or are exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

Certain judgments obtained against us by our shareholders may not be enforceable.

We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our wholly owned subsidiaries and affiliated entities in China. All of our officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the respective laws of the Cayman Islands and China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.

Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2007 Revision) and common law of the Cayman Islands. The rights of shareholders to take

 

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legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us or our management named in the prospectus.

We conduct substantially all of our operations in China and all of our assets are located in China. In addition, except for two directors, all of our directors and senior executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our PRC counsel has advised us that the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.

Our management will have considerable discretion as to the use of the net proceeds to be received by us from this offering.

Our allocation of the net proceeds to be received by us of this offering is based on current plans and business conditions. The amounts and timing of any expenditure will vary depending on the amount of cash generated by our operations, competitive and market developments and the number and type of new projects, if any, we undertake. Accordingly, our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our share price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

Our articles of association may contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our common shares and ADSs.

We are considering adopting amended and restated articles of association that will contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges and relative participating, optional or special rights and their qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our common shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our

 

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board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our common shares and ADSs may be materially and adversely affected. As a result, the price of our ADSs may fall.

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or common shares.

We do not expect to be considered a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our taxable year ending December 31, 2007. However, the determination of our PFIC status is dependent upon the composition of our income and assets and, in addition, we must make a separate determination at the close of each taxable year as to whether we are a PFIC. Because PFIC status is a factual determination based on actual results for the entire taxable year, our U.S. counsel expresses no opinion with respect to our PFIC status and also expresses no opinion with respect to our expectations contained in this paragraph. A non-U.S. corporation will be considered a PFIC for any taxable year if either (1) at least 75% of its gross income is passive income or (2) at least 50% of the value of its assets is attributable to assets that produce or are held for the production of passive income. The market value of our assets will be determined based on the market price of our ADSs and common shares, which is likely to fluctuate after this offering. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. If we were treated as a PFIC for any taxable year during which a U.S. person held an ADS or a common share, certain adverse U.S. federal income tax consequences could apply to such U.S. person. See “Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company.”

We may be classified as a controlled foreign corporation, which will result in application of special rules to certain of our U.S. holders.

Given our current ownership, there is a possibility that we may be a controlled foreign corporation, or CFC, following the issuance of the ADSs. Because CFC status is a factual determination dependent on the circumstances existing on the relevant date and thereafter, our U.S. counsel expresses no opinion with respect to our CFC status following the issuance of ADSs. If we were treated as a CFC for any taxable year during which a U.S. 10% shareholder held ADSs or common shares, certain adverse U.S. federal income tax consequences could apply to such U.S. 10% shareholder. See “Taxation—U.S. Federal Income Taxation—Controlled Foreign Corporation.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that relate to our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Our Industry” and “Business.” These statements relate to events that involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:

 

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our future business development, results of operations and financial condition;

 

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our expectations with respect to our ability to acquire adequate suitable land use rights for future development;

 

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our ability to continue to implement our business model successfully;

 

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our ability to secure adequate financing for our project development;

 

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our ability to successfully sell or complete our property projects under construction and planning;

 

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our ability to enter into new geographic markets and expand our operations;

 

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our ability to maintain strict cost control;

 

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our ability to obtain permits and licenses to carry on our business;

 

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competition from other real estate developers;

 

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our belief with respect to market opportunities in, and growth prospects of, Tier II cities in China;

 

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the expected growth of the real estate industry in China, particularly Tier II cities; and

 

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fluctuations in general economic and business conditions in China.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$             million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. These estimates are based upon an assumed initial offering price of US$             per ADS, the midpoint of the range shown on the front cover page of this prospectus. A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) the net proceeds to us from this offering by US$             million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option and no other change to the number of ADSs offered by us as set forth on the cover page of this prospectus.

We intend to use approximately US$             of the net proceeds to acquire land use rights for future property development projects and to use the remaining net proceeds for working capital and other general corporate purposes.

The foregoing use of our net proceeds from this offering represents our current intentions based upon our present plans and business condition. The amounts and timing of any expenditure will vary depending on the amount of cash generated by our operations, competitive and market developments and the number and type of new projects, if any, we undertake. Accordingly, our management will have significant discretion in the allocation of the net proceeds we receive from this offering. Depending on future events and other changes in the business climate, we may determine at a later time to use the net proceeds for different purposes. Pending their use, we intend to place our net proceeds in short-term bank deposits.

In utilizing the proceeds of this offering, as an offshore holding company, we are permitted, under PRC laws and regulations, to provide funding to our existing and any future PRC subsidiaries through capital contributions, subject to satisfaction of applicable government registration and approval requirements. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Relating to China—Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise adversely affect us.”

 

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DIVIDEND POLICY

We have never declared or paid dividends, nor do we have any present plan to pay any cash dividends on our common shares in the foreseeable future. We currently intend to retain our available funds and any future earnings to operate and expand our business.

Under our indentures for our floating rates notes and our convertible notes, we may not pay dividends unless our net income or cash flow exceeds specified thresholds and certain other conditions are satisfied. Assuming we are able, in accordance with these contractual arrangements, to pay dividends, any payment of dividends will still be subject to our board of directors’ discretion and the form, frequency and amount of any dividend will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

If we pay any dividends, we will pay our ADS holders to the same extent as holders of our common shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our common shares, if any, will be paid in U.S. dollars.

 

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EXCHANGE RATES

Our financial statements and other financial data included in this prospectus are presented in U.S. dollars. Our business and operations are primarily conducted in China through our PRC subsidiaries. The functional currency of our PRC subsidiaries is RMB. Their financial statements are translated into United States dollars, using published exchange rates in China, based on (i) year-end exchange rates for assets and liabilities and (ii) average yearly exchange rates for revenues and expenses. Capital accounts are translated at historical exchange rates when the transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in our shareholders’ equity.

The RMB is not freely convertible into foreign currency. Since January 1, 1994, the PBOC has set and published daily a base exchange rate with reference primarily to the supply and demand of RMB against the U.S. dollar in the market during the prior day. On July 21, 2005, the PBOC announced a reform of its exchange rate system and revalued the RMB to RMB8.11 to US$1.00. Under the reform, the RMB is no longer effectively linked to the U.S. dollar but instead is allowed to fluctuate within a narrow and managed band against a basket of foreign currencies, according to market demand and supply conditions. The PBOC announces the RMB’s closing price each day, and that rate serves as the midpoint of the next day’s trading band.

The following table sets forth, for each of the periods indicated, the low, average, high and period-end noon buying rates in New York City for cable transfers, in RMB per U.S. dollar, as certified for customs purposes by the Federal Reserve Bank of New York.

 

		Noon Buying Rate
Period		Period End		Average(1)		Low		High
		(RMB per US$1.00)
2002		8.2800		8.2770		8.2800		8.2700
2003		8.2767		8.2772		8.2800		8.2765
2004		8.2765		8.2768		8.2774		8.2764
2005		8.0702		8.1940		8.2765		8.0702
2006		7.8041		7.9723		8.0702		7.8041
2007
April		7.7090		7.7247		7.7345		7.7090
May		7.6516		7.6773		7.7065		7.6463
June		7.6120		7.6333		7.6680		7.6120
July		7.5720		7.5757		7.6055		7.5580
August		7.5462		7.5734		7.6181		7.5420
September		7.4928		7.5196		7.5540		7.4928
October		7.4682		7.5016		7.5158		7.4682
November (through November 15)		7.4250		7.4383		7.4582		7.4190

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(1)

Determined by averaging the rates on the last business day of each month during the relevant period for annual and quarterly periods and each business day for monthly periods or any part thereof.

We make no representation that any RMB or U.S. amounts referred to in this prospectus could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all.

 

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2007:

 

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on an actual basis; and

 

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on an as adjusted basis to give effect to (i) the deemed dividend of US$             from the common shareholders to the Series A preference shareholders upon the modification of Series A preference shares; (ii) the automatic conversion of all of our outstanding Series A preference shares into 30,805,400 common shares upon completion of this offering; (iii) the issuance of 1,853,172 common shares upon the exercise of the Burnham warrants prior to the completion of this offering; and (iv) the issuance and sale of            common shares in the form of ADSs by us in this offering, assuming an initial public offering price of US$            per ADS, the mid-point of the estimated range of the initial public offering price, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option and no other change to the number of ADSs offered by us as set forth on the cover page of this prospectus.

You should read this table together with our financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

		As of September 30, 2007
		Actual		As Adjusted(1)
		(US$ in thousands)
Long-term debt(2)		233,130
Series A convertible redeemable preference shares, US$0.0001 par value, 50,000,000 shares authorized; 30,805,400 shares issued and outstanding, actual; 0 shares issued and outstanding, as adjusted		24,441
Shareholders’ equity:
Common shares, US$0.0001 par value, 500,000,000 shares authorized; 75,704,379 shares issued and outstanding, actual              shares issued and outstanding, as adjusted		8
Additional paid-in capital(3)		17,181
Statutory reserves		4,067
Retained earnings		57,477
Accumulated other comprehensive earnings		8,025
Total shareholders’ equity(3)		86,758
Total capitalization(3)		344,328

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(1)

Excludes:

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6,802,495 common shares underlying all of the options and restricted share awards granted on August 11, 2007;

 

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2,441,844 common shares underlying the options granted on November 5, 2007;

 

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9,597,120 common shares issuable upon the conversion of the convertible notes; and

 

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common shares underlying the warrants issued to the holders of our floating rate notes, assuming an initial public offering price of US$             per ADS (the mid-point of the price range set forth on the front cover of this prospectus). A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would decrease (increase) the number of common shares underlying the warrants issued to the holders of our floating rate notes by              shares.

 

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(2)

Includes long-term bank loans, convertible notes and floating rate notes but excludes fair value of embedded derivatives.

(3)

Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by US$             million.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per common share is substantially in excess of the book value per common share attributable to the existing shareholders for our presently outstanding common shares.

Our net tangible book value as of September 30, 2007 was US$109,438,339, or US$1.03 per common share and US$             per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, minus the amount of our total consolidated liabilities. Without taking into account any other changes in such net tangible book value after September 30, 2007, other than to give effect to (i) the automatic conversion of our Series A preference shares into 30,805,400 common shares upon completion of this offering, (ii) the issuance of 1,853,172 common shares upon the exercise of the Burnham warrants at the completion of this offering; (iii) 9,597,120 common shares issuable upon the conversion of the convertible notes, (iv)              common shares underlying the warrants issued to the holders of our floating rate notes, assuming an initial public offering price of US$             per ADS (the mid-point of the price range set forth on the front cover of this prospectus), and (v) the issuance and sale of              common shares in the form of ADSs by us in this offering, at the assumed initial public offering price of US$             per ADS, the midpoint of the estimated range of the initial public offering price, and after deduction of underwriting discounts and commissions and estimated offering expenses of this offering payable by us, our adjusted net tangible book value as of September 30, 2007 would have increased to US$             million or US$             per common share or US$             per ADS. This represents an immediate increase in net tangible book value of US$             per common share, or US$             per ADS, to the existing shareholders and an immediate dilution in net tangible book value of US$             per common share, or US$             per ADS, to investors purchasing ADSs in this offering. The following table illustrates such per share dilution:

 

Assumed initial public offering price per ADS		US$
Net tangible book value per common share as of September 30, 2007		US$1.03
Adjusted net tangible book value per common share after giving effect to this offering and the common share issuances described above		US$
Adjusted net tangible book value per ADS after giving effect to this offering and the common share issuances described above		US$
Amount of dilution in net tangible book value per common share to new investors in this offering		US$
Amount of dilution in net tangible book value per ADS to new investors in this offering		US$

---

A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$             million, or by US$             per common share and by US$             per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other expenses of this offering.

 

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The following table summarizes, on a pro forma basis as of September 30, 2007, the differences between existing shareholders (including holders of our Series A preference shares and our issued warrants that will be automatically converted into or exercised for our common shares immediately upon the completion of this offering) and the new investors with respect to the number of common shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per common share and per ADS paid before deducting underwriting discounts and commissions and estimated offering expenses, assuming an initial public offering price of US$             per ADS, the midpoint of the estimated range of the initial public offering price. The total number of common shares in the following table does not include common shares underlying the ADSs issuable upon the exercise of the underwriters’ over-allotment option.

 

Common Shares Purchased

Total Consideration

Average Price Per Common Share

Average Price Per ADS

Number

Percent

Amount

Percent

Existing shareholders(1)

%

US$

%

US$

US$

New investors

Total

%

US$

%

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(1)

Assumes the automatic conversion of our outstanding Series A preference shares into common shares and the issuance of common shares upon the exercise of our issued warrants at the completion of this offering.

A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and the average price per ADS paid by all shareholders by US$             million, US$             million and US$            , respectively, assuming no change in the number of ADSs sold by us as set forth on the cover page of this prospectus and without deducting underwriting discounts and commissions and other expenses of the offering.

The dilution to new investors will be US$             per common share and US$             per ADS, if the underwriters exercise in full their over-allotment option.

The discussion and tables above also assume no exercise of any outstanding share options or awards under our 2007 equity incentive plan and 2007 long term incentive plan. In August 2007, we adopted our 2007 equity incentive plan pursuant to which we granted share options and restricted share awards for 6,802,495 common shares to our directors, management, employees and consultants. In November 2007, we adopted our 2007 long term incentive plan for our directors, management and employees under which we are authorized to grant options, restricted shares, restricted stock units, stock appreciation rights and other stock-based awards for the purchase of up to 10 million common shares. To the extent that any of these options or other awards are exercised, there will be further dilution to new investors.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of operations and other consolidated financial data for the years ended December 31, 2004, 2005 and 2006, other than the earnings per ADS data, and the consolidated balance sheet data as of December 31, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. Our audited consolidated financial statements have been prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP, and have been audited by Ernst & Young Hua Ming, an independent registered public accounting firm. The selected consolidated statements of operations data for the nine months ended September 30, 2006 and 2007 and the consolidated balance sheet data as of September 30, 2007 have been derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. The selected consolidated statements of operations data and the consolidated balance sheet data as of and for the years ended December 31, 2002 and 2003 have been derived from our unaudited consolidated financial statements, which are not included in this prospectus. Our consolidated financial statements have been prepared as if our current corporate structure had been in existence throughout the relevant periods.

You should read the selected consolidated financial data in conjunction with our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results do not necessarily indicate our results expected for any future periods.

 

		Year Ended December 31,															Nine Months Ended September 30,
		2002			2003			2004			2005			2006			2006			2007
		US$			US$			US$			US$			US$			US$			US$
		(unaudited)															(unaudited)
		(in thousands, except share, per share and per ADS data)
Consolidated Statements of Operations Data(1)
Total revenues		12,807			16,746			35,632			61,942			142,367			99,655			218,301
Total costs of revenues		(11,875	)		(11,978	)		(26,376	)		(42,632	)		(108,196	)		(75,613	)		(146,990	)
Selling and distribution expenses		(493	)		(1,319	)		(1,604	)		(2,175	)		(2,996	)		(1,876	)		(5,957	)
General and administrative expenses		(537	)		(939	)		(1,004	)		(1,696	)		(3,626	)		(2,095	)		(7,736	)
Operating income		(99	)		2,510			6,648			15,439			27,549			20,071			57,618
Net income before minority interest		(471	)		1,067			3,943			9,548			16,120			12,493			35,965
Net income		(471	)		1,067			3,943			9,563			16,123			12,495			35,965
Earnings per share
- Basic		(0.01	)		0.02			0.07			0.16			0.21			0.19			0.32
- Diluted		—			—			0.07			0.16			0.21			0.19			0.30
Shares used in computation
- Basic		60,000,000			60,000,000			60,000,000			60,000,000			72,694,467			63,038,341			106,509,779
- Diluted		60,000,000			60,000,000			60,000,000			60,000,000			72,694,467			63,038,341			114,268,871
Pro forma earnings per share
- Basic (unaudited)(2)		—			—			—			—			0.17			—			0.34
- Diluted (unaudited)(2)		—			—			—			—			0.17			—			0.30
Pro forma shares used in computation
- Basic (unaudited)(2)		—			—			—			—			92,612,479			—			106,531,892
- Diluted (unaudited)(2)		—			—			—			—			96,612,479			—			114,333,967
Earnings per ADS(3)
- Basic
- Diluted
Other Operating Data
Number of projects launched		2			3			2			2			3			2			5
Aggregate GFA delivered (m2)		54,304			53,076			107,455			161,717			370,105			148,654			350,357

 

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		As of December 31,										As of September 30,
		2002		2003		2004		2005		2006		2007
		US$		US$		US$		US$		US$		US$
		(unaudited)								(unaudited)
		(in thousands)
Consolidated Balance Sheet Data(1)
Cash and cash equivalents		2,812		2,822		5,249		14,929		34,914		106,410
Restricted cash		1,432		3,792		11,399		5,385		32,011		41,916
Real estate property under development(4)		18,091		24,914		47,403		64,857		106,804		308,709
Total current assets		26,660		38,294		65,121		90,357		174,426		428,576
Total assets		27,899		43,683		83,004		108,702		204,956		505,017
Total current liabilities		23,851		32,756		72,855		82,228		118,840		131,518
Long-term bank loans		3,624		9,001		3,141		7,435		12,806		139,998
Minority interest		—		—		—		22		—		—
Preference shares		—		—		—		—		22,309		24,441
Total shareholders’ equity		678		1,746		6,896		17,000		46,583		86,757

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(1)

Our financial information is first prepared in RMB and then translated into U.S. dollars at (i) the following year-end exchange rates for assets and liabilities and (ii) the following average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the transactions occurred.

 

		As of and for the year ended December 31,										As of and for the nine months ended September 30,
		2002		2003		2004		2005		2006		2006		2007
Period end RMB : US$ exchange rate		8.2773		8.2769		8.2765		8.0702		7.8087		7.9087		7.5108
Period average RMB : US$ exchange rate		8.2770		8.2771		8.2766		8.1734		7.9721		8.0079		7.6659

 

See “Exchange Rates” and Note 2(d) to our consolidated financial statements.

(2)

On August 25, 2006, we issued Series A preference shares that would convert automatically into 30,805,400 common shares upon the completion of an initial public offering. These pro forma amounts assume that the conversion had occurred “on a hypothetical basis” on January 1, 2006. The pro forma shares used in the computation for the nine months ended September 30, 2007 also include:

 

Ÿ

1,853,172 common shares issuable upon the exercise of the Burnham warrants, which we expect to be exercised prior to completion of this offering;

 

Ÿ

22,113 vested restricted shares, representing a weighted average based on the number of days from vesting to the ending date of the periods presented, and 42,983 unvested restricted shares calculated using the treasury-stock method; and

 

Ÿ

5,905,920 common shares issuable upon the conversion of the convertible notes, representing a weighted average based on the number of days from issuance to the ending date of the periods presented.

 

(3)

Earnings per ADS is calculated based on each ADS representing                  common shares. See “Description of American Depositary Shares.”

(4)

Includes real estate property under development recorded under current assets and non-current assets.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial and Operating Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a fast-growing residential real estate developer that focuses on Tier II cities in China. We focus on developing large scale, quality residential projects aimed at providing middle-income consumers with a comfortable and convenient community life. Since our inception in 1997, we have completed 13 projects with total GFA of 939,829 square meters. As of September 30, 2007, we had 14 projects with estimated total GFA of 2,053,279 square meters under construction and planning, of which seven projects with estimated total GFA of 770,781 square meters were under construction.

We commenced operations in 1997 in Zhengzhou, the provincial capital of Henan Province, and we were ranked No. 1 among all property developers in Zhengzhou in terms of contracted sales of residential units in 2004, 2005 and 2006, according to statistics prepared by the Bureau of Real Estate Management in Zhengzhou. Since 2006, we have expanded into certain Tier II cities in China which we strategically selected based on a set of criteria, which include population and urbanization growth rate, general economic condition and growth rate, disposable income and purchasing power of resident consumers, anticipated demand for private residential properties, availability of future land supply and land prices and governmental urban planning and development policies. We have established operations in five Tier II cities in China, including Chengdu in Sichuan Province, Hefei in Anhui Province, Jinan in Shandong Province, Suzhou in Jiangsu Province and Zhengzhou in Henan Province.

Our revenues, derived primarily from sales of residential units, have grown from US$35.6 million in 2004 to US$61.9 million in 2005 and US$142.4 million in 2006, while our net income was US$3.9 million, US$9.6 million and US$16.1 million, respectively, for the same periods. For the nine months ended September 30, 2007, our revenue and net income were US$218.3 million and US$36.0 million, respectively. We have achieved our growth by employing a standardized and scalable business model that emphasizes rapid asset turnover, efficient capital management and strict cost control. We acquire land primarily through auctions of government land. This acquisition method allows us to obtain unoccupied land with unencumbered land use rights, which in turn enable us to avoid the time and expenses associated with demolition and re-settlement and to commence construction relatively quickly.

We hold a 45% minority interest in a joint venture project company, Jiantou Xinyuan, which had one completed project with total GFA of 107,846 square meters and three additional projects under construction with estimated total GFA of 366,049 square meters as of September 30, 2007. All of Jiantou Xinyuan’s projects are located in Zhengzhou.

Principal Factors Affecting Our Results of Operations

Economic growth and demand for residential property in China

Our business and results of operations are significantly affected by trends and developments in the PRC economy, including disposable income levels, urbanization rate, population growth, availability of project and consumer financing, which affect demand for residential properties in China. During the past decade, China has experienced significant economic growth, which has created a favorable operating environment for us in the Tier II cities where we operate. Sales of our residential units have been strong and 99.6% of the units in our completed projects have been sold as of September 30, 2007. We expect continuing economic growth in China,

 

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rising disposable income levels and population growth in Tier II cities to support demand for residential properties, including our residential units, over the next few years, despite recent measures by the PRC government to control overheating in the PRC property market.

PRC government policies and regulations

Our business and results of operations are significantly affected by PRC government policies and regulations, particularly those that relate to land sales and development, project and consumer financing, property sales and transfers, property taxation and residential property prices.

Since 2004, due to concerns that investment in the PRC property market may become excessive, the PRC government has introduced a series of measures to curb speculative investments in the property market, regulate real estate project lending and promote the development of more low- and mid-priced housing. These measures are discussed in more detail under “Regulation.” We believe that these policies have negatively affected our sales to a lesser extent than other property developers that focus on the luxury sector, because our business model focuses on the development of mid-priced housing, which is consistent with these policies. However, these measures will require us to invest greater capital outlay upfront to finance our projects and may increase our bank borrowing costs. As a consequence, we may not be able to expand our operations as rapidly as we could in the absence of these policies.

Moreover, a substantial portion of our customers depend on mortgage financing to purchase our properties. Although government policies have generally fostered the growth of private home ownership, regulations have been adopted in recent years to tighten mortgage lending rules. For example, the minimum down payment required for residential properties of 90 square meters or more was increased from 20% to 30% of the purchase price in 2006. In September 2007, the minimum down payment for any second or subsequent purchase of residential property was increased to 40% of the purchase price where the purchaser had obtained a bank loan to finance the purchase of his or her first property. Moreover, the interest rate for bank loans of such purchase shall not be less than 110% of the PBOC benchmark rate of the same term and category. The pricing and continued availability of mortgage financing are important factors that affect our results of operations.

Number, type and location of our property developments

The amount of revenues we record in any given period is affected by a number of factors, including the number, type and location of properties we have under construction and their stage of completion, whether the completed units have been sold and the realized selling prices for such units. The average selling prices of our projects vary depending on the types and sizes of the units sold and on the location of the projects. As the overall development moves closer to completion, the sales prices tend to increase because a more established residential community is offered to purchasers. The type of property development affects the estimated construction period of the project, which largely determines the revenue recognition method we apply. Revenue recognized in any period under the full accrual method depends on the number, aggregate GFA and average selling prices of units completed and sold during the period. Revenue recognized in any period under the percentage of completion method depends on contracted sales of units in the relevant project and the completion progress of a project (measured by the ratio of cost incurred to total estimated cost). See “—Critical Accounting Policies.” As the completion and sales of our projects are not spread evenly over time, our results of operations may differ significantly from period to period.

Availability and cost of financing

Like other property developers, we require substantial capital investment for the acquisition of land use rights and the construction of our projects. Our ability to secure financing for such purposes affects the number of projects we are able to develop at any time. The cost of our financing also affects our operating results. We typically obtain bank borrowings for up to 65% of our land use rights cost to fund project development after we receive required permits. Interest on our commercial bank borrowings is typically linked to benchmark lending rates published by the People’s Bank of China. In 2007, we issued US$75 million principal amount of floating rate notes, which bear interest at a variable rate based on LIBOR, and US$25 million principal amount of

 

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convertible notes, which bear interest at 2% per annum. We expect our interest costs to fluctuate in future periods as a result of changes in interest rates and our outstanding borrowings.

Acquisition of land use rights in target markets

Our business model depends to a large extent on our ability to acquire land use rights for development sites and proceed quickly with construction to shorten our development cycle. As a consequence, we are frequently surveying the market for attractive development opportunities in our target Tier II cities. Under current regulations and market practice, land use rights for residential development purposes may be acquired from local governments through a competitive auction or other bidding process, in which the minimum reserve price is determined based on the appraised value. Land use rights may also be acquired in the secondary markets. Land use rights prices vary significantly from city to city.

Government land auctions are a transparent and competitive process for bringing development land to market, allowing the developer to acquire clean title and the ability to proceed immediately with development. However, as competition for development sites in Tier II cities increases, the auction mechanism tends to lead to higher market-clearing prices, which has led to increasing land use rights costs. In 2004, 2005, 2006 and the nine months ended September 30, 2006 and 2007, land use rights costs, including auction price and taxes, constituted 22.8%, 23.8%, 30.0%, 28.9% and 37.2%, respectively, of our cost of revenue. We expect that our land use rights costs may continue to increase in the future, especially as we expand our operations to Tier II cities with higher land prices, which may lead to a decrease in our profit margin.

Our business and geographical expansion

We have expanded our business and operations significantly during the past three years and plan to continue this expansion over the next few years. The number of projects we had under construction has increased from three projects with total GFA of 278,868 square meters as of December 31, 2004 to five projects with total GFA of 584,011 square meters as of December 31, 2006 to seven projects with total GFA of 770,781 square meters as of September 30, 2007, and we had another seven projects with total GFA of 1,282,498 square meters under planning as of September 30, 2007. Since 2006, we have expanded our operations outside of Zhengzhou and we are currently developing and planning projects in five Tier II cities. As a result of this expansion, our capital investment and our financing needs have grown. Moreover, our operating expenses have increased as a result of this expansion, particularly because of the need to recruit more personnel and acquire office space as we expand into new cities. We expect our operating expenses, including our general and administrative expenses, to continue to increase as we continue to expand.

As a result of this offering, we will become a public company subject to the rules and regulations of the United States securities laws and the New York Stock Exchange relating to, among other things, corporate governance and internal controls. In preparation for our transition to become a public company, we have recruited additional management, accounting and other personnel. We have also incurred expenses to improve our enterprise resource management system and internal controls, and expect to incur additional associated costs in the near future.

Share-based compensation expenses

We adopted our equity incentive plan for our directors, management, employees and consultants in August 2007. On August 11, 2007, we granted share options and restricted share awards for an aggregate of 6,802,495 common shares at a weighted average exercise price of US$1.08. These options and restricted shares have various vesting periods ranging from 10 to 60 months, and will vest only if the holder is still a director or an employee or an affiliate of our company at the time of the relevant vesting. The share options will begin to vest upon the completion of this offering and they have a catch-up provision, at the discretion of our board of directors, to allow for vesting from the grant date upon completion of this offering. The restricted share awards have a catch-up provision upon the completion of this offering to allow for vesting from the grant date. These share options and restricted share awards will expire no later than August 10, 2017. See “Management—2007 Equity Incentive Plan.”

 

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The share options and restricted share awards granted are performance-based and do not begin vesting until the consummation of this offering. As a result, no compensation expense had been recognized during the nine months ended September 30, 2007.

In November 2007, we adopted our 2007 long term incentive plan for our directors, management and key employees under which we are authorized to grant options, restricted shares, restricted stock units, stock appreciation rights and other stock-based awards for the purchase of up to 10 million common shares at prevailing market prices. On November 5, 2007, we granted options for an aggregate of 2,441,844 common shares at the exercise price that will be equal to the initial public offering price of the ADSs as set forth on the cover of this prospectus. These options have vesting periods of up to 36 months, starting at the listing date of this offering and will expire no later than the 10th anniversary of the date of grant. See “Management — 2007 Long Term Incentive Plan.”

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets and liabilities, (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates based on our own experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are inherently uncertain. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

When reading our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

Revenue and cost recognition

We apply either of two different methods for revenue recognition, depending on the expected construction period.

Full accrual method

Revenue from the sale of properties where the construction period (the period from the construction permit award date to the unit delivery date) is expected to be 12 months or less is recognized by the full accrual method when the sale is consummated and the unit has been delivered. A sale is considered to be consummated when the sales price has been paid, any permanent financing for which we are responsible has been arranged, all conditions precedent to closing have been performed, we do not have any substantial continuing involvement with the unit and the usual risks and rewards of ownership have been transferred to the buyer. Costs are recorded based on the ratio of the sales value of the relevant units completed and sold to the estimated total project sales value, multiplied by the estimated total project cost. For these projects, our policy is that cash payments received from the buyer are recorded as a deposit liability and costs are capitalized as incurred, up to when the sale is consummated and the unit has been delivered.

Delivery and closing take place only after the local government has certified that the building is completed and ready for habitation (comparable to a certificate of occupancy in the United States) and the following events have occurred:

 

Ÿ

The sales department has determined that the sales contract is signed, the sales tax invoice is properly issued, the purchaser is physically present and the purchasers’ identification cards are checked;

 

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Ÿ

All consideration has been paid by the purchaser; and

 

Ÿ

The unit has been inspected and accepted by the purchaser.

Percentage of completion method

Revenue from the sale of properties where the construction period is expected to be more than 12 months is recognized by the percentage of completion method on the sale of individual units based on the completion progress of a project, as described below.

We apply the percentage of completion method to projects with an expected construction period of over 12 months, not including any unforeseen delays, or delays beyond our control. For these projects, our policy is that cash payments received from the buyer are initially recorded as customer deposits, and costs are capitalized as incurred.

Revenue and profit from the sale of these development properties are recognized by the percentage of completion method on the sale of individual units when the following conditions are met:

 

(a)

construction is beyond a preliminary stage;

 

(b)

the buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit;

 

(c)

sufficient units have already been sold to assure that the entire property will not revert to rental property;

 

(d)

sales prices are collectible; and

 

(e)

aggregate sales proceeds and costs can be reasonably estimated.

Under the percentage of completion method, revenues from units sold and related costs are recognized over the course of the construction period, based on the completion progress of a project. In relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts.

Our significant judgments and estimates related to applying the percentage of completion method include our estimates of the time necessary to complete the project, the total expected revenue and the total expected costs. Fluctuations in sales prices and variances in costs from budgets could change the percentages of completion and affect the amount of revenue and costs recognized. Changes in total estimated project cost or losses, if any, are recognized in the period in which they are determined. Revenue recognized to date in excess of amounts received from customers is classified as current assets under real estate property under development. Amounts received from customers in excess of revenue recognized to date are classified as current liabilities under customer deposits.

Interest capitalization

We obtain loans from banks and shareholders and we issue debt securities to finance projects and provide for working capital. See “—Liquidity and Capital Resources.” We charge the borrowing costs related to working capital loans to interest expense when incurred and capitalize interest costs related to project developments as a component of the project costs.

The interest to be capitalized for a project is based on the amount of borrowings related specifically to such project. Interest for any period is capitalized based on the amounts of accumulated expenditures and the interest rate of the loans. Payments received from the pre-sales of units in the project are deducted in the

 

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computation of the amount of accumulated expenditures during a period. The interest capitalization period begins when expenditures have been incurred and activities necessary to prepare the asset (including administrative activities before construction) have begun, and ends when the project is substantially completed. Interest capitalized is limited to the amount of interest incurred.

The interest rate used in determining the amount of interest capitalized is the weighted average rate applicable to the project-specific borrowings. However, when accumulated expenditures exceed the principal amount of project-specific borrowings, we also capitalize interest on borrowings that are not specifically related to the project, at a weighted average rate of such borrowings.

Our significant judgments and estimates related to interest capitalization include the determination of the appropriate borrowing rates for the calculation, and the point at which capitalization is started and discontinued. Changes in the rates used or the timing of the capitalization period may affect the balance of property under development and the costs of sales recorded.

Income taxes

We have adopted the liability method for financial accounting and reporting for income taxes. We recognize:

 

Ÿ

the amount of taxes payable or refundable for the current fiscal year;

 

Ÿ

deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns; and

 

Ÿ

the difference between the taxes calculated based on our earnings at the statutory rates and the amounts charged by the local tax authorities based on our “deemed earnings.”

Our significant judgments and estimates include the allowability of deductible items for income tax purposes and other tax positions that we may take. Disagreements with the taxing authorities could subject us to additional taxes, and possibly, penalties.

Please see note 13 to our consolidated financial statements.

Impairment of long-lived assets

We review long-lived assets, including real estate projects, whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected as a result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the fair value of the assets.

Our significant judgments and estimates related to impairment include our determination if an event has occurred to warrant an impairment test. If a test is required, other significant judgments and estimates include our expectations of future cash flows, and the calculation of the fair value of the assets impaired.

Share-based payments

Under SFAS No. 123(R), we are required to recognize share-based compensation as compensation expense in our statement of operations based on the fair value of stock options and other equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide services to us in exchange for the equity award. However, the options granted under the 2007 Equity Incentive Plan are performance-based and do not begin vesting until the consummation of our initial public offering. Due to the performance condition in the awards, no compensation expense has been recognized during the nine months ended September 30, 2007.

 

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Since August 25, 2006, we have issued instruments convertible into or exercisable for common shares to investors, employees and directors as set forth in the following table.

 

Type of instrument		Issue Date/ Grant Date		No. of shares / warrant / option issued / granted		Conversion price / Exercise price		Fair Value of Instrument at Issue/Grant Date					Fair Value of Common Equity		Type of Valuation
								Per unit			Aggregate
						US$		US$			US$		US$
Series A Convertible Redeemable Preference Shares		August 25, 2006		30,805,400		0.81 Note(1)		0.80 Note(2)			24,504,000		0.53		(a	)
Series A Convertible Redeemable Preference Shares associated warrants		August 25, 2006		3,987,009		0.01		0.12			496,000		0.53		(a	)
Burnham warrants		August 25, 2006		1,853,172		0.81		0.03			55,595		0.53		(c	)
Floating rate note warrants		April 13, 2007		750		Note(3)		9,812.00			7,359,000		1.45		(a	)
Convertible notes		April 13, 2007		9,597,120		2.60 Note(1)		2.60			25,000,000		1.45		(a	)
Stock Option Plan I		August 11, 2007		3,604,078		0.0001		3.25			11,713,254		3.25		(b	)
Stock Option Plan II		August 11, 2007		400,000		0.81		2.69			1,076,000		3.25		(b	)
Stock Option Plan III		August 11, 2007		2,798,417		2.50		1.98			5,540,866		3.25		(b	)
Stock Option Plan IV		November 5, 2007		2,441,844		price of this offering		Note	(4)						(d	)

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(a)

Retrospective valuation of common equity by American Appraisal China Limited, an independent third party appraisal firm.

(b)

Contemporaneous valuation of common equity by American Appraisal China Limited.

(c)

Valuation based on the value of services provided.

(d)

Valuation of common shares by management based on an assumed initial offering price of US$            , the mid-point of the indicative price range for the offering, adjusted for a 5% lack of marketability discount.

 

Note  (1):

Amount represents the original issuance price times the conversion rate at which these securities are convertible into common shares.

Note  (2):

Valuation based on negotiated price between independent third parties at arm’s length. A retrospective valuation of the preference shares by American Appraisal China Limited indicated a fair value of US$1.26.

Note  (3):

The exercise price for each warrant share is 80% of price per common share at an initial public offering. Total number of common shares to be purchased is quotient of US$30 million divided by exercise price.

Note  (4):

The fair value of each option is estimated on the date of grant using the Dividend Adjusted Black-Scholes option-pricing model that uses such assumptions: average risk-free rate of return of 4.61%; expected term of 5.8 years; volatility rate of 46.5%; and no dividend yield.

We have engaged American Appraisal China Limited, or American Appraisal, an independent third party appraisal firm, to assist in our determination of the fair value of our common shares as of each relevant grant date or issuance date of the preference shares, warrants and options on August 25, 2006, April 13, 2007 and August 11, 2007, respectively. Valuations on August 25, 2006 and April 13, 2007 have been performed retrospectively and the valuation on August 11, 2007 was performed contemporaneously.

American Appraisal used a combination of (i) the discounted cash flow, method of the income approach and (ii) the market approach to assess the fair value of common shares underlying the warrants and options we granted in 2006 and 2007. The determination of the fair value of our common shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of each grant.

The major assumptions used in calculating the fair value of common shares include:

 

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Weighting of discounted cash flow and market multiples. American Appraisal assigned a 50% weight to the discounted cash flow approach and 50% weight to the market multiple approach.

 

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Weighted average cost of capital. Weighted average cost of capital of between 17.5% and 22.0% was used. This was the combined result of the change in risk-free rate, industry average beta, our increased use of leverage and the decrease in our company-specific risk as we continued to grow and meet important milestones.

 

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Ÿ

Comparable companies. In deriving discount rates and market multiples, American Appraisal selected nine companies in the real estate industry whose shares are publicly traded on securities markets in China and Hong Kong for reference as our guideline companies. These companies have longer trading history on the public market and therefore more meaningful records from a volatility perspective.

 

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Capital market valuation multiples. American Appraisal obtained and assessed updated capital market data of the selected comparable companies and used multiples of enterprise value to earnings before interest, taxes, depreciation and amortization or EV/EBITDA, for its valuations.

 

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Discount for lack of marketability, or the DLOM. American Appraisal quantified discount for lack of marketability using the Black-Scholes option-pricing model. This option pricing method is one of the methods commonly used in estimating DLOM as it takes into consideration factors such as timing of liquidity event (e.g. this offering) and estimated volatility of our shares. This method treats the right to sell a company’s shares freely before a liquidity event as a put option. The further the valuation date is from an expected liquidation event and the higher the estimated volatility of our share, the higher the put option value and thus the higher the implied discount would be. Discounts for lack of marketability of between 13% and 20% were used in our valuations.

We estimated the volatility of our shares based on the stock price volatilities of our comparable companies. As at August 11, 2007, the average share price volatility of our comparable companies for a comparable period to the time of the expected date of this offering was 57%. Based on this information, American Appraisal used the option-pricing model to reach a DLOM of approximately 13%. As the amount of time until the expected date of this offering decreases, the DLOM will decrease and ultimately fall to zero. If the DLOM decreases by 1%, for example, from 13% to 12%, additional compensation expense of US$244,000 would be recognized over the vesting period of the options and restricted shares granted on August 11, 2007.

We summarized below the key assumptions used in the valuations of common shares underlying the instruments as at each issue date.

 

Issue Date		Weighted average cost of capital			Volatility used for allocating equity value			Discount for lack of marketability			EV/EBITDA of comparable companies (before adjustment)		EV/EBITDA used in valuation (adjusted)
August 25, 2006		22.0	%		49.8	%		20	%		7.2 - 38.6		3.9
April 13, 2007		21.0	%		52.2	%		18	%		4.2 - 24.8		4.5
August 11, 2007		17.5	%		57.3	%		13	%		6.0 - 49.9		9.3

The income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts developed by us. The assumptions used in deriving the fair values are consistent with our business plan at the time of respective valuations. These assumptions include: no material changes in the existing political, legal and economic conditions in China; no material changes in our ability to retain competent management, key personnel and staff to support our ongoing operations; and no material deviation in market conditions from economic forecasts. These assumptions are inherently uncertain. The risks associated with achieving our forecasts were assessed by selecting the appropriate discount rates, which ranged from 21% to 22%.

The discount rates have been determined by American Appraisal using weighted average cost of capital, weighted at a long-term debt level of between 20% to 30%. After-tax cost of debt is estimated at between 5% to 8% and cost of equity at between 22% to 26%.

 

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The cost of debt as at each issuance date was determined by a consideration of the interest rates of our existing bank loans and the best lending rates in China. The cost of equity was determined by American Appraisal, using the Capital Asset Pricing Model, based on a consideration of the factors like risk-free rate, comparative industry risk, equity risk premium, small-company premium and company-specific factors. The decrease in weighted average cost of capital from 22.0% on August 25, 2006 to 17.5% on August 11, 2007 was the combined result of (i) the continuous growth of our business and company size, (ii) increased financial leverage of our company and (iii) the likely lower cost of equity when becoming a public company.

Under the market approach, enterprise value to earnings before interest, taxes, depreciation and amortization or EV/EBITDA multiples of comparable companies were calculated and analyzed. The trading multiples of the comparable companies vary but in general, the companies with higher projected growth, higher profit margin and lower business risk (manifested as lower required cost of capital and larger market capitalization) would lead to a higher multiple. As no single public company is similar to us in all aspects, American Appraisal compared each individual company to us and derived the adjusted multiples applicable to us based on the above factors. American Appraisal took the average of the adjusted multiples, and multiplied that by the forecast EBITDA of our company to come up with an enterprise value on a minority and freely tradable basis. To reflect the fact that we were a private company, a discount for lack of marketability has also been considered.

Due to the facts that (i) we were a small company and our cost of capital was higher than those of the public companies and (ii) our land reserves are less than many of the comparable companies, which increases the risk and uncertainty in realizing our projected profits, the EV/EBITDA multiples used in the valuations were lower than or on the low end of the range of the comparable companies.

American Appraisal used the option-pricing method to allocate enterprise value to preference and common shares, taking into account the guidance prescribed by the AICPA Audit and Accounting Practice Aid “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” or the Practice Aid. The method treats common stock and preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the preferred stock. Under this method, the common stock has value only if the funds available for distribution to shareholders exceed the value of the liquidation preference at the time of a liquidity event.

This method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our board and management. Estimating the volatility of the share price of a privately held company is complex because there is no readily available market for the shares. American Appraisal estimated the volatility of our shares based on historical volatility of comparable companies’ shares. Volatilities of between 50% and 60% have been used. Had we used different estimates of volatility, the allocations between preferred and common shares would have been different.

As at the issue date, as retrospectively determined by American Appraisal, the fair value of the Series A Convertible Redeemable Preference Shares, or the Series A preference shares, was US$1.26 and the fair value of common share was US$0.53. As the Series A preference shares have rights, privileges and preferences that common shares do not have, value of the preferred share is normally higher than that of the common share. The difference in value between the common share and the Series A preference share will decrease as the value of our company grows.

The key factors that cause the difference in values between the preference share and the common share include (i) the Series A preference shares are redeemable five years after issuance at issue price plus accrued interests at an annual compound rate of 10%, (ii) the preference shares rank senior to the common shares in all respects as to rights of payment and distribution and (iii) on a winding-up, the holders of Series A preference shares shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds

 

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of us to holders of the common shares by reason of their ownership of such shares, for each Series A preference share, the amount per share, or the Series A Preference Amount, equals to two (2) times the sum of (x) US$0.81155 and (y) an accreted annual amount of 10% on the original Series A issue price, compounded annually from the date of issuance of such Series A preference shares to the date of payment hereunder. After the payment in full has been made to the holders of Series A preference shares, the holders of the Series A preference shares shall be entitled to share pro rata in all remaining assets and funds to be distributed.

On November 5, 2007, we granted options exercisable for 2,441,844 common shares. These options vest over a period of three years, starting at the listing date of this offering, and have an exercise price that will be equal to the initial public offering price of the ADSs as set forth on the cover of this prospectus.

We have applied a 5% discount to an assumed initial offering price of US$            , the mid-point of the indicative price range for the offering, to arrive at a fair value of US$             for each common share. In calculating the discount, we have accounted for adjustments due to the residual price risk of the common shareholders before the offering and have assumed that the offering will be consummated prior to year end.

The fair value of each option is estimated on the date of grant using the Dividend Adjusted Black-Scholes option-pricing model that uses the assumptions noted below:

 

Average risk-free rate of return		4.61%
Expected term		5.8 years
Volatility rate		46.5%
Dividend yield		0%

The risk-free rate for periods within the expected life of the option is based on the implied yield rates of China International Bond denominated in U.S. dollar as of the valuation date. The expected life of options represents the period of time the granted options are expected to be outstanding. Since we have not previously granted options that have vested, no historical exercising pattern could be followed in estimating the expected life. Therefore, the expected life is estimated as the average of the contractual term and the vesting period. We have not paid dividends in the past nor do we expect to pay dividends in the foreseeable future, therefore the dividend yield is set as zero. Since our shares are not publicly tradable at the moment, the expected volatility we used in our calculations was based on the historical volatilities of comparable publicly traded companies engaged in similar business.

Selected Statement of Operations Items

Revenues

Our revenues are derived mainly from the development and sale of real estate. In addition, we generate a small percentage of revenue from leasing ancillary facilities and residential units in certain of our residential developments, as well as from the provision of related services, including property management and real estate agency services.

The following table sets forth a breakdown of our revenues for the periods indicated.

 

		Year Ended December 31,												Nine Months Ended September 30,
		2004				2005				2006				2006				2007
		US$		%		US$		%		US$		%		US$		%		US$		%
		(US$ in thousands, except for percentages)
Real estate sales		35,320.6		99.1		61,769.4		99.7		141,577.7		99.5		99,341.0		99.7		215,908.3		98.9
Real estate leasing		143.9		0.4		132.1		0.2		204.4		0.1		171.2		0.2		165.5		0.1
Other revenue		168.0		0.5		40.5		0.1		585.1		0.4		142.9		0.1		2,227.0		1.0
Total revenues		35,632.5		100.0		61,942.0		100.0		142,367.2		100.0		99,655.1		100.0		218,300.8		100.0

 

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Real Estate Sales

Real estate sales represent revenues from the sales of residential properties we develop. Throughout this prospectus, real estate sales are stated net of sales tax levied on the relevant contracted sales value. Sales tax is a one-time tariff which consists of a business tax at the rate of 5%, an urban construction tax at the rate of 0.35% and an education surcharge at the rate of 0.15%. Total sales tax amounted to US$2.1 million, US$3.6 million and US$8.3 million, for 2004, 2005, and 2006, respectively. Total sales tax amounted to US$5.8 million and US$12.7 million for the nine months ended September 30, 2006 and 2007, respectively.

Historically we recognized most of our projects under the full accrual method. In 2004 and 2005, we recognized revenues from one project, Zhengzhou Xinyuan Splendid Haojingge, under the percentage of completion method. In 2006, we recognized revenues from two additional projects, Zhengzhou Central Garden-East and Zhengzhou Central Garden-West, under the percentage of completion method. In the nine months ended September 30, 2007, we recognized revenues from five additional projects, Suzhou Lake Splendid, Jinan Elegant Scenery, Zhengzhou Commercial Plaza, Suzhou Colorful Garden and Hefei Wangjiang Garden, under the percentage of completion method. The full accrual method was applied to the remainder of our projects. See “—Critical Accounting Policies—Revenue and cost recognition.”

Real Estate Leasing

Real estate leasing revenues represent the income from the rental of ancillary facilities, including kindergarten, elementary school, clubhouse and parking facilities, in a number of our developments. We also lease a small number of residential units owned by us.

Other Revenue

Other revenue consists primarily of fees received for our property management services, real estate agency services and other real estate related services that we provided to residents and purchasers of our residential units. We acquired these operations from Mr. Yong Zhang and Ms. Yuyan Yang in August 2006 for an aggregate consideration of US$2.1 million.

Also included in other revenues are discounts given by suppliers with respect to expenses incurred in prior years, penalties paid by tenants of our leased properties for late payment and penalties paid by our contractors for delays in their contract performance.

Cost of Revenues

The following table sets forth a breakdown of our cost of revenues for the periods indicated.

 

		Year Ended December 31,												Nine Months Ended September 30,
		2004				2005				2006				2006				2007
		US$		%		US$		%		US$		%		US$		%		US$		%
		(US$ in thousands, except for percentages)
Costs of real estate sales
Land use rights costs		6,005.5		22.8		10,148.4		23.8		32,439.0		30.0		21,889.8		28.9		54,608.2		37.2
Construction costs		20,118.5		76.3		32,051.1		75.2		74,828.4		69.2		53,210.8		70.4		90,423.2		61.5
Total		26,124.0		99.1		42,199.5		99.0		107,267.4		99.2		75,100.6		99.3		145,031.4		98.7
Costs of real estate leasing		252.1		0.9		432.8		1.0		442.0		0.4		347.3		0.5		319.8		0.2
Other costs		—		—		—		—		486.3		0.4		164.5		0.2		1,638.6		1.1
Total costs of revenues		26,376.1		100.0		42,632.3		100.0		108,195.7		100.0		75,612.4		100.0		146,989.8		100.0

 

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Costs of Real Estate Sales

Costs of real estate sales consist primarily of land use rights costs and construction costs. Costs of real estate sales are capitalized and allocated to development projects using the specific identification method. When the full accrual method of revenue recognition is applied, costs are recorded based on the ratio of the sales value of the relevant units completed and sold to the estimated total project sales value, multiplied by the estimated total project costs. When the percentage of completion method of revenue recognition is applied, capitalized costs are released to our statement of operations based on the completion progress of a project. See “—Critical Accounting Policies—Revenue and cost recognition.”

Land use rights costs.    Land use rights costs include the land premium we pay to acquire land use rights for our property development sites, plus taxes. We acquire our development sites mainly by competitive bidding at public auctions of government land. Our land use rights costs for different projects vary according to the size and location of the site and the minimum land premium set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Our land use rights costs have increased in the past few years due to rising property prices in Zhengzhou and increased competition from other bidders at government land auctions.

Construction costs.    We outsource the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide for fixed or capped payments which cover substantially all labor, materials, fittings and equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and door frames. Our construction costs also include capitalized interest costs.

Costs of Real Estate Leasing

Our costs of real estate leasing consist primarily of depreciation expenses and maintenance expenses associated with the leased properties. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of our properties held for lease are 20 years.

Other Costs

Other costs represent costs incurred in connection with the property management services, real estate agency services and other property related services that we provide to residents and purchasers of our developments.

Selling and Distribution Expenses

Our selling and distribution expenses include:

 

Ÿ

advertising and promotion expenses, such as print advertisement costs, billboard and other display advertising costs, and costs associated with our showrooms and model apartments;

 

Ÿ

staff costs, which consist primarily of salaries and sales commissions of approximately 0.45% of contracted sales of our sales personnel; and

 

Ÿ

other related expenses.

As of September 30, 2007, we employed 160 full time sales and marketing personnel. We expect our selling and marketing expense to increase in the near future as we increase our sales efforts, launch more projects and target new markets to expand our operations.

General and Administrative Expenses

General and administrative expenses principally include:

 

Ÿ

staff salaries and benefits;

 

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Ÿ

travelling and entertainment expenses;

 

Ÿ

professional fees, such as audit and legal fees; and

 

Ÿ

other expenses.

We expect that general and administrative expenses will increase as we expand our business and operations. In addition, as a result of this offering, we will become a public company subject to the rules and regulations of United States securities laws and the New York Stock Exchange relating to, among other things, corporate governance and internal controls. In preparation for our transition to become a public company, we have recruited additional management and accounting personnel, and we believe that we will need to hire more personnel as our business continues to grow. We have also incurred expenses to improve our enterprise resource management system and internal controls, and we believe that we will need to incur additional such costs in the near future.

Interest Income

Interest income represents interest earned on our bank balances.

Interest Expenses

Interest expenses include (i) interest paid on our bank borrowings and other indebtedness, including our floating rate notes and convertible notes issued in April 2007, (ii) amortization of warrants and debt issuance cost, (iii) accretion of fair value of embedded derivatives and (iv) change in fair value of embedded derivatives. The floating rate notes bear interest at the adjustable annual rate of six-month LIBOR plus 6.8%, while the convertible notes bear interest at the fixed annual rate of 2%. The rates of interest payable on our floating rate notes and convertible notes are subject to adjustment under some circumstances which are described in more detail under “Description of Debt and Equity-Linked Securities.” Interest rates on our bank borrowings, all of which are granted by PRC commercial banks and denominated in RMB, are typically linked to benchmark rates published by PBOC. As of the date of this prospectus, the PBOC benchmark rate for one-year loan is 7.29% per annum and those for loans of more than one year range from 7.47% to 7.83% per annum.

Share of Income (Loss) in Equity Investee

Share of income (loss) in equity investee represents profit or loss associated with our 45% equity interest in Jiantou Xinyuan. Under the relevant joint venture agreement, we share the profit or loss of Jiantou Xinyuan according to our equity interest percentage. Jiantou Xinyuan recorded a loss in the nine months ended September 30, 2006, due to the start-up of its development activities. Jiantou Xinyuan launched Zhengzhou International City Garden Phase I in March 2006 and completed this project in January 2007. Jiantou Xinyuan also launched three projects in 2007. See “Business—Jiantou Xinyuan’s Projects.” Jiantou Xinyuan recorded a net income of US$13.0 million in the nine months ended September 30, 2007.

Change in Fair Value of Derivative Liabilities

We have issued warrants to Series A preference shareholders and our floating rate notes holders, which are accounted for as derivative liabilities. Under our amended warrant agreement dated as of August 28, 2007, the Series A preference shares warrants, entitling the Series A preference shareholders to purchase additional preference shares, shall terminate if we meet our earnings target in the warrant agreement or if we consummate a qualified initial public offering prior to March 31, 2008. During the nine months ended September 30, 2007, the fair value of Series A preference shares warrants decreased as a result of the amendment to the warrant agreement and primarily due to our performance relative to our earnings target. The warrants issued to our floating rate notes holders entitle them to purchase our common shares at 80% of the price per common share sold to the public pursuant to an initial public offering. During the nine months ended September 30, 2007, the fair value of such warrants has decreased as the likelihood of such offering has improved.

 

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The change in fair value is measured (i) in the case of the Series A preference shares warrants, against fair value as of December 31, 2006, and (ii) in the case of the warrants issued with floating rate notes, against fair value as of the date of their issuance.

Income Taxes

The following table sets forth the components of income taxes for the periods indicated.

 

		Year Ended December 31,														Nine Months Ended September 30,
		2004						2005				2006				2006				2007
		US$			%			US$		%		US$		%		US$		%		US$		%
		(in thousands, except for percentages)
Corporate income tax		2,011.7			103.0			2,949.8		56.2		6,193.6		57.8		4,127.2		59.4		3,604.8		17.5
Land appreciation tax		10.1			0.5			418.5		8.0		2,003.0		18.7		396.1		5.7		3,848.6		18.7
Tax uncertainty benefit		—			—			—		—		—		—		—		—		8,810.1		42.8
Deferred tax (benefit) expense		(69.6	)		(3.5	)		1,879.5		35.8		2,520.7		23.5		2,425.3		34.9		4,320.7		21.0
Income taxes		1,952.2			100.0			5,247.8		100.0		10,717.3		100.0		6,948.6		100.0		20,584.2		100.0

Corporate Income Tax, Tax Uncertainty Benefit and Deferred Tax Expense

As a Cayman Islands exempted company, we are not subject to income tax in the Cayman Islands.

Our PRC subsidiaries are subject to income tax at a statutory rate of 33% (30% state income tax plus 3% local income tax) on their taxable income. This tax rate will be reduced to 25% according to the PRC’s new Corporate Income Tax Law which will take effect from January 1, 2008. In 2004, 2005, 2006 and the nine months ended September 30, 2006 and 2007, in accordance with local provisional tax regulations in Henan province, the local tax authority in Zhengzhou determined that the taxable income of our PRC subsidiaries in Henan province should be deemed at 12% or 14% of their total cash receipts from sales of residential units. Total cash receipts include cash receipts proceeds from pre-sales of our properties that are recorded as customer deposits, which partly comprise mortgage loan proceeds received in our account from mortgage lending banks. The Zhengzhou local tax authority has provisionally confirmed that it will apply the same levy method to our PRC subsidiaries located in Henan province for the year ending December 31, 2007. For our subsidiaries located in Shandong, Jiangsu, Anhui and Sichuan provinces, the relevant local tax authorities levy income tax similarly at the rate of 33% on a deemed taxable income basis by applying a taxable margin rate to cash receipts from our sales, including pre-sales, of real estate properties located in those jurisdictions, net of applicable business tax, surcharges and costs.

The Zhengzhou and other local tax authorities are entitled to re-examine taxes paid in prior years under the levy method described above; however, they have not indicated whether they will do so. We have made full provision for the corporate income tax payable by our PRC subsidiaries based on the statutory 33% income tax rate after appropriate adjustments to our taxable income used in the calculation. Prior to January 1, 2007, the difference between tax payable on our actual taxable income and tax levied on the deemed taxable income basis has been treated as a temporary difference, giving rise to deferred tax balances. We believe this is appropriate due to the possibility of reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, as the local authorities have indicated that they will apply the regulation in the same manner in 2007. The deferred tax balances have been classified as non-current.

On January 1, 2007, we adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). There was no cumulative effect adjustment to beginning retained earnings resulting from the adoption of FIN 48. The total liability for cumulative unrecognized tax uncertainty benefit as of January 1, 2007 was US$2.7 million. As of the date of adoption, no interest and penalties have been recognized under FIN 48.

 

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Since the adoption of FIN 48 on January 1, 2007, our total unrecognised tax uncertainty benefit increased by US$8.8 million, and the balance at September 30, 2007 is US$11.8 million. The provision for deferred tax arising from the difference between tax payable on our actual taxable income and tax levied on the deemed taxable income basis has been reclassified to unrecognized tax uncertainty benefit.

Land Appreciation Tax

Under PRC laws and regulations, our PRC subsidiaries engaging in property development are subject to land appreciation tax, or LAT, which is levied by the local tax authorities upon the “appreciation value” as defined in the relevant tax laws. All taxable gains from the sale or transfer of land use rights, buildings and related facilities in China are subject to LAT at progressive rates that range from 30% to 60%. Certain exemptions are allowed for sales of ordinary residential properties if the appreciation value does not exceed a threshold specified in the relevant tax laws. Gains from sales of commercial properties are not eligible for this exemption. Whether a property qualifies for the ordinary residential property exemption is determined by the local government taking into consideration the property’s plot ratio, aggregate GFA and sales price.

The Zhengzhou local tax authority did not impose the LAT on real estate companies until September 2004. Since September 2004, it has levied LAT at fixed rates of 0.8% and 1% on total cash receipts from sales, including pre-sales, of our residential units and commercial properties (which comprised certain retail space within our residential developments), respectively, rather than applying the progressive rates to the appreciation value. On December 28, 2006, the State Administration of Taxation issued the Notice on the Administration of the Settlement of Land Appreciation Tax of Property Development Enterprises, which came into effect on February 1, 2007. Such notice provides further clarification on the payment and settlement of LAT.

We have responded to this Notice by making provision for LAT on all projects completed since the date of incorporation. We have accrued all LAT payable on our property sales and transfers in accordance with the progressive rates specified in relevant tax laws, less amounts previously paid under the levy method applied by relevant local tax authorities. Provision for LAT on projects completed in prior years is charged as income tax in year 2006. In prior years, we recognized LAT as an expense upon completion of our projects based on the rate of 0.8% or 1%, as applicable, of cash receipts imposed by the local tax authority. As of December 31, 2004 and 2005 our prepaid LAT balances of US$134,411 and US$284,028, which represent amounts we had paid to local tax authorities based on cash receipts associated with the properties pre-sold during those periods, were included in other deposits and prepayments in our consolidated balance sheets, before the relevant projects were completed. Once the projects were completed, the relevant prepaid LAT balances were recorded as income tax expense.

 

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Results of Operations

The following table presents a summary of our consolidated statements of operations by amount and as a percentage of our total revenues during the periods indicated. Our historical results presented below are not necessarily indicative of the results that may be expected for any other future period.

 

		Year Ended December 31,																	Nine Months Ended September 30,
		2004					2005						2006						2006						2007
		US$		%			US$			%			US$			%			US$			%			US$			%
		(in thousands, except for percentages)																							(unaudited)
Revenues		35,632.5		100.0			61,942.0			100.0			142,367.2			100.0			99,655.1			100.0			218,300.7			100.0
Cost of revenues		(26,376.1)		(74.0	)		(42,632.3	)		(68.8	)		(108,195.7	)		(76.0	)		(75,612.5	)		(75.9	)		(146,989.7	)		(67.3	)
Gross profit		9,256.4		26.0			19,309.7			31.2			34,171.5			24.0			24,042.6			24.1			71,311.0			32.7
Selling and distribution expenses		(1,604.0)		(4.5	)		(2,175.1	)		(3.5	)		(2,996.2	)		(2.1	)		(1,876.1	)		(1.9	)		(5,956.7	)		(2.7	)
General and administrative expenses		(1,004.1)		(2.8	)		(1,695.4	)		(2.7	)		(3,625.8	)		(2.5	)		(2,095.9	)		(2.1	)		(7,736.0	)		(3.5	)
Operating income		6,648.3		18.7			15,439.2			24.9			27,549.5			19.4			20,070.6			20.1			57,618.3			26.5
Interest income		66.9		0.2			191.0			0.3			461.3			0.3			124.4			0.1			735.5			0.3
Interest expenses		(820.1)		(2.3	)		(834.5	)		(1.3	)		(727.0	)		(0.5	)		(307.2	)		(0.3	)		(1,438.6	)		(0.7	)
Share of income (loss) in equity investee		—		—			—			—			(446.1	)		(0.3	)		446.1			(0.4	)		5,819.7			2.7
Change in fair value of derivative liabilities		—		—			—			—			—			—			—			—			(6,186.0	)		(2.8	)
Income from operations before income taxes		5,895.1		16.5			14,795.7			23.9			26,837.7			18.9			19,441.7			19.5			56,548.9			26.0
Income taxes		(1,952.1)		(5.5	)		(5,247.8	)		(8.5	)		(10,717.3	)		(7.5	)		(6,948.6	)		(7.0	)		(20,584.2	)		(9.4	)
Minority interest		—		—			14.9			0.0			2.6			0.0			2.2			0.0			—			—
Net income		3,943.0		11.1			9,562.8			15.4			16,123.0			11.3			12,495.3			12.5			35,964.7			16.6
Accretion of Series A convertible redeemable preference shares		—		—			—			—			—			—			(235.6	)		(0.2	)		(2,167.4	)		(1.0	)
Net income attributable to ordinary shareholders		3,940.0		11.1			9,562.8			15.4			16,123.0			11.3			12,259.7			12.3			33,797.3			15.6

 

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Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Revenues

Revenues increased by US$118.6 million, or 119.1%, to US$218.3 million for the nine months ended September 30, 2007 from US$99.7 million for the nine months ended September 30, 2006.

Real estate sales.    Revenues from real estate sales increased by US$116.6 million, or 117.3%, to US$215.9 million for the nine months ended September 30, 2007 from US$99.3 million for the nine months ended September 30, 2006, primarily as a result of increased residential unit sales and increased selling prices of those residential units. In the nine months ended September 30, 2007, we recognized revenues from Zhengzhou Central Garden-East, Zhengzhou Central Garden-West, Suzhou Lake Splendid, Jinan Elegant Scenery, Zhengzhou Commercial Plaza, Suzhou Colorful Garden and Hefei Wangjiang Garden under the percentage of completion method, while revenues from other projects were recognized under the full accrual method. In the nine months ended September 30, 2006, we recognized revenues from Zhengzhou Xinyuan Splendid Haojingge, Zhengzhou Central Garden-East and Zhengzhou Central Garden-West under the percentage of completion method, while revenues from other projects were recognized under the full accrual method. The increase was also attributable to the increase of average selling price of units we sold from RMB3,125 per square meter in the nine months ended September 30, 2006 to RMB4,820 per square meter in the nine months ended September 30, 2007.

Full accrual method revenues

The following table sets forth for the nine months ended September 30, 2006 and 2007 the aggregate GFA and the related revenues recognized under the full accrual method by project:

Project		Total GFA(1)		GFA delivered for nine months ended September 30,					Percentage of total GFA delivered(2) as of September 30,				Revenues recognized for nine months ended September 30,
				2007			2006		2007		2006		2007					2006
		m2		m2			m2		%		%		US$			%(3)		US$		%(3)
Zhengzhou Xinyuan Splendid 1A		62,623		884			56		97.8		96.2		857,339			0.4		73,153		0.1
Zhengzhou Xinyuan Splendid 2B		27,041		—			—		100.0		100.0		23,838			0.0		—		—
Zhengzhou Xinyuan Splendid 3A3B3C		114,774		225			1,942		100.0		99.4		125,459			0.1		909,693		0.9
Zhengzhou Xinyuan Splendid City Homestead		45,378		645			1,279		100.0		98.2		404,391			0.2		694,463		0.7
Other		—		—			—		—		—		62,074			0.0		955,902		1.0
Zhengzhou Xinyuan Splendid Subtotal		249,816		1,754			3,277						1,473,101			0.7		2,633,211		2.7
Zhengzhou City Family		39,226		5,968			—		92.1		0.0		3,392,758			1.6		—		—
Zhengzhou City Manor(4)		118,716		(105	)		118,716		99.9		100.0		(34,550	)		0.0		37,624,101		37.9
Total		407,758		7,617			121,993						4,831,309			2.3		40,257,312		40.6

 

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(1)

The amount for “total GFA” in this table and elsewhere in this prospectus are the amounts of total saleable residential GFA and are derived on the following basis:

 

Ÿ

for properties that are sold, the stated GFA is based on the sale contracts relating to such property;

 

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Ÿ

for unsold properties that are completed or under construction, the stated GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and

 

Ÿ

for properties that are under planning, the stated GFA is based on the land grant contract and our internal projection.

 

(2)

Percentage of total GFA delivered is the total GFA delivered as of a period end divided by the project’s total GFA.

(3)

Percentage of all real estate sales revenues for the relevant period, including revenues recognized under full accrual method and under percentage of completion method.

(4)

During the nine months ended September 30, 2007, we purchased one unit from one of our customers to use for property management purposes.

Percentage of completion method revenues

The following table sets forth the percentage of completion, the percentage sold and related revenues for our projects recognized under the percentage of completion method in the nine months ended September 30, 2006 and 2007.

 

Project		Total GFA(1)		Percentage of Completion(2) as of September 30,				Percentage Sold(3) - Accumulated as of September 30,				Revenues recognized for nine months ended September 30,
				2007		2006		2007		2006		2007				2006
		m2		%		%		%		%		US$		%(4)		US$		%(4)
Zhengzhou Xinyuan Splendid Haojingge		31,089		100.0		100.0		100.0		100.0		—		—		1,236,419		1.2
Zhengzhou Central Garden-East		165,206		100.0		57.0		100.0		79.0		32,702,607		15.1		29,945,203		30.1
Zhengzhou Central Garden-West		190,384		100.0		53.0		100.0		71.0		40,977,706		19.0		27,902,110		28.1
Zhengzhou Commercial Plaza		67,578		49.1		—		61.0		—		12,750,809		5.9		—		—
Suzhou Lake Splendid		197,179		66.4		—		79.1		—		73,245,679		33.9		—		—
Suzhou Colorful Garden		81,131		69.2		—		2.2		—		1,106,624		0.5		—		—
Jinan Elegant Scenery		99,777		76.7		—		65.2		—		32,397,132		15.0		—		—
Hefei Wangjiang Garden		145,452		48.8		—		49.8		—		17,896,411		8.3		—		—
Total		977,796										211,076,968		97.7		59,083,732		59.4

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(1)

The amounts for “total GFA” in this table and elsewhere in this prospectus are the amounts of total saleable residential GFA and are derived on the following basis:

 

Ÿ

for properties that are sold, the stated GFA is based on the sale contracts relating to such property;

 

Ÿ

for unsold properties that are completed or under construction, the stated GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and

 

Ÿ

for properties that are under planning, the stated GFA is based on the land grant contract and our internal projection.

 

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(2)

Percentage of completion is calculated by dividing total costs incurred by total estimated costs for the relevant project.

(3)

Percentage sold is calculated by dividing contracted sales value from property sales by total estimated sales value of the relevant project.

(4)

Percentage of all real estates sales revenues for the relevant period, including revenues recognized under full accrual method and under percentage of completion method.

Real estate leasing.    Real estate leasing income decreased by US$5,636 to US$165,514 for the nine months ended September 30, 2007 from US$171,150 for the nine months ended September 30, 2006, because we did not lease out our club house after we transferred it to fixed assets in 2007.

Other revenue.    Other revenue increased to US$2.2 million for the nine months ended September 30, 2007 from US$142,871 for the nine months ended September 30, 2006. This increase primarily resulted from revenue for real estate related services from operations which we acquired in August 2006, including, among others, property management service fees and consulting service and agency service fees in the amount of US$1.4 million and US$0.8 million, respectively, in the nine months ended September 30, 2007, as compared to US$93,505 and US$49,366 in the nine months ended September 30, 2006.

Cost of Revenue

Cost of revenue increased by US$71.4 million, or 94.4%, to US$147.0 million for the nine months ended September 30, 2007 from US$75.6 million for the nine months ended September 30, 2006.

Cost of real estate sales

Cost of real estate sales increased by US$69.9 million, or 93.1%, to US$145.0 million for the nine months ended September 30, 2007 from US$75.1 million for the nine months ended September 30, 2006, due to the launch of new projects in the nine months ended September 30, 2007. The land use right costs increased to US$54.6 million for the nine months ended September 30, 2007 from US$21.9 million for the nine months ended September 30, 2006. The construction costs increased to US$90.4 million for nine months ended September 30, 2007 from US$53.2 million for nine months ended September 30, 2006.

Cost of real estate leasing

Cost of real estate leasing decreased by US$27,591, or 7.9%, to US$319,750 for the nine months ended September 30, 2007 from US$347,341 for the nine months ended September 30, 2006. The decrease was mainly because the depreciation of a clubhouse was recorded as general and administrative expense after we ceased leasing it out in 2007.

Other costs

Other costs were US$1.6 million for the nine months ended September 30, 2007, compared to US$164,543 for the nine months ended September 30, 2006. Other costs represent costs incurred in connection with the property management services, real estate agency services and other property related services we provided.

Gross Profit

Gross profit increased by US$47.3 million, or 197.1%, to US$71.3 million for the nine months ended September 30, 2007 from US$24.0 million for the nine months ended September 30, 2006, due to the cumulative effect of the foregoing factors. The gross margin of our projects is normally in the range of 20% to 30%. However, our gross margin increased to 32.7% for the nine months ended September 30, 2007 from 24.1% for

 

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the nine months ended September 30, 2006. The increase was due primarily to the higher gross margin in the nine months ended September 30, 2007 than in the nine months ended September 30, 2006 of Zhengzhou Central Garden-East, Zhengzhou Central Garden-West and Zhengzhou Commercial Plaza whose revenue represented 40.1% of our revenue for the nine months ended September 30, 2007. During the nine months ended September 30, 2007, the selling price of the units of Zhengzhou Central Garden increased significantly as its construction approached completion, while its actual costs decreased from the estimation mainly because the Zhengzhou Municipal Government reduced the heat installation tariff from US$7.12 per square meter in 2006 to US$5.70 per square meter in 2007 and we also achieved significant cost reduction in property exterior decoration. Zhengzhou Commercial Plaza, a property newly launched in 2007, enjoyed a relatively high gross margin because the land for this project was acquired at a relative lower cost than other projects.

Selling and Distribution Expenses

Selling and distribution expenses increased by US$4.1 million, or 215.8%, to US$6.0 million for the nine months ended September 30, 2007 from US$1.9 million for the nine months ended September 30, 2006. The increase was primarily due to the launch of more projects as well as the increased level of marketing activities as we entered into new markets in the nine months ended September 30, 2007. As a percentage of revenue, selling and distribution expenses increased to 2.7% in the nine months ended September 30, 2007 from 1.9% in the nine months ended September 30, 2006.

General and Administrative Expenses

General and administrative expenses increased by US$5.6 million, or 266.7%, to US$7.7 million for the nine months ended September 30, 2007 from US$2.1 million for the nine months ended September 30, 2006. The increase was primarily due to the opening and expansion of our operations in Suzhou, Jinan, Hefei and Chengdu. As a percentage of revenue, general and administrative expenses increased to 3.5% in the nine months ended September 30, 2007 from 2.1% in the nine months ended September 30, 2006.

Interest Income

Interest income increased by US$610,925, or 490.9%, to US$735,376 for the nine months ended September 30, 2007 from US$124,451 for the nine months ended September 30, 2006. The increase was due primarily to an increase in our bank balances resulting from increased cash receipts from property sales and financing activities.

Interest Expenses

Interest expenses, net of interest capitalized, increased by US$1.1 million, or 366.7%, to US$1.4 million for the nine months ended September 30, 2007 from US$0.3 million for the nine months ended September 30, 2006. The gross interest expense for the nine months ended September 30, 2007 consisted of US$12.7 million of interest on loans, US$1.9 million of accretion of discount arising from warrants and amortization of debt issuance cost, US$0.8 million of accretion of fair value of embedded derivatives and a US$5.9 million income from the change in fair value of embedded derivatives. In the nine months ended September 30, 2006, the interest expenses consisted solely of interest on loans.

Total interest costs incurred amounted to US$12.7 million for the nine months ended September 30, 2007, including US$4.7 million interest on our floating rate notes and convertible notes issued in April 2007, from US$1.4 million for the nine months ended September 30, 2006. Total interest expense capitalized as part of the construction cost for the nine months ended September 30, 2007 and 2006 amounted to US$8.1 million and US$1.1 million, respectively.

Share of Income (Loss) in an Equity Investee

We recorded income of US$5.8 million for the nine months ended September 30, 2007, compared to a loss of US$0.4 million for the nine months ended September 30, 2006. Our equity investee, Jiantou Xinyuan,

 

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recognized net income of US$13.0 million during the nine months ended September 30, 2007, as it began to generate revenues from the completed project, Zhengzhou International City Garden Phase I, and from Zhengzhou City Mansion under the percentage of completion method.

Change in Fair Value of Derivative Liabilities

For the nine months ended September 30, 2007, we recorded US$6.2 million of net expenses due to changes in fair value of derivative liabilities, resulting from a decrease of US$420,000 in the fair value of our Series A preference shares warrants and an increase of US$6.6 million in the fair value of the warrants issued with floating rate notes.

Income Taxes

Income taxes increased by US$13.7 million, or 198.6%, to US$20.6 million for the nine months ended September 30, 2007 from US$6.9 million for the nine months ended September 30, 2006. The increase was consistent with the increase of our pre-tax income and partly due to the increase of LAT. Our effective tax rate decreased from 35.7% for the nine months ended September 30, 2006 to 36.4% for the nine months ended September 30, 2007. See “— Components of results of operation - Income Taxes.”

Minority Interest

Minority interest for the nine months ended September 30, 2007 was nil, as compared to US$2,223 for the nine months ended September 30, 2006. This decrease was due to the fact that Beijing Xinyuan Jinhe Investment & Development Co., Ltd., a company 99% owned by us, was dissolved in November 2006.

Net Income

Net income increased by US$23.5 million, or 188%, to US$36.0 million for the nine months ended September 30, 2007 from US$12.5 million for the nine months ended September 30, 2006.

Accretion expense of Series A convertible redeemable preference shares

Our Series A preference shares are redeemable, if not previously converted, upon the earlier occurrence of the date on which Mr. Zhang ceases to serve as the chairman of our board or the fifth anniversary of the issuance date. The redemption price is determined at a per share price in cash equal to the sum of the original issue price of US$0.81155 per share and an accreted amount of 10% of the original issue price, compounded annually to the date of redemption. For the nine months ended September 30, 2007 and 2006, we recorded an accretion expense of US$2.2 million and US$0.2 million, respectively, based on the net proceeds from our Series A preference shares issuance multiplied by an effective annual accretion rate.

2006 Compared to 2005

Revenues

Revenues increased by US$80.5 million, or 129.8%, to US$142.4 million for 2006 from US$61.9 million for 2005.

Real estate sales.    Revenues from real estate sales increased by US$79.8 million, or 129.2%, to US$141.6 million for 2006 from US$61.8 million for 2005 primarily as a result of increased residential unit sales in 2006 as compared to 2005. In 2006, we recognized revenues from Zhengzhou Xinyuan Splendid Haojingge, Zhengzhou Central Garden-East and Zhengzhou Central Garden-West under the percentage of completion method, while revenues from Xinyuan Splendid (except Zhengzhou Xinyuan Splendid Haojingge), Zhengzhou City Family and Zhengzhou City Manor Projects were recognized under the full accrual method. In 2005, we

 

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recognized all revenues under the full accrual method, except for those of Zhengzhou Xinyuan Splendid Haojingge.

Full accrual method revenues

The following table sets forth for the years 2005 and 2006 the aggregate GFA sold and the related revenues recognized under the full accrual method by project:

 

Project		Total GFA(1)		GFA delivered for the year ended December 31,				Percentage of total GFA delivered(2) as of December 31,				Revenues recognized for the year ended December 31,
				2006		2005		2006		2005		2006				2005
		m2		m2		m2		%		%		US$		%(3)		US$			%(3)
Zhengzhou Xinyuan Splendid 1A		62,623		205		516		96.4		96.1		225,247		0.2			150,634			0.2
Zhengzhou Xinyuan Splendid 1B		43,673		—		255		100.0		100.0		—		—			78,752			0.1
Zhengzhou Xinyuan Splendid 2A		39,996		—		116		100.0		100.0		—		—			35,572			0.1
Zhengzhou Xinyuan Splendid 2B		27,041		—		593		100.0		100.0		—		—			238,411			0.4
Zhengzhou Xinyuan Splendid 2C		21,748		—		311		100.0		100.0		—		—			114,072			0.2
Zhengzhou Xinyuan Splendid 3A3B3C		114,774		2,369		109,087		99.8		97.7		1,266,807		0.9			43,425,320			70.2
Zhengzhou Xinyuan Splendid City Homestead		45,378		1,453		43,280		98.6		95.4		824,757		0.6			14,262,549			23.1
Other		—		—		—		—		—		972,780		0.7			528,008			0.9
Zhengzhou Xinyuan Splendid Subtotal		355,233		4,027		154,158		99.1		98.0		3,289,591		2.4			58,833,318			95.2
Zhengzhou City Family		39,226		30,175		—		76.9		—		13,768,566		9.7		—			—
Zhengzhou City Manor		118,716		118,716		—		100.0		—		37,773,234		26.6		—			—
Total		513,175		152,918		154,158						54,831,391		38.7			58,833,318			95.2

 

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(1)

The amounts for ‘‘total GFA’’ in this table and elsewhere in this prospectus are the amounts of total saleable residential GFA and are derived on the following basis:

 

Ÿ

for properties that are sold, the stated GFA is based on the sale contracts relating to such property;

 

Ÿ

for unsold properties that are completed or under construction, the stated GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and

 

Ÿ

for properties that are under planning, the stated GFA is based on the land grant contract and our internal projection.

 

(2)

Percentage of total GFA delivered is the total GFA delivered as of a period end divided by the project’s total GFA.

 

(3)

Percentage of all real estate sales revenues for the financial year, including revenues recognized under full accrual method and under percentage of completion method.

 

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Percentage of completion method revenues

The following table sets forth the percentage of completion, the percentage sold and related revenues recognized for our Zhengzhou Xinyuan Splendid Haojingge, Zhengzhou Central Garden-East and Zhengzhou Central Garden-West projects in 2005 and 2006:

 

Project		Total GFA(1)		Percentage of Completion(2) as of December 31,				Percentage Sold(3) –Accumulated as of December 31,				Revenues recognized for the year ended December 31,
				2006		2005		2006		2005		2006				2005
		m2		%		%		%		%		US$		%(4)		US$			%(4)
Zhengzhou Xinyuan Splendid Haojingge		31,089		100.0		100.0		100.0		87.7		1,241,320		0.9		2,936,118			4.8
Zhengzhou Central Garden-East		165,206		71.1		21.0		82.6		20.8		42,474,231		30.0		—	(5)		—
Zhengzhou Central Garden-West		190,384		68.6		18.7		80.5		—		43,030,796		30.4		—			—
Total		386,679										86,746,347		61.3		2,936,118			4.8

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(1)

The amounts for ‘‘total GFA’’ in this table and elsewhere in this prospectus are the amounts of total saleable residential GFA and are derived on the following basis:

 

Ÿ

for properties that are sold, the stated GFA is based on the sale contracts relating to such property;

 

Ÿ

for unsold properties that are completed or under construction, the stated GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and

 

Ÿ

for properties that are under planning, the stated GFA is based on the land grant contract and our internal projection.

 

(2)

Percentage of completion is calculated by dividing total costs incurred by total estimated costs for the relevant project.

(3)

Percentage sold is calculated by dividing contracted sales value from property sales by total estimated sales value of the relevant project.

(4)

Percentage of all real estates sales revenues for the financial year, including revenues recognized under full accrual method and under percentage of completion method.

(5)

As of December 31, 2005, construction on Zhengzhou Central Garden-East was not beyond the preliminary stage, hence no revenues were recognized for the period ended on that date.

Real estate leasing.    Real estate leasing income increased by US$72,284, or 54.7%, to US$204,411 for 2006 from US$132,127 for 2005. The increase was due primarily to an increase in the rental of parking facilities in 2006.

Other revenue.    Other revenue increased by US$544,585 to US$585,072 for 2006 from US$40,487 for 2005. The increase represents fees for property related services that we provided. We acquired these operations in August 2006 and, consequently, did not record any other revenue in 2005.

Cost of Revenue

Cost of revenue increased by US$65.6 million, or 153.8%, to US$108.2 million for 2006 from US$42.6 million for 2005.

 

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Cost of real estate sales

Cost of real estate sales increased by US$65.1 million, or 154.2%, to US$107.3 million for 2006 from US$42.2 million for 2005. This increase was due primarily to the increase in units completed and sold and higher land use rights costs associated with the projects for which revenues were recognized during the period. Our land use rights costs increased by US$22.3 million, or 219.6%, to US$32.4 million for 2006 from US$10.1 million for 2005. Our revenues in 2005 were derived solely from our Xinyuan Splendid projects, which are built on land acquired in 2001, when land use rights were available for relatively lower costs.

Cost of real estate leasing

Cost of real estate leasing increased by US$9,172, or 2.1%, to US$442,020 for 2006 from US$432,848 for 2005.

Other cost

Other cost was US$486,307 for 2006.

Gross Profit

Gross profit increased by US$14.9 million, or 77.0%, to US$34.2 million for 2006 from US$19.3 million for 2005 due to the cumulative effect of the foregoing factors. Our gross margin decreased from 31.2% in 2005 to 24.0% in 2006. Our gross margin in 2005 benefited from the relatively lower land use rights costs associated with our Xinyuan Splendid projects.

Selling and Distribution Expenses

Selling and distribution expenses increased by US$0.8 million, or 37.7%, to US$3.0 million for 2006 from US$2.2 million for 2005, as a result of the launch of three new projects in 2006, including our Zhengzhou Central Garden (East and West) and Jinan City Family. Our advertising and marketing campaign for Zhengzhou Central Garden and Jinan City Family was on a larger scale than our other property launches. As a percentage of revenue, selling and distribution expenses declined from 3.5% in 2005 to 2.1% in 2006.

General and Administrative Expenses

General and administrative expenses increased by US$1.9 million, or 113.9%, to US$3.6 million for 2006 from US$1.7 million for 2005, primarily as a result of our expansion into Jinan, Suzhou and Hefei, which involved establishing local offices, and the recruitment of additional staff in those cities and additional administrative staff to support our expansion. In addition, we incurred US$432,329 of professional fees in 2006. As a percentage of revenue, general and administrative expenses declined from 2.7% in 2005 to 2.5% in 2006.

Interest Income

Interest income increased by US$270,335, or 141.5%, to US$461,335 for 2006 from US$191,000 for 2005. The increase was due primarily to an increase in our bank balances resulting from increased cash receipts from our property sales.

Interest Expense

Interest expense decreased by US$107,428, or 12.9%, to US$727,041 for 2006 from US$834,469 for 2005. The decrease was due primarily to interest capitalization in relation to a larger volume of construction in

 

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progress in 2006 compared to 2005. Total interest costs incurred amounted to US$2,209,340 for 2006 and US$1,725,090 for 2005. Total interest expense capitalized as part of the construction costs for the year ended December 31, 2006 and 2005 amounted to US$1,482,299 and US$890,621, respectively.

Share of Income (Loss) in Equity Investee

Share of loss in equity investee was US$446,086 for 2006 compared to nil for 2005. This amount is attributable to our investment in Jiantou Xinyuan. In 2005, Jiantou Xinyuan had not commenced its operations, and in 2006 it incurred losses related to the start-up of its development activities, without generating any revenue during the period. The first project of Jiantou Xinyuan was completed in January 2007.

Income Taxes

Income taxes increased by US$5.5 million, or 104.2%, to US$10.7 million for 2006 from US$5.2 million for 2005. The increase was primarily due to increased corporate income tax liabilities related to higher taxable income incurred in 2006. The increase is also due to higher LAT related to the higher sales revenues recognized in 2006 and provision for LAT in respect of projects completed in prior years. As a result, our effective tax rate increased from 35.5% in 2005 to 39.9% in 2006. See “—Components of results of operations—Income Taxes.”

Minority Interest

Share of loss by minority interest decreased by US$12,319, or 82.7%, to US$2,572 for 2006 from US$14,891 for 2005. The decrease was due to smaller loss incurred by a 99% subsidiary which was dissolved as of December 31, 2006.

Net Income

Net income increased by US$6.6 million, or 68.6%, to US$16.1 million for 2006 from US$9.6 million for 2005.

2005 Compared to 2004

Revenues

Revenues increased by US$26.3 million, or 73.8%, to US$61.9 million for 2005 from US$35.6 million for 2004.

Real estate sales.    Revenue from real estate sales increased by US$26.4 million, or 74.9%, to US$61.8 million for 2005 from US$35.3 million for 2004. The increase was primarily attributable to an increase in the number and aggregate GFA of units completed and sold from 107,455 square meters in 2004 to 161,717 square meters, an increase of 50.5%. In 2005, our revenues derived primarily from sales of Xinyuan Splendid Phase Three and Xinyuan Splendid City Homestead, and in 2004 our revenues derived primarily from sales of Xinyuan Splendid Phases One and Two.

 

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Full accrual method revenues

The following table sets forth for the years 2004 and 2005 the aggregate GFA completed and sold and the related revenues recognized under the full accrual method by project:

 

Project		Total GFA(1)		GFA delivered for the year ended December 31,				Percentage of total GFA delivered(2) as of December 31,				Revenues recognized for the year ended December 31,
				2005		2004		2005		2004		2005				2004
		m2		m2		m2		%		%		US$		%(3)		US$			%(3)
Zhengzhou Xinyuan Splendid 1A		62,623		516		902		96.1		95.3		150,634		0.2			284,447		0.8
Zhengzhou Xinyuan Splendid 1B		43,673		255		43,418		100.0		99.4		78,752		0.1			15,088,754		42.7
Zhengzhou Xinyuan Splendid 2A		39,996		116		1,877		100.0		99.7		35,572		0.1			636,821		1.8
Zhengzhou Xinyuan Splendid 2B		27,041		593		15,817		100.0		97.8		238,411		0.4			6,193,456		17.5
Zhengzhou Xinyuan Splendid 2C		21,748		311		21,437		100.0		98.6		114,072		0.2			7,705,168		21.8
Zhengzhou Xinyuan Splendid 3A3B3C		114,774		109,087		3,093		97.7		2.7		43,425,320		70.2			1,118,458		3.2
Zhengzhou Xinyuan Splendid City Homestead		45,378		43,280		—		95.4		—		14,262,549		23.1		—			—
Other		—		—		—		—		—		528,008		0.9		—			—
Total		355,233		154,158		86,544						58,833,318		95.2			31,027,104		87.8

---

(1)

The amounts for ‘‘total GFA’’ in this table and elsewhere in this prospectus are the amounts of total saleable residential GFA and are derived on the following basis:

 

Ÿ

for properties that are sold, the stated GFA is based on the sale contracts relating to such property;

 

Ÿ

for unsold properties that are completed or under construction, the stated GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and

 

Ÿ

for properties that are under planning, the stated GFA is based on the land grant contract and our internal projection.

 

(2)

Percentage of total GFA delivered is the total GFA delivered as of a period end divided by the project’s total GFA.

 

(3)

Percentage of all real estates sales revenues for the financial year, including revenues recognized under full accrual method and under percentage of completion method.

Percentage of completion method revenues

The following table sets forth the percentage of completion, percentage sold and related revenues recognized for our Zhengzhou Xinyuan Splendid Haojingge project in 2004 and 2005.

 

Project		Total GFA		Percentage of completion as of December 31,				Percentage Sold- Accumulated as of December 31,				Revenues Recognized for the year ended December 31,
				2005		2004		2005		2004		2005				2004
		m2		%		%		%		%		US$		%		US$		%
Zhengzhou Xinyuan Splendid Haojingge		31,089		100.0		100.0		87.7		67.2		2,936,118		4.8		4,293,481		12.2

 

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Real estate leasing.    Real estate leasing decreased by US$11,781, or 8.2%, to US$132,127 for 2005 from US$143,908 for 2004.

Other Revenue

Other revenue decreased by US$127,530, or 75.9%, to US$40,487 for 2005 from US$168,017 for 2004. Late payment penalties paid by tenants in our real estate lease business and penalties paid by contractors for delay in contract performance in 2004 were substantially reduced in 2005.

Cost of Revenue

Cost of revenue increased by US$16.3 million, or 61.6%, to US$42.6 million for 2005 from US$26.4 million for 2004.

Cost of real estate sales.    Cost of real estate sales increased by US$16.1 million, or 61.5%, to US$42.2 million for 2005 from US$26.1 million for 2004. This increase was due primarily to the increase in units completed and sold during the period.

Cost of real estate leasing.    Cost of real estate leasing increased by US$180,705, or 71.7%, to US$432,848 for 2005 from US$252,143 for 2004. This increase was due primarily to depreciation expenses associated with certain parking and clubhouse facilities completed in 2005.

Gross Profit

Gross profit increased by US$10.1 million, or 108.6%, to US$19.3 million for 2005 from US$9.3 million for 2004. Our gross margin increased from 26.0% in 2004 to 31.2% in 2005. This increase in gross margin in 2005 was primarily due to the increase in sales while the land use rights costs remained stable.

Selling and Distribution Expenses

Selling and distribution expenses increased by US$0.6 million, or 35.6%, to US$2.2 million for 2005 from US$1.6 million for 2004. The increase was attributable to the launch of additional projects within the Xinyuan Splendid development. As a percentage of revenue, selling and distribution expenses declined from 4.5% in 2004 to 3.5% in 2005.

General and Administrative Expenses

General and administrative expenses increased by US$0.7 million, or 68.8%, to US$1.7 million for 2005 from US$1.0 million for 2004. The increase was primarily attributable to increases in, among others, staff costs, traveling and entertainment costs, depreciation and consultants’ fees, in line with the growth of our business. As a percentage of revenue, general and administrative expenses declined from 2.8% in 2004 to 2.7% in 2005.

Interest Income

Interest income increased by US$124,045, or 185.3%, to US$191,000 for 2005 from US$66,955 for 2004. The increase was due primarily to an increase in bank balances resulting from increased cash receipts generated by increased property sales.

Interest Expense

Interest expense increased by US$14,320 to US$834,469 for 2005 from US$820,149 for 2004. Total interest costs incurred amounted to US$1,725,090 for 2005 and US$1,302,126 for 2004. Total interest expense capitalized as part of the construction costs for the year ended December 31, 2005 and 2004 amounted to US$890,621 and US$481,977, respectively.

 

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Income Taxes

Income taxes increased by US$3.3 million, or 168.8%, to US$5.2 million for 2005 from US$2.0 million for 2004 due to increased property sales. Our effective tax rate increased from 33.1% in 2004 to 35.5% in 2005 due to an increase in non-deductible expenses. See Note 12 to consolidated financial statements.

Minority Interest

Share of loss by minority interest of US$14,891 in 2005 was due to loss incurred by a 99% subsidiary that was established in April 2005.

Net Income

Net income increased by US$5.6 million, or 142.5%, to US$9.6 million for 2005 from US$3.9 million for 2004.

Business Segments

We consider each of our individual property developments as a discrete operating segment. As presentation of segment information for each property development would not be meaningful, we have aggregated our segments into the following reporting segments: (i) property developments in Zhengzhou, Henan Province, (ii) property developments in Jinan, Shandong Province, (iii) property developments in Suzhou, Jiangsu Province, (iv) property developments in Hefei, Anhui Province, (v) property developments in Chengdu, Sichuan Province and (vi) property management services and other real estate-related services we provide.

 

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The table below sets forth selected information of our reporting segments for the periods indicated:

		For Nine Months Ended September 30,
		2007			2006
		(US$ in thousands, except for percentages)
Zhengzhou, Henan
Total revenue		91,359.2			99,512.2
Total cost of revenues		(46,085.1	)		(75,448.0	)
Gross profit		45,274.1			24,064.2
Gross margin		49.6	%		24.2	%
Operating income (loss)		40,603.6			20,370.7
Jinan, Shandong
Total revenue		32,422.0			0.7
Total cost of revenues		(26,524.7	)		—
Gross profit		5,897.3			0.7
Gross margin		18.2	%		—
Operating income (loss)		3,508.4			(223.7	)
Suzhou, Jiangsu
Total revenue		74,397.3			—
Total cost of revenues		(58,342.7	)		—
Gross profit		16,054.6			—
Gross margin		21.6	%		—
Operating income (loss)		13,187.7			—
Hefei, Anhui
Total revenue		17,909.6			—
Total cost of revenues		(14,398.7	)		—
Gross profit		3,510.9			—
Gross margin		19.6	%		—
Operating income (loss)		2,219.7			—
Chengdu, Sichuan
Total revenue		0.0			—
Total cost of revenues		—			—
Gross profit		0.0			—
Gross margin		—			—
Operating income (loss)		(383.9	)		—
Others
Total revenue		2,212.7			142.2
Total cost of revenues		(1,638.6	)		(164.5	)
Gross profit		574.1			(22.3	)
Gross margin		26.0	%		(15.7	)%
Operating income (loss)		(1,517.1	)		(76.4	)

 

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Selected Quarterly Results of Operations

The following table sets forth our unaudited consolidated selected quarterly results of operations for the seven fiscal quarters ended September 30, 2007. You should read the following table in conjunction with our audited and unaudited financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited consolidated selected quarterly financial information on the same basis as our audited and unaudited consolidated financial statements. The unaudited consolidated financial information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented.

 

		Three Months Ended
		March 31, 2006			June 30, 2006			September 30, 2006			December 31, 2006			March 31, 2007			June 30, 2007			September 30, 2007
		(US$ in thousands)
Revenues		51,458.3			23,022.0			25,174.8			42,712.1			22,876.8			74,828.9			120,595.0
Costs of revenues		(39,069.8	)		(17,547.7	)		(18,995.0	)		(32,583.2	)		(10,225.9	)		(47,832.8	)		(88,931.1	)
Gross profit		12,388.5			5,474.3			6,179.8			10,128.9			12,650.9			26,996.2			31,664.0
Selling and distribution expenses		(594.8	)		(733.2	)		(548.1	)		(1,120.1	)		(1,018.3	)		(2,172.0	)		(2,766.4	)
General and administrative expenses		(437.0	)		(789.9	)		(869.0	)		(1,529.9	)		(1,892.3	)		(2,864.8	)		(2,978.9	)
Operating income		11,356.7			3,951.2			4,762.7			7,478.9			9,740.3			21,959.3			25,918.7
Interest income		30.0			38.6			55.8			336.9			165.1			151.0			419.4
Interest expenses		(11.7	)		(108.2	)		(187.3	)		(419.8	)		(174.3	)		492.8			(1,757.1	)
Share of income (loss) in equity investee		—			(406.4	)		(39.7	)		—			—			3,599.3			2,220.4
Change in fair value of derivative liabilities		—			—			—			—			476.0			(4,822.0	)		(1,840.0	)
Income from operations before income taxes		11,375.0			3,475.2			4,591.5			7,396.0			10,207.1			21,380.4			24,961.4
Net income		6,836.4			2,736.6			2,922.3			3,627.7			6,867.0			13,846.7			15,251.0

Our quarterly revenues have primarily been affected by the GFA and the selling price of the properties we sold. Our quarterly cost of revenues and selling, general and administrative expenses experienced less fluctuation than our quarterly revenues as a portion of our cost of revenues and selling, general and administrative expenses are fixed in nature and do not vary in proportion with revenues from quarter to quarter.

Both seasonal fluctuations in real estate transactions and real estate industry cyclicality have affected, and are likely to continue to affect, our business and our quarterly results of operations. We generally experience relatively low volume of real estate transactions in the first quarter due to the cold weather and the Chinese New Year holiday, while the fourth quarter is typically the strongest period for our real estate sales activities.

Liquidity and Capital Resources

To date, we have financed our operations primarily through cash flows from operations, borrowings from banks and proceeds from issuances of equity and debt securities.

 

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Cash Flows

The following table presents selected cash flow data from our cash flow statements for the periods indicated.

 

		Year Ended December 31,									Nine Months Ended September 30,
		2004			2005			2006			2006			2007
		(US$ in thousands)									(unaudited)
Net cash provided by (used in) operating activities		(2,249.9	)		12,555.4			(27,679.2	)		2,213.0			(109,415.0	)
Net cash provided by (used in) investing activities		(103.1	)		(666.2	)		(3,021.9	)		(1,911.5	)		(1,614.9	)
Net cash provided by (used in) financing activities		4,780.0			(2,474.3	)		49,295.0			4,403.3			179,740.0
Net increase in cash and cash equivalents		2,427.0			9,414.9			18,593.9			4,704.8			68,710.1
Effect of exchange rate changes on cash and cash equivalents		(0.2	)		264.6			1,391.6			1,017.2			2,786.1
Cash and cash equivalents at beginning of year/period		2,822.4			5,249.2			14,928.7			14,928.7			34,914.2
Cash and cash equivalents at end of year/period		5,249.2			14,928.7			34,914.2			20,650.7			106,410.4

Operating Activities

Net cash used in operating activities was US$109.4 million in the nine months ended September 30, 2007, primarily attributable to cash paid to acquire land use rights in our real estate property under development, an increase in accounts receivable, an increase in other deposits and prepayments, and a decrease in income tax payable. The increase in cash used in operating activities was partly offset by an increase in our accounts payable, customer deposits, other payables and accrued liabilities, and payroll and welfare payable. The increase in our customer deposits was attributable to increased cash receipts from sales of real estate properties in the nine months ended September 30, 2007. The increase in accounts payable was mainly due to increased payables to engineering and construction service providers, reflecting the increased number of, and investments in, real estate properties under construction in the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006.

Net cash used in operating activities in 2006 reflected substantial increases in projects under construction during the period. Net cash used in operating activities was US$27.7 million in 2006, primarily attributable to cash paid to acquire land use rights in our real estate property under development, a decrease in our customer deposits and increases in advances to suppliers and deposits and prepayments. The decrease in customer deposits was attributable to recognition of the related amounts as revenues after meeting all conditions of revenue recognition method. The increase in cash used in our operating activities was partly offset by corresponding increases in our net income and deferred taxation expenses associated with the properties completed and delivered, as well as increases in our other payables and accrued liabilities and accounts payable.

Net cash provided by operating activities was US$12.6 million in 2005, primarily attributable to increases in our net income and deferred taxation expenses associated with properties completed and sold, and a corresponding decrease in property development completed. Customer deposits also increased, as a result of pre-sales of properties under construction. An increase in accounts payable also contributed to cash provided by operating activities. The increase was partially offset by increases in real estate property under development, reflecting properties under construction, as well as related advances to suppliers, other deposits and prepayments.

Net cash used in operating activities was US$2.2 million in 2004, primarily attributable to an increase in real estate property under development and in related advances to suppliers, other deposits and prepayments. The increase in cash used in operating activities was partially offset by increases in customer deposits resulting from

 

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pre-sales of properties under construction, and by increases in accounts payable and income taxes payable. Our net income increased and real estate property development completed decreased as a result of the completion and sale of properties.

Proceeds from pre-sales of our properties under development are an important source of cash flow for our operations. PRC law allows us to pre-sell properties before their completion upon satisfaction of certain requirements and requires us to use the pre-sales proceeds to develop the particular project pre-sold. The amount and timing of cash flows from pre-sales are affected by a number of factors, including restrictions on pre-sales imposed by PRC law, market demand for our properties subject to pre-sales, prices at which we can pre-sell and the number of properties we have available for pre-sale. Any pre-sales payments we receive before we recognize revenue are recorded as current liabilities under customer deposits. At December 31, 2004, 2005 and 2006 and September 30, 2007, we recorded current liabilities consisting of customer deposits of US$31.0 million, US$43.8 million, US$25.5 million and US$44.2 million, respectively. We actively market pre-sales of our properties in accordance with regulations to accelerate cash flows to the extent possible.

Investing Activities

Net cash used in investing activities was US$1.6 million in the nine months ended September 30, 2007, primarily attributable to US$1.3 million we used in purchasing property and equipment.

Net cash used in investing activities was US$3.0 million in 2006, primarily attributable to US$1.6 million we paid in consideration for the acquisition from Mr. Yong Zhang and Ms. Yuyan Yang of four subsidiaries providing real estate-related services, net of cash acquired.

Net cash used in investing activities was US$0.7 million in 2005, primarily attributable to the investments in Jiantou Xinyuan and Henan Xinyuan Real Estate Agency Co., Ltd.

Net cash used in investing activities was US$103,145 in 2004, due to purchases of plant and equipment.

Financing Activities

Net cash provided by financing activities was US$179.8 million in the nine months ended September 30, 2007, primarily attributable to proceeds in the amount of US$141.1 million from long-term bank loans, proceeds in the amount of US$17.3 million from short-term bank loans and net proceeds in the amount of US$94.9 million from the issue of our floating rate notes and convertible notes, partly offset by US$35.0 million repayment of shareholders’ loans, a US$8.5 million increase of restricted cash, US$11.3 million repayment of short-term bank loans and US$17.0 million repayment of long-term bank loans.

Net cash provided by financing activities was US$49.3 million in 2006, primarily attributable to proceeds in the amount of US$36.5 million from issuances of common and Series A preference shares, a US$35.0 million bridge loan from shareholders and US$28.5 million proceeds from short- and long-term bank borrowings, partially offset by an increase of US$26.6 million in restricted cash, reflecting the increase in real estate sales, and US$24.8 million repayment of short-term bank loans.

Net cash used in financing activities was US$2.5 million in 2005, primarily attributable to the proceeds of short- and long-term bank loans in the aggregate of US$34.7 million and a decrease in restricted cash of US$6.2 million, largely offset by repayment of short-term bank loans in the amount of US$37.0 million and loans to related parties of US$5.6 million.

Net cash provided by financing activities was US$4.8 million in 2004, primarily attributable to proceeds from short-term bank loans of US$20.5 million, partially offset by increase in restricted cash of US$7.6 million, repayments of long-term bank loans of US$5.9 million and repayment of borrowings from employees of US$3.0

 

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million. These borrowings from employees were used for our real property developments, and were fully repaid as of September 30, 2007.

Debt and Equity-Linked Securities

See “Description of Debt and Equity-Linked Securities” for a description of warrants, floating rate notes and convertible notes that we have issued.

Bank Borrowings

Bank borrowing is an important source of funding for our property developments. Our borrowings as of December 31, 2004, 2005, 2006 and September 30, 2007, respectively, were as follows.

 

		As of December 31,						As of September 30, 2007
		2004		2005		2006
		US$		US$		US$		US$
Short-term bank loans		30,145,593		24,410,795		22,667,025		29,690,579
Long-term bank loans		3,141,425		7,434,760		12,806,229		139,998,402
Total		33,287,018		31,845,555		35,473,254		169,688,981

As of December 31, 2004, 2005 and 2006 and September 30, 2007, the weighted average interest rate on our short-term bank loans was 6.31%, 7.31%, 7.05% and 6.99%, respectively. As of December 31, 2004, 2005 and 2006 and September 30, 2007, our short-term bank loans were all denominated in Renminbi and are secured by our land use rights, real estate under development, certain property certificates and certain bank deposits.

As of December 31, 2004, 2005 and 2006 and September 30, 2007, the weighted average interest rate on our long-term bank loans was 6.30%, 6.62%, 6.93% and 7.77%, respectively. As of December 31, 2004, 2005 and 2006 and September 30, 2007, our long-term bank loans were all denominated in Renminbi and are secured by our land use rights and real estate under development.

Since June 2003, commercial banks have been prohibited under PBOC guidelines from advancing loans to fund the payment of land premium. In addition, the PRC government also encourages property developers to use internal funds to develop their property projects. Under guidelines jointly issued by the Ministry of Construction and other PRC government authorities in August 2004, commercial banks in China are not permitted to lend funds to property developers with an internal capital ratio, calculated by dividing the internal funds available by the total capital required for the project, of less than 35%, an increase of five percentage points from 30% as previously required. Such increase in internal capital ratio has limited the amount of bank financing that property developers, including us, are able to obtain.

Shareholders’ loan

On December 7, 2006, we borrowed a bridge loan in the principal amount of US$35 million from Blue Ridge China and Equity International, holders of our Series A preference shares and common shares. This loan bore interest at the rate of 12.5% per annum. In April 2007, we repaid the bridge loan using a portion of the net proceeds from the issuance and sale of floating rate notes.

Capital Expenditures

Our capital expenditures were US$103,145, US$174,245, US$1,540,874 and US$1,614,897 in 2004, 2005, 2006 and the nine months ended September 30, 2007, respectively. Our capital expenditures in 2004, 2005, 2006 and the nine months ended September 30, 2007 were mainly used for building improvements and to

 

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purchase vehicles, fixtures and furniture and equipment. We expect to incur capital expenditures of approximately US$0.4 million in the last quarter of 2007, which will be used primarily to purchase vehicles, computers and other equipment for our newly established subsidiaries. The source of our capital expenditures is primarily the cash flow generated from operating activities.

Recent Development

The terms of our Series A preference shares contain a contingent conversion option that allows holders to receive additional common shares if the value of our common shares in connection with this offering is less than two times the original Series A preference shares issuance price of US$0.81155, plus an accreted amount of 10% compounded annually to the date of the offering. On November 13, 2007, in order to provide more clarity with respect to accounting treatment of the Series A preference shares in our financial statements, we requested that Blue Ridge China and Equity International, the only holders of the Series A preference shares waive this option. They agreed in writing to the waiver on the belief that the option condition will be satisfied and therefore not triggered. Accordingly, we expect to issue 30,805,400 common shares upon the conversion of all of our Series A preference shares at the completion of this offering. We will recognize a deemed dividend to the holders of the Series A preference shares in connection with this waiver of the contingent conversion option. This deemed dividend will not affect our net income or cash flows, however, it will reduce our net income attributable to ordinary shareholders and earnings per share (ADS) for the year ending December 31, 2007. The dividend will be calculated based on the difference between the fair value of the Series A preference shares immediately after the waiver of the contingent conversion option and the carrying value of the Series A preference shares immediately prior to the waiver. The carrying value of the Series A preference shares immediately prior to the waiver was US$24,785,612. We have determined that on November 13, 2007, a 4% marketability discount be applied to an assumed initial offering price of US$            , the mid-point of the indicative price range for the offering, to arrive at a fair value of US$             for each Series A preference share. At this estimated fair value, we will record the modified Series A preference shares at an amount of approximately US$             million and the deemed dividend to the Series A preference shareholders at approximately US$             million, which will reduce the net income attributable to ordinary shareholders and retained earnings by the same amount of US$             million for the year ending December 31, 2007.

Contractual Obligations

As of September 30, 2007, our contractual obligations amounted to US$432.0 million, primarily arising from contracted construction costs or other capital commitments for future property developments and debt obligations. The following table sets forth our contractual obligations for the periods indicated.

 

		Payments due by period
Contractual Obligations		Total		less than 1 year		1-3 years		3-5 years		more than 5 years
		(US$ in thousands)
Long-term debt obligations:
— long-term bank loans		139,998		—		139,998		—		—
— interest on long-term bank loans(1)		18,114		10,234		7,880		—		—
— convertible notes		25,000		—		—		25,000		—
— interest on convertible notes(2)		2,300		508		1,521		271		—
— floating rate notes		75,000		—		75,000		—		—
— interest on floating rate notes(3)		23,109		9,122		13,987		—		—
Short-term debt obligations		29,691		29,691		—		—		—
— interest on short-term debt obligations(4)		1,099		1,099		—		—		—
Operating lease obligations		186		168		18		—		—
Non-cancellable construction contract obligations		117,484		117,484		—		—		—
Contracted land use rights obligations		163,084		163,084		—		—		—
Total		595,065		331,390		238,404		25,271		—

 

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(1)

Our long-term bank loans bear variable interest at rates adjustable based on the PBOC benchmark rate. Interest on long-term loans is calculated based on the current interest rate of each loan, ranging from 5.99% to 8.217% per annum, using the PBOC benchmark rate of 7.47% as of September 30, 2007.

(2)

Interest on convertible notes is calculated at a rate of 2% per annum, assuming that we will complete an initial public offering prior to October 15, 2009.

(3)

Interest on floating rate notes is calculated at 6-month LIBOR as of September 30, 2007 plus 6.8% per annum. The applicable LIBOR rate was 5.3625% as of September 30, 2007.

(4)

Interest on short-term loans is calculated based on the fixed interest rates for relevant loans, ranging from 6.41% to 7.344% per annum.

This table does not include a liability of US$11.8 million for unrecognized tax benefits.

Off-Balance Sheet Arrangements

As is customary in the property industry in China, we provide guarantees to commercial banks in respect of the mortgage loans they extend to our customers prior to the issuance of their property ownership certificates. These guarantees remain outstanding until the completion of the registration of the mortgage with the relevant mortgage registration authorities. In most cases, guarantees for mortgages on residential properties are discharged when we submit the individual property ownership certificates and certificates of other interests in the property to the mortgagee bank. In our experience, the application for and issuance of the individual property ownership certificates typically takes six to 12 months, so the guarantee periods typically last for up to six to 12 months after we deliver the related property.

As of December 31, 2004, 2005 and 2006 and September 30, 2007, we guaranteed mortgage loans in the aggregate outstanding amounts of US$17.8 million, US$37.9 million, US$62.4 million and US$172.5 million, respectively.

Except for the contingent liabilities set forth above, we have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any transactions with unconsolidated entities, derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements.

Inflation

Inflation has not had a significant effect on our business during the past three years. According to the National Bureau of Statistics of China, China’s overall national inflation rate, as represented by the general consumer price index, was approximately 3.9%, 1.8%, 1.5% and 4.1% in 2004, 2005, 2006 and the nine months ended September 30, 2007, respectively. Deflation could negatively affect our business as it would be a disincentive for prospective property buyers to make a purchase. As of the date of this prospectus, we have not been materially affected by any inflation or deflation.

Quantitative and Qualitative Disclosure about Market Risks

Market risk is the risk of loss related to adverse changes in market prices, including interest rate and foreign exchange rates of financial instruments. We are exposed to various types of market risks, in the normal course of business. We have not in the past used derivatives to manage our exposure to market interest rate risk or foreign exchange risk. The following discussion and analysis, which constitute “forward-looking statements” that involve risk and uncertainties, summarize our exposure to different market risks.

 

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Foreign Exchange Risk

All of our revenues are denominated in RMB. However, we have substantial U.S. dollar denominated obligations, including the redemption obligation relating to the Series A preference shares and the obligation to pay interest and principal on the floating rate notes and convertible notes. Accordingly, any significant fluctuation between the RMB and the U.S. dollar could expose us to foreign exchange risk. We do not currently hedge our exchange rate exposure. We evaluate such risk from time to time and may consider engaging in hedging activities in the future to the extent we deem appropriate. Such hedging arrangements may require us to pledge or transfer cash and other collateral to secure our obligations under the agreements, and the amount of collateral required may increase as a result of mark-to-market adjustments.

The Renminbi is not a freely convertible currency. The PRC government may take actions that could cause future exchange rates to vary significantly from current or historical exchange rates. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its previous policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Since July 21, 2005, this change in policy has resulted in an approximately 7.98% appreciation of the Renminbi against the U.S. dollar by September 30, 2007. There remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar. To the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Any appreciation of the Renminbi against the U.S. dollar or any other foreign currencies would make any new RMB-denominated investments or expenditures more costly to us, to the extent that we need to convert foreign currencies into Renminbi for such purposes. Any significant depreciation in the exchange rates of the Renminbi against the U.S. dollar could adversely affect the value of our dividends, which would be funded by Renminbi but paid in U.S. dollars. There can be no assurance that any future movements in the exchange rate of the Renminbi against the U.S. dollar or other foreign currencies will not adversely affect our results of operations and financial condition (including our ability to pay dividends). A significant depreciation in the Renminbi against major foreign currencies may have a material adverse impact on our results of operations, financial condition and share price because our reporting currency is U.S. dollars and our ADSs are expected to be quoted in U.S. dollars, whereas our revenues, costs and expenses are denominated in RMB.

Interest Rate Risk

We are subject to market risks due to fluctuations in interest rates and refinancing of short-term debt. Our cost of financing is sensitive to fluctuations in interest rates. Our bank borrowings and the floating rate notes bear interest at variable rates, and an increase in interest rates would increase our costs thereunder. Our net income is affected by changes in interest rates as a result of the impact such changes have on interest income from, and interest expense on, short-term deposits and other interest-bearing financial assets and liabilities. In addition, our sales are also sensitive to fluctuations in interest rates. An increase in interest rates would adversely affect our prospective purchasers’ ability to obtain financing and depress the overall housing demand. Higher interest rates, therefore, may adversely affect our revenues, gross profits and net income, and our ability to raise and service debt and to finance our developments.

Our indebtedness consists primarily of short- and long-term bank borrowings, the floating rate notes and the convertible notes. As of September 30, 2007, we had US$29.7 million of short-term bank borrowings, all of which are denominated in Renminbi and bear interest at fixed rates ranging from 6.41% per annum to 7.344% per annum, with a weighted average interest rate at such date of 6.99%. As of September 30, 2007, we had outstanding long-term bank loans of US$140.0 million that bore interest rates ranging from 5.99% per annum to 8.22% in the first contract years, with a weighted average interest rate at such date of 7.77%, which should be adjusted based on the PBOC benchmark rate in the range of 95% to 110% in the following years. The PBOC

 

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regulates the interest rates of our Renminbi-denominated borrowings. The PBOC-published benchmark one-year lending rates in China, which directly affect the property mortgage rates offered by commercial banks in China, as at December 31, 2004, 2005 and 2006 and September 30, 2007 were 5.58%, 5.58%, 6.12% and 7.29%, respectively. The floating rate notes and the convertible notes are denominated in U.S. dollars. The floating rate notes bear interest at a floating rate based on six-month LIBOR plus 6.8%. The convertible notes bear interest at 2% per annum, adjustable to 8% from October 15, 2009 to maturity if an initial public offering does not occur prior to October 15, 2009.

Credit Risk

We provide guarantees to mortgage lending banks in respect of the mortgage loans provided to the purchasers of our properties up until completion of the registration of the mortgage with the relevant authorities, which generally occurs within six to 12 months after the purchasers take possession of the relevant properties. If a purchaser defaults under the loan while our guarantee is in effect and we repay all debt owed by the purchaser to the mortgagee bank under the loan, the mortgagee bank must assign its rights under the loan and the mortgage to us and, after the registration of the mortgage, we will have full recourse to the property. In line with what we believe is industry practice, we do not conduct independent credit checks on our customers but rely on the credit checks conducted by the mortgagee banks.

As of September 30, 2007, we had guaranteed mortgages in the principal amount of US$172.5 million. If a purchaser defaults on the payment of its mortgage during the term of the guarantee, the mortgage lending bank may require us to repay the outstanding amount under the loan plus any accrued interest. In this event, although we are able to retain the customer’s deposit and sell the property to recover any amounts paid by us to the bank, there can be no assurance that we would be able to sell the property at a price equal to or greater than the amount necessary to pay off the defaulting purchaser’s outstanding loan amount and any accrued interest thereon.

Recent Accounting Pronouncements

In September 2006, the EITF issued EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing Investment under SFAS No. 66 for the Sale of Condominiums” (“EITF 06-8”). EITF 06-8 states that in assessing the collectibility of the sales price pursuant to paragraph 37(d) of SFAS 66, an entity should evaluate the adequacy of the buyer’s initial and continuing investment to conclude that the sales price is collectible. If an entity is unable to meet the criteria of paragraph 37, including an assessment of collectibility using the initial and continuing investment tests described in paragraphs 8-12 of SFAS 66, then the entity should apply the deposit method as described in paragraphs 65-67 of SFAS 66. EITF 06-8 is effective for fiscal years beginning after March 15, 2007. In November 2006, the FASB ratified the EITF’s recommendation. The application of the continuing investment criteria on the collectibility of the sales price will limit our ability to recognize revenue and costs using the percentage of completion accounting method. Although we will continue to evaluate the application of EITF 06-8, we do not foresee that the adoption will have a material impact on the revenue or costs reported under percentage of completion accounting in fiscal 2004-2006. The effect of a change resulting from adoption of this consensus will be recognized as a cumulative-effect adjustment.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The provisions are to be applied prospectively as of the beginning of the fiscal year in which SFAS No. 157 is initially applied, except as it pertains to a change in accounting principles related to (i) large positions previously accounted for using a block discount and (ii) financial instruments (including derivatives and hybrids) that were initially measured at fair value using the transaction price in accordance with guidance in footnote 3 of EITF No. 02-3 or similar guidance in SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements

 

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No. 133 and 140”. For these transactions, differences between the amounts recognized in the statement of financial position prior to the adoption of SFAS No. 157 and the amounts recognized after adoption should be accounted for as a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. We are currently assessing the impact, if any, of this new standard on our financial statements, however, management does not currently foresee that the adoption will have a material impact on our results of operations or financial position.

In February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No.115”. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently assessing the impact of this new standard on our financial statements, however, management does not currently foresee that the adoption will have a material impact on our results of operations or financial position.

In March 2007, the FASB EITF released Topic No. D-109, “Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement No. 133.” EITF Topic D-109 provides guidance that the determination of the nature of the host contract for a hybrid financial instrument (that is, whether the nature of the host contract is more akin to debt or to equity) issued in the form of a share should be based on a consideration of economic characteristics and risks. The SEC believes that the consideration of the economic characteristics and risks of the host contract should be based on all the stated and implied substantive terms and features of the hybrid financial instrument. EITF Topic D-109 is effective at the beginning of the first fiscal quarter beginning after June 15, 2007. Although we will continue to evaluate the application of EITF Topic No. D-109, management does not currently foresee that the adoption will have a material impact on our results of operations or financial position.

 

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OUR INDUSTRY

General

Since early 1990s, the real estate industry in China, including its residential property market, has been transitioning from a planned system controlled by the PRC government into a more market-oriented system. At present, although the PRC government still owns all urban land in China, long term land use rights with terms of up to 70 years can be granted to, and owned or leased by, private individuals and companies. A large and active market in the private sector has developed for sales and transfers of land use rights initially granted by the PRC government and property units built by private developers on such land. This has fostered the development of real estate-related businesses, such as property development, property management and real estate agencies.

The real estate industry in China, like elsewhere, is highly influenced by the domestic macroeconomic environment. The PRC economy has experienced significant growth during the past decade, which has led to a significant expansion of its real estate industry. This expansion has been supported by other factors, including increasing urbanization, growing personal affluence, as well as the emergence of the mortgage lending market. The following table sets forth selected statistics for the real estate industry in China for the periods indicated.

 

		For the year ended December 31,										2001-2005 CAGR
		2001		2002		2003		2004		2005
Investment in real estate development (RMB in billions)		634.4		779.1		1,015.4		1,315.8		1,590.9		25.8	%
Total GFA sold (square meters in millions)		224.1		268.1		337.2		382.3		554.9		25.4	%
Average price of properties sold (RMB per square meter)		2,170		2,250		2,359		2,778		3,168		9.9	%

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Source:

China Statistical Yearbook

Under a recently-enacted PRC Property Rights Law, which became effective on October 1, 2007, the term of the land use rights for residential land may be automatically renewed upon expiration. We expect this new law to encourage further growth in the PRC residential property market.

Growth in the PRC Economy

According to the 11th Five-year Plan for National Economic and Social Development, the PRC government expects the country to achieve GDP growth of approximately 7.5% per annum from 2006 to 2010. The table below sets forth selected PRC economic statistics for the periods indicated.

 

		For the year ended December 31,										2001-2005 CAGR
		2001		2002		2003		2004		2005
Nominal GDP (RMB in billions)		10,965.5		12,033.3		13,582.3		15,987.8		18,308.5		13.7	%
Per capita GDP (RMB)		8,622		9,398		10,542		12,336		14,040		13.0	%
Real GDP growth rate (%)		8.3		9.1		10.0		10.1		10.2		N/A

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Source:

China Statistical Yearbook

 

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Increasing Urbanization in China

The urban population in China has grown significantly in the past 10 years, creating higher demand for housing in many cities. The following table sets forth China’s urban population, total population and urbanization rates for the periods indicated.

 

		For the year ended December 31,										2001-2005 CAGR
		2001		2002		2003		2004		2005
Urban population (in millions)		480.6		502.1		523.8		542.8		562.1		4.0	%
Total population (in millions)		1,276.3		1,284.5		1,292.3		1,299.9		1,307.6		0.6	%
Urbanization rate (%)		37.7		39.1		40.5		41.8		43.0		N/A

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Source:

China Statistical Yearbook

Growing Personal Affluence

Demand for housing in major cities has also grown significantly as a result of growing personal affluence, particularly among urban residents. The following table sets forth China’s per capita disposable income for urban households and aggregate personal savings for the periods indicated:

 

		For the year ended December 31,										2001-2005 CAGR
		2001		2002		2003		2004		2005
Aggregate personal savings (RMB in billions)		7,376.2		8,691.1		10,361.8		11,955.5		14,105.1		17.6	%
Per capita disposable income for urban households (RMB)		6,860		7,703		8,472		9,422		10,493		11.2	%

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Source:

National Bureau of Statistics of China; China Statistical Yearbook

Emergence of mortgage lending in China

Financing for property purchases effectively began in 1994 when the PRC government promulgated rules which required companies to establish housing purchase benefit plans for their employees in urban areas. These plans were jointly funded by both employers and employees and provided substantial financial assistance for home purchases. The PRC government ended its practice of allocating housing units in urban areas in 1998. In 1999, commercial banks in China began to offer mortgage loans for up to 80% of the purchase price to individual property purchasers with maximum terms of 30 years. According to the National Bureau of Statistics of China, the aggregate balance of outstanding mortgage loans for residential properties in China increased from approximately RMB560 billion in 2001 to approximately RMB1,840 billion in 2005. The increased availability in property financing fostered the growth in private property purchases.

 

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The Residential Property Market in China

The following table sets forth selected statistics regarding the residential property market in China for the periods indicated.

 

		For the year ended December 31,										2001-2005 CAGR
		2001		2002		2003		2004		2005
Investment in real estate development in residential properties (RMB in billions)		421.7		522.8		677.7		883.7		1,086.1		26.7	%
GFA of residential properties sold (square meters in millions)		199.4		237.0		297.8		338.2		495.9		25.6	%
Average price of residential properties (RMB per square meter)		2,017		2,092		2,197		2,608		2,937		9.8	%

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Source:

China Statistical Yearbook

As a result of the growing demand and increased prices for residential properties, total residential property sales in China increased from approximately RMB402.1 billion in 2001 to approximately RMB1,456.4 billion in 2005, according to China Statistical Yearbook.

At present, there is no uniform standard to categorize the different types and sizes of cities in China. In this prospectus, we refer to certain larger and more developed cities in China as Tier I and Tier II cities based on the categorization used by the CIHAF Valuation Report on Real Estate Investment in PRC Cities published by China Real Estate Business, or CREB, an authoritative real estate publication in China, YUBO Media and Institute of Finance and Trade Economics of Chinese Academy of Social Sciences. According to this report, four cities in China, namely Beijing, Shanghai, Shenzhen and Guangzhou, are currently considered Tier I cities due to their higher economic output and relatively more mature real estate market development. Another 35 cities are currently considered Tier II cities based on their economic growth and real estate development and investment growth potential.

We see a higher demand potential in the real estate market of the Tier II cities compared to the Tier I cities. The Tier II cities have a total population of 215.1 million and nominal GDP of RMB5,563.0 billion as of December 31, 2005. These represent a 16.4% of China’s total population and 30.4% of China’s total nominal GDP, compared to 2.7% of China’s total population and 14.3% of China’s total nominal GDP in the Tier I cities.

Also, we expect a more robust growth in the real estate market of the Tier II cities, given a more rapid urbanization in the Tier II cities compared to Tier I cities. The Tier II cities have an average urbanization rate of 52.7%, which is lower than the 82.0% rate in the Tier I cities, as of December 31, 2005. However, the urban population in Tier II cities has grown at a CAGR of 6.1% from 2001 to 2005, which is higher than a CAGR of 4.0% in Tier I cities in such period. We believe that the increasing urbanization rates in many Tier II cities are among the factors that have contributed to the growth in their residential housing demand and that the lower urbanization rates in these cities, compared to Tier I cities, are an indication of their capacity for further urban population growth.

In addition, Tier II cities have displayed a higher economic growth. In 2005, Tier II cities grew at a weighted average real GDP growth of 14.5%, which is higher than the 12.4% growth in Tier I cities. We expect continuing economic growth in many Tier II cities and improved intercity transportation infrastructure to encourage growth in the urban populations and residential housing demand of these cities.

 

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The following sets forth an overview of the Tier II cities in which we currently operate:

Chengdu, Sichuan Province

Chengdu is the capital city of Sichuan Province, which is located in Southwest China. According to the China City Statistical Yearbook, Chengdu had a population of 10.8 million as of December 31, 2005, making it the second largest Tier II city in China. The table below sets forth selected economic statistics and real estate industry data for Chengdu for the periods indicated.

 

		For the year ended December 31,
		2001		2002		2003		2004		2005
Population (in millions)		10.2		10.3		10.4		10.6		10.8
Nominal GDP (RMB in billions)		149.2		166.7		187.1		218.6		237.1
Real GDP growth rate (%)		13.1		13.1		13.0		13.6		13.5
Per capita disposable income for urban households (RMB)		8,128		8,972		9,641		10,394		11,359
Residential real estate investments (RMB in billions)		12.3		14.9		18.9		18.6		29.4
Residential GFA completed (square meters in millions)		7.2		7.8		9.0		7.0		5.0
Residential GFA sold (square meters in millions)		6.4		7.4		9.0		6.8		4.9
Average price of residential property per square meter (RMB)		1,648		1,775		1,908		2,224		2,308

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Source:

China City Statistical Yearbook; China Real Estate Statistics Yearbook; Chengdu Statistical Yearbook

Hefei, Anhui Province

Hefei is the capital city of Anhui Province, which is located in Eastern China. According to the China City Statistical Yearbook, Hefei had a population of 4.6 million as of December 31, 2005, making it the 24th largest Tier II city in China. The table below sets forth selected economic statistics and real estate industry data for Hefei during the periods indicated.

 

		For the year ended December 31,
		2001		2002		2003		2004		2005
Population (in millions)		4.4		4.5		4.6		4.4		4.6
Nominal GDP (RMB in billions)		36.3		41.3		48.5		59.0		85.4
Real GDP growth rate (%)		12.5		13.1		13.7		16.2		16.9
Per capita disposable personal income for urban households (RMB)		6,817		7,145		7,784		8,610		9,684
Residential real estate investments (RMB in billions)		1.7		2.4		6.4		10.3		14.3
Residential GFA completed (square meters in millions)		1.1		1.9		2.6		3.0		4.1
Residential GFA sold (square meters in millions)		0.7		1.8		2.5		3.1		5.3
Average price of residential property per square meter (RMB)		1,522		1,618		1,889		2,271		2,807

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Source:

China City Statistical Yearbook; China Real Estate Statistics Yearbook; Hefei Statistical Yearbook

 

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Jinan, Shandong Province

Jinan is the capital city of Shandong Province, which is located in Eastern China. Jinan had a population of 6.0 million as of December 31, 2005 according to the China City Statistical Yearbook, making it the 18th largest Tier II city in China. The table below sets forth selected economic statistics and real estate industry data for Jinan for the periods indicated.

 

		For the year ended December 31,
		2001		2002		2003		2004		2005
Population (in millions)		5.7		5.8		5.8		5.9		6.0
Nominal GDP (RMB in billions)		106.6		120.1		136.5		161.9		187.7
Real GDP growth rate (%)		12.1		13.2		14.5		15.6		15.6
Per capita disposable income for urban households (RMB)		9,565		10,094		11,013		12,005		13,578
Residential real estate investments (RMB in billions)		4.8		6.4		7.4		8.7		9.6
Residential GFA completed (square meters in millions)		1.6		2.4		2.5		2.5		1.9
Residential GFA sold (square meters in millions)		1.2		1.9		2.4		2.3		2.4
Average price of residential property per square meter (RMB)		1,858		2,068		2,307		2,831		3,026

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Source:

China City Statistical Yearbook; China Real Estate Statistics Yearbook; Jinan Statistical Yearbook

Suzhou, Jiangsu Province

Suzhou is located in the southeast region of Jiangsu Province, approximately 100 kilometers outside of Shanghai. As of December 31, 2005, Suzhou had a population of 6.1 million, making it the 17th largest Tier II city in China. The table below sets forth selected economic statistics and real estate industry data for Suzhou during the periods indicated:

 

		For the year ended December 31,
		2001		2002		2003		2004		2005
Population (in millions)		5.8		5.8		5.9		6.0		6.1
Nominal GDP (RMB in billions)		176.0		208.0		280.2		345.0		402.7
Real GDP growth rate (%)		12.3		14.0		18.0		17.6		15.3
Per capita disposable income for urban households (RMB)		10,515		10,617		12,362		14,451		16,276
Residential real estate investments (RMB in billions)		5.6		8.3		14.8		27.6		32.9
Residential GFA completed (square meters in millions)		3.9		4.6		7.1		12.7		13.8
Residential GFA sold (square meters in millions)		4.3		4.8		5.3		7.5		6.8
Average price of residential property per square meter (RMB)		1,730		2,044		2,481		2,964		3,718

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Source:

Suzhou Statistical Yearbook; China City Statistical Yearbook

 

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Zhengzhou, Henan Province

Zhengzhou is the capital of Henan Province, which is located in central China. According to the China City Statistical Yearbook, Zhengzhou had a population of approximately 6.8 million as of December 31, 2005, making it the 11th largest Tier II city in China. The table below sets forth selected economic statistics and real estate industry data for Zhengzhou during the periods indicated:

 

		For the year ended December 31,
		2001		2002		2003		2004		2005
Population (in millions)		6.4		6.5		6.6		6.7		6.8
Nominal GDP (RMB in billions)		82.8		92.8		110.2		137.8		166.1
Real GDP growth rate (%)		10.9		11.0		14.8		15.7		16.0
Per capita disposable income for urban households (RMB)		6,633		7,495		8,346		9,364		10,640
Residential real estate investments (RMB in billions)		3.5		4.8		6.4		9.5		12.6
Residential GFA completed (square meters in millions)		1.4		2.1		2.8		2.8		3.6
Residential GFA sold (square meters in millions)		1.3		1.6		2.6		3.0		5.6
Average price of residential property per square meter (RMB)		1,880		1,914		1,955		2,004		2,387

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Source:

China City Statistical Yearbook; China Real Estate Statistics Yearbook; Zhengzhou Statistical Yearbook

Recent Government Policies

The PRC government has announced on several occasions in recent years that its policy towards the development of the real estate industry is to promote healthy and sustainable growth, which includes encouraging the development of more low to medium priced housing. Since 2004, amidst growing concerns of overheating in the real estate industry, particularly in Tier I cities where average property prices have risen by more than 20% between 2001 to 2005, the PRC government has introduced a series of measures intended to slow growth in both property demand and supply and discourage speculation in the residential property market. These measures include the following:

Land Allocation and Real Estate Development

In May 2005, the Ministry of Construction and other relevant Chinese government authorities jointly issued the Notice Regarding Stabilizing Property Prices, which was followed by a set of implementation measures, including:

 

Ÿ

the imposition of a charge on land that remains undeveloped for one year from the commencement date specified in the relevant government land grant contract;

 

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the cancellation of land use rights for land that remains undeveloped for two years from the specified commencement date;

 

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the revocation of approval for projects that fail to comply with relevant planning permits;

 

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a ban on the grant of land use rights for the construction of villas; and

 

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a restriction on the grant of land use rights for the construction of other types of luxury residential properties.

 

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In 2006 and 2007, further measures targeted at promoting the development of more low- and middle-end properties were introduced to regulate land supply and property development projects, including the following:

 

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with effect from June 1, 2006, at least 70% of the total GFA of each urban residential property development must comprise residential units with floor area of less than 90 square meters, unless prior government approval is obtained; and

 

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the tightening of regulations relating to the levy and payment of LAT, a property gains tax and the filing and reporting obligations of property developers.

Mortgage Lending and Borrowing

Under the Circular on Strengthening the Management of Commercial Real Estate Credit Facilities introduced in 2007, with effect from September 27, 2007, the minimum down payment for any purchase of a first self-use residential property with a unit GFA of less than 90 square meters is 20% of the purchase price of the property. The minimum down payment for any purchase of first self-use residential property with a unit GFA of 90 square meters or more is 30% of the purchase price of the property. The minimum down payment for any purchase of a second or subsequent residential property was increased to 40% of the purchase price if the purchaser had obtained a bank loan to finance the purchase of his or her first property.

Property Sales

In 2006 and 2007, additional measures were introduced to slow the increase in real property prices. For instance, a business tax was imposed in June 2006 on the proceeds from sales of residential properties occurring within five years of purchase as well as any gains from sales of residential properties that are not deemed to be non-luxury residential properties occurring after five years of purchase.

We expect continuing economic growth in China, rising disposable income levels and population growth in Tier II cities to support demand for residential properties, including our residential units, over the next years, despite these measures by the PRC government to control overheating in the PRC property market. Our model of rapid development cycle reduces our risk of incurring penalties or having land use rights cancelled under these new rules for undeveloped land, as well as lowers the potential for taxable appreciation in the value of our land over an extended period of time beyond our development cycle.

 

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OUR CORPORATE HISTORY AND STRUCTURE

We are a Cayman Islands holding company and conduct substantially all of our business through our operating subsidiary in the PRC, Xinyuan (China) Real Estate, Ltd., or Xinyuan China. We own 100% of Xinyuan Real Estate, Ltd., or Xinyuan Ltd., a Cayman Islands holding company, which owns 100% of Xinyuan China. Xinyuan China has 11 wholly-owned subsidiaries in the PRC and holds a 45% minority interest in Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd. The following diagram illustrates our corporate structure as of the date of this prospectus:

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The other shareholders of Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd. are Zhengzhou General Construction Investment Company (50%) and Zhengzhou Jiantou Project Consulting Co., Ltd. (5%).

We commenced our operations in May 1997 through Henan Xinyuan Real Estate Co., Ltd., one of our wholly-owned subsidiaries in the PRC. We completed a restructuring in April 2007 under which we established our current corporate structure by completing a share exchange in which the existing shareholders of Xinyuan Ltd., our then holding company, exchanged their respective shares for an equivalent number of our shares of the same class.

In April 2007, we issued the following equity and debt securities:

 

Ÿ

In connection with the restructuring referred to above and in exchange for Series A preference shares of Xinyuan Ltd. that were issued in August 2006 for cash proceeds of US$25 million, or US$0.81155 per share, we issued an aggregate of 30,805,400 Series A convertible redeemable preference shares, or Series A preference shares, to Blue Ridge China Partners, L.P., or Blue Ridge China, and EI Fund II China, LLC, or Equity International, together with certain warrants. If our cumulative net income for the two years ending December 31, 2008 is less than US$80 million, the holders of the warrants are entitled to purchase up to a maximum of 3,987,009 fully paid Series A preference shares at an exercise price of US$0.01 per share. If our cumulative net income for such period equals or exceeds US$80 million, or if we consummate a qualified initial public offering prior to March 31, 2008, then these warrants will expire without exercise. We expect these warrants to expire without exercise upon the completion of this offering. The fair value assigned to the warrants as at the date of issuance was US$496,000.

 

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Ÿ

In connection with the restructuring referred to above and in exchange for warrants of Xinyuan Ltd. that were issued in August 2006 in consideration of financial advisory and investment banking services rendered, we issued the Burnham warrants, for the issuance of 1,853,172 fully paid common shares at an exercise price of US$0.81155 per share. We assigned a fair value of US$55,595 to these warrants, which was recorded as paid-in capital.

 

Ÿ

In connection with the restructuring referred to above and in exchange for common shares of Xinyuan Ltd. that were issued in November 2006 for an aggregate consideration of US$15 million, or US$0.9551 per share, we issued 15,704,379 common shares to Blue Ridge China and Equity International.

 

Ÿ

We issued US$75 million principal amount of units, each unit comprising US$100,000 principal amount of secured senior floating rate notes due 2010, or the floating rate notes, and one warrant to subscribe for our common shares. Each warrant entitles the holder to subscribe at the warrant exercise price for the number of common shares equal to the quotient obtained by dividing (i) US$40,000 by (ii) the warrant exercise price, which will be equal to 80% of the price per common share derived from the offering of the ADSs. The fair value assigned to the warrants as at the date of issuance was US$7.36 million.

 

Ÿ

We issued US$25 million principal amount of convertible subordinated notes due 2012, or convertible notes. The convertible notes are convertible into common shares at the rate of 38,388.48 common shares per US$100,000 principal amount of convertible notes, or a total of 9,597,120 common shares.

See “Description of Share Capital—History of Share Issuances” with respect to the original issuances of such securities by Xinyuan Ltd.

For a discussion of our current shareholding structure, see “Principal Shareholders.”

 

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BUSINESS

Overview

We are a fast-growing residential real estate developer that focuses on Tier II cities in China. We utilize a standardized and scalable model that emphasizes rapid asset turnover, efficient capital management and strict cost control. We commenced operations in 1997 in Zhengzhou, the provincial capital of Henan Province, and were ranked No. 1 among all property developers in Zhengzhou in terms of contracted sales of residential units for the years 2004, 2005 and 2006, according to statistics prepared by the Bureau of Real Estate Management in Zhengzhou. Since 2006, we have expanded into strategically selected Tier II cities around the country and expect to benefit from rising residential housing demand in these markets as a result of increasing income levels of consumers and growing populations in these cities. We currently have operations in five Tier II cities, including Chengdu in Sichuan Province, Hefei in Anhui Province, Jinan in Shandong Province, Suzhou in Jiangsu Province and Zhengzhou in Henan Province.

We focus on developing large scale quality residential projects, which typically consist of multiple residential buildings that include multi-layer apartment buildings, sub-high-rise apartment buildings or high-rise apartment buildings, together with auxiliary services and amenities such as retail outlets, leisure and health facilities, kindergartens and schools. We also develop small scale residential properties. Our developments aim at providing middle-income consumers with a comfortable and convenient community life. In addition, we provide property management services for our developments and other real estate-related services to our customers. We acquire development sites primarily through public auctions of government land. This acquisition method allows us to obtain unencumbered land use rights to unoccupied land without the need for additional demolition, re-settlement or protracted legal processes to obtain title. As a result, we are able to commence construction relatively quickly after we acquire a site for development.

We have expanded our business and operations significantly during the past three years. The number of projects we had under construction increased from three projects with a total GFA of 278,868 square meters as of December 31, 2004, to seven projects with a total GFA of 770,781 square meters as of September 30, 2007. We have seven additional projects with a total GFA of 1,282,498 square meters under planning as of September 30, 2007. As of September 30, 2007, we have completed 13 projects with a total GFA of approximately 939,829 square meters and comprising a total of 8,645 units, more than 99.0% of which have been sold. For each of the three years ended December 31, 2004, 2005 and 2006, our revenues were US$35.6 million, US$61.9 million and US$142.4 million, respectively, representing a CAGR of 99.9%. Our net income for each of those three years was US$3.9 million, US$9.6 million and US$16.1 million, respectively, representing a CAGR of 102.2%. For the nine months ended September 30, 2006 and 2007, our revenue was US$99.7 million and US$218.3 million, respectively. Our net income for the nine months ended September 30, 2006 and 2007 was US$12.5 million and US$36.0 million, respectively.

 

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We intend to continue our expansion into additional selected Tier II cities as suitable opportunities arise. The following map illustrates the geographic locations of our current operations and selected target Tier II cities which we currently survey for expansion in the near future:

Competitive Strengths

We believe the following strengths allow us to compete effectively in the real estate development industry:

Well Positioned to Capture Attractive Growth Opportunities in Tier II Cities.    Increases in consumer disposable income and urbanization rates have resulted in the emergence of a growing middle-income consumer market, driving demand for affordable and quality housing in many cities across China. Since 1997, we have been building large communities of modern, mid-sized residential properties for this market segment and have accumulated substantial knowledge and experience about the residential preferences and demands of these customers. We believe demand for product types and consumption trends are similar across the selected Tier II cities we enter into and believe that we can leverage our experience to capture the growth opportunities in these

 

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markets. We typically acquire land through the government auction system providing us ready access to undeveloped land, which enables us to expand rapidly into other Tier II cities. We believe our land acquisition method offers a sustainable source of land, which also positions us well to capitalize on increasing demand and growth opportunities in our target markets.

Standardized and Scalable Business Model.    Our business model focuses on a standardized property

development process designed for rapid asset turnover. We segment the process into well-defined stages and closely monitor costs and development schedules through each stage. These stages include (i) identifying land, (ii) pre-planning and budgeting, (iii) land acquisition, (iv) detailed project design, (v) construction management, (vi) sales and (vii) after-sale service. We commence pre-planning and budgeting prior to land acquisition, which enables us to acquire land at costs that meet our pre-set investment targeted returns and to quickly begin the development process upon acquisition. We typically acquire land through a transparent government auction system providing us with unencumbered land use rights to unoccupied land. Our enterprise resource planning enables us to collect and analyze information on a real-time basis throughout the entire property development process, optimizing decision making, outsourcing and development cycle scheduling. We utilize our customer relationship management system to track customer profiles and sales to forecast future individual preferences and market demand. We believe that these standardized practices and methodologies, together with a systematic approach to the development process, can be replicated in strategically selected Tier II cities, allowing us to effectively and rapidly enter into new geographic markets and develop new projects as attractive opportunities arise. Since 2006, we have expanded from one to a total of five Tier II cities in China, and from December 31, 2004 to September 30, 2007, our total GFA for projects under construction has grown 176.4%.

Proven Ability to Provide Large Scale Quality Housing for Middle-Income Consumers.    We have a clear focus on emerging middle-income consumers in China’s Tier II cities. We provide standardized mid-sized units, typically ranging from 50 square meters to 100 square meters in size, at affordable prices for this market. Our residential units feature modern designs and offer comfortable and convenient community lifestyles. We have developed a portfolio of architectural plans and designs, which typically comprise 1,000 to 5,000 units and include facilities such as clubhouses, retail shops and schools. We have a proven track record of building large-scale quality residential communities that appeal to middle-income customers, as demonstrated by the sale of more than 99.0% of the units in completed projects and revenue growth at a CAGR of 99.9% from 2004 to 2006.

Ability to Generate Attractive Investment Returns.    Our standardized processes that emphasize rapid

asset turnover allow us to efficiently use capital and generate attractive returns on our investments. We typically

acquire land that is ready for development through the government auction system. We do not tie up capital in idle land banks but instead begin development relatively quickly after land acquisition. We use working capital efficiently by actively managing and coordinating receivables and expenditures across various projects. We can complete a project consisting of multi-layered buildings of six stories or below in 13 to 17 months from the date of land acquisition. We typically begin pre-sales for a project within two to four months after we commence construction. Historically, our pre-sales activities have allowed us to generate cash flows relatively early in the development cycle and to fund a significant portion of the capital required for existing projects, reducing financing needs and associated costs. Moreover, our project development and construction management emphasizes strict cost control at each stage of project development. Our long-term relationships established with third-party contractors allow us to efficiently conduct selection processes and closely manage and supervise construction progress to avoid unexpected delays and cost overruns. We believe that the velocity of our development cycle and our ability to efficiently manage capital and maintain strict cost control at each stage of the development cycle enable us to generate attractive returns on our projects.

Experienced Management Team Supported by Trained and Motivated Workforce.    Our senior managers, most of whom have been working with our company for over five years, have on average over 10 years of experience in the PRC real estate industry and considerable strategic planning and business management expertise. Our Chairman and founder, Mr. Yong Zhang, has more than 20 years of experience in developing

 

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residential housing in China. Mr. Zhang was elected in 2004 as one of the Top 10 Rising Entrepreneurs in China’s Real Estate Industry by the China International Real Estate & Archi-tech Fair, or the CIHAF. Our management and workforce are well-trained and motivated. To promote effective recruitment, retention and advancement, we provide management with training and incentive programs that include subsidizing management’s pursuit of post-secondary degrees and programs. Currently, some of our managers are undertaking part-time post-secondary degrees and over 50 managers have completed or are at various stages of undertaking one year part-time business administration programs at top universities in China. Employees receive on-going training in their areas of specialization at our head office in Zhengzhou. In addition, we have adopted broad performance-based stock incentive plans, which we believe enables us to retain and motivate the workforce as well as attract new talent to support our rapid expansion.

Relationships with Our Institutional Shareholders.    In 2006, Blue Ridge China and Equity International invested in our company. Blue Ridge China is a China-focused private equity fund and Equity International is a privately-held investment company specializing in real estate investments outside the United States, founded and led by Samuel Zell and Gary Garrabrant. Equity International’s portfolio companies include Homex in Mexico and Gafisa in Brazil, both of which are publicly traded in the United States. Equity International is affiliated with Equity Group Investments, LLC, a privately-held investment company founded by Samuel Zell, which together with its affiliates, has created some of the largest publicly-traded real estate companies in the United States. Both of these shareholders (through their designees on the board of directors) are active in major board-level decisions and contribute their expertise in corporate governance best practices, financial management and accessing global capital. After the offering, Blue Ridge China and Equity International will hold         % and         % of our outstanding shares, respectively, and will have representatives participating on our board of directors.

Strategies

Our goal is to become the leading residential property developer focused on China’s Tier II cities by implementing the following strategies:

Continue Expanding in Selected Tier II Cities.    We believe that Tier II cities present development opportunities that are well suited for our scalable business model of rapid asset turnover. Many Tier II cities offer a large supply of potential development sites that meet the criteria of our internal pre-set targeted returns. Furthermore, Tier II cities currently tend to be in an early stage of market maturity and have fewer large national developers. We believe that the fragmented market and relative abundance of land supply in Tier II cities, as compared to Tier I cities, offer opportunities for us to generate attractive margins and believe that our experience in and strategic focus on Tier II cities afford us the opportunity to emerge as a leading developer in these markets. We have rapidly expanded from one to five Tier II cities since 2006 and plan to enter into other Tier II cities that have:

 

Ÿ

increasing urbanization rates and population growth;

 

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high economic growth and increasing disposable income; and

 

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sustainable land supply for future developments.

Capitalize on Growth of Middle-Income Population.    The growing middle-income consumer market in China presents an attractive opportunity to continue our business expansion at a rapid pace. We will target this market by continuing to provide quality mid-sized modern residential units in large community developments for middle-income consumers. Our strategy is also consistent with the housing policy direction of relevant PRC governmental authorities in the context of rising incomes and rapid urbanization. The Ministry of Construction and other PRC governmental authorities released policies in 2006 to promote the development of more low- and mid-priced housing and to limit the amount of resources, including land supply, devoted to the luxury housing market. We believe that our strategy and business model to target the middle-income market provide us with a competitive advantage in China’s new regulatory environment.

 

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Focus on Efficient Land Acquisition.    We constantly seek and assess land acquisition opportunities in selected Tier II cities through the governmental land auction system. To achieve our land acquisition targets, we have established a centralized and efficient system to research land acquisition opportunities. We monitor, plan and budget development costs for potential development sites and, if the development opportunity meets our pre-set investment target, bid for the site through the auction process. We believe that beginning with efficient land acquisitions and following through with well-executed development will allow us to expand into Tier II cities successfully and provide sustainable growth to our business. Our goal is to acquire land supply sufficient for two to three years of development to support our planned business growth. It will also allow us to more efficiently manage our capital by coordinating receivables and expenditures from project to project, lowering our financing requirements and associated costs.

Maintain Strict Cost Control.    We plan to continue to closely monitor our capital and cash positions and carefully manage our land use rights costs, construction costs and operating expenses. We believe that by adhering to prudent cost management we will be able to more efficiently use our working capital, which will help to maintain our profit margins. When selecting a property project for development, we will continue to follow our established internal evaluation process, including utilizing the analysis and input of our institutional shareholders and choosing third-party contractors through a tender process open only to bids which meet our budgeted costs, thus allowing us to meet our investment return criteria. We will also actively manage our sales and pre-sales to generate cash flows for our ongoing capital requirements.

Strengthen our “Xinyuan” Brand.    We intend to continue promoting “Xinyuan” brand in selected Tier II cities by delivering quality products and attentive real estate-related services to our customers. We believe, based on surveys we conduct with our customers, that over half of our property purchasers were referred to us by existing unit owners. We therefore believe that we can most effectively enhance our brand name by continuing to focus on providing quality products and after-sales support to customers to maintain their trust and loyalty and promote referrals to us. At the same time, we will continue to actively promote the “Xinyuan” brand through marketing initiatives in our targeted markets, such as increasing the level of advertising activities.

Our Markets

We currently operate in five markets—Chengdu in Sichuan Province, Hefei in Anhui Province, Jinan in Shandong Province, Suzhou in Jiangsu Province and Zhengzhou in Henan Province.

The following table sets forth the numbers of our projects and the total GFA in each location indicated as of September 30, 2007.

 

		Chengdu		Hefei		Jinan		Suzhou		Zhengzhou		Total
Properties under construction		—		1		3		2		1		7
Properties under planning		2		—		1		1		3		7
Completed projects		—		—		—		—		13		13
Total number of projects		2		1		4		3		17		27
Total GFA(1) (m2)		447,981		145,452		404,068		487,890		1,507,717		2,993,108

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The amounts for ‘‘total GFA’’ in this table and elsewhere in this prospectus are the amounts of total saleable residential GFA and are derived on the following basis:

 

Ÿ

for properties that are sold, the stated GFA is based on the sales contracts relating to such property;

 

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for unsold properties that are completed or under construction, the stated GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and

 

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Ÿ

for properties that are under planning, the stated GFA is based on the land grant contract and our internal projection.

In addition, Zhengzhou Jiantou Xinyuan Real Estate Co, Ltd, or Jiantou Xinyuan, a project company in which we own a 45% interest, has one completed project in Zhengzhou with a total GFA of 107,846 square meters and three projects under construction in Zhengzhou with an estimated total GFA of 366,049 square meters, as of September 30, 2007.

We intend to seek attractive opportunities to expand into additional Tier II cities, which we will select based on certain macroeconomic criteria, including economic growth, per capita disposable income, population, urbanization rate as well as availability of suitable land supply and local residential property market conditions.

Our Property Projects

Overview

We offer the following three main types of real estate property products:

 

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multi-layer apartment buildings, which are typically six stories or less and normally require nine to 12 months to construct after we obtain the related construction permit;

 

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sub-high-rise apartment buildings, which are typically seven to 11 stories and normally require 12 to 18 months to construct after we obtain the related construction permit; and

 

Ÿ

high-rise apartment buildings, which are typically 12 to 33 stories and normally require 18 to 24 months to construct after we obtain the related construction permit.

Our projects are in one of the following three stages:

 

Ÿ

completed projects, comprising projects the construction of which has been completed;

 

Ÿ

properties under construction, comprising properties for which the construction permits have been obtained; and

 

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properties under planning, comprising properties for which we have entered into land grant contracts and are in the process of obtaining the required permits to begin construction.

 

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Properties under Construction and Properties under Planning

The following table sets forth each of our properties currently under construction or planning as of September 30, 2007:

 

Project Name		Location		Type of Products(1)		Actual or Estimated Construction Period		Actual or Estimated Pre-sale Commencement Date(2)		Total Site Area		Total GFA(3)		Total Number of Units		Number of Units Sold
										(m2)		(m2)
Properties under construction
Hefei Wangjiang Garden		Hefei		M/H		05/2007-04/2009		07/2007		51,939		145,452		1,649		911
Jinan City Family		Jinan		M		10/2006-11/2007		11/2006		47,411		61,066		786		755
Jinan Elegant Scenery		Jinan		H/S		12/2006-12/2008		04/2007		61,502		99,777		1,127		821
Jinan International City Garden I		Jinan		H/S		09/2007-05/2009		11/2007		63,524		118,598		1,678		—
Suzhou Lake Splendid		Suzhou		M/H/S		03/2007-12/2008		05/2007		130,945		197,179		2,315		1,660
Suzhou Colorful Garden		Suzhou		M/H		06/2007-04/2009		09/2007		41,365		81,131		968		15
Zhengzhou Commercial Plaza		Zhengzhou		H		11/2006-08/2008		05/2007		8,410		67,578		920		614
Subtotal										405,096		770,781		9,443		4,776
Properties under planning
Chengdu Xinyuan Splendid I		Chengdu		H		11/2007-04/2010		01/2008		34,007		230,493		4,066		—
Chengdu Xinyuan Splendid II		Chengdu		H		01/2008-07/2010		05/2008		30,497		217,488		3,113		—
Jinan International City Garden II		Jinan		H		12/2007-08/2009		03/2008		30,404		124,627		2,126		—
Suzhou Xinyuan Splendid		Suzhou		H/S		01/2008-08/2010		05/2008		119,089		209,580		3,209		—
Zhengzhou Longhai Road Project		Zhengzhou		H		10/2008-12/2010		03/2009		63,328		266,888		2,423		—
Zhengzhou Xinyuan Huating		Zhengzhou		H		12/2007-12/2009		05/2008		16,502		49,361		654		—
Zhengzhou Xinyuan Colorful Garden		Zhengzhou		M/H/S		06/2008-04/2010		10/2008		74,462		184,061		2,130		—
Subtotal										368,289		1,282,498		17,721		—
Total										773,385		2,053,279		27,164		4,776

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“M” refers to multi-layer buildings, “H” refers to high-rise buildings and “S” refers to sub-high-rise buildings.

(2)

Pre-sale commencement dates refer to dates on which we began or expect to begin pre-sale activities after receiving the relevant pre-sale permits.

(3)

The amounts for ‘‘total GFA’’ in this table and elsewhere in this prospectus are the amounts of total saleable residential GFA and are derived on the following basis:

 

Ÿ

for properties that are sold, the stated GFA is based on the sales contracts relating to such property;

 

Ÿ

for unsold properties that are completed or under construction, the stated GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and

 

Ÿ

for properties that are under planning, the stated GFA is based on the land grant contract and our internal projections.

 

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Properties under Construction

Hefei, Anhui Province

Hefei Wangjiang Garden.    Hefei Wangjiang Garden is located at Wangjiang Road of Baohe District in Hefei. We commenced construction of this project in May 2007 and expect to deliver it by April 2009. Hefei Wangjiang Garden covers a site area of 51,939 square meters and has a total GFA of 145,452 square meters, of which 9,434 square meters are for multi-layer buildings, 135,159 square meters for high-rise buildings and 859 square meters for retail stores. This project, when completed, will consist of 1,649 units. We have started pre-sales in July 2007. As of September 30, 2007, we had sold 911 units.

Jinan, Shandong Province

Jinan City Family.    Jinan City Family is located on Zhangzhuang Road of Huaiyin District in Jinan. We commenced construction of this project in October 2006 and expect to deliver it by November 2007. Jinan City Family covers a site area of 47,411 square meters and has a total GFA of 61,066 square meters, of which 60,256 square meters are for multi-layer buildings and 810 square meters for retail stores. We started pre-sale in November 2006. As of September 30, 2007, we had sold 755 units out of 786 saleable units.

Jinan Elegant Scenery.    Jinan Elegant Scenery is located on Autoplant Road East of Tianqiao District in Jinan. We commenced construction of this project in December 2006 and expect to deliver it by December 2008. Jinan Elegant Scenery covers a site area of 61,502 square meters and has a total GFA of 99,777 square meters, of which 78,862 square meters are for sub-high-rise buildings, 15,793 square meters for high-rise buildings and 5,122 square meters for retail stores. We started pre-sales in April 2007. As of September 30, 2007, we had sold 821 units out of 1,127 saleable units.

Jinan International City Garden I.    Jinan International City Garden I is located on South Industrial Road of Hitech Industry Park in Jinan. We commenced construction of this project in September 2007 and expect to deliver it by May 2009. Jinan International City Garden I covers a site area of 63,524 square meters and has a total GFA of 118,598 square meters, of which 97,323 square meters are for high-rise buildings, 18,773 square meters for sub-high-rise buildings and 2,502 square meters for retail stores. This project will consist of 1,678 units. We plan to start pre-sales in November 2007.

Suzhou, Jiangsu Province

Suzhou Lake Splendid.    Suzhou Lake Splendid is located on Tongda Road of Wuzhong District in Suzhou. We commenced construction of this project in March 2007 and expect to deliver it by December 2008. Suzhou Lake Splendid covers a site area of 130,945 square meters and has a total GFA of 197,179 square meters, of which 98,832 square meters are for multi-layer buildings, 16,826 square meters for sub-high-rise buildings, 77,423 square meters for high-rise buildings and 4,098 square meters for retail stores. We started pre-sales in May 2007. As of September 30, 2007, we had sold 1,660 units out of 2,315 saleable units.

Suzhou Colorful Garden.    Suzhou Colorful Garden is located on Xihuan Road of Jinchang District in Suzhou. We commenced construction of this project in June 2007 and expect to deliver it by April 2009. This project covers a site area of 41,365 square meters and has a total GFA of 81,131 square meters, which consists of 32,860 square meters of multi-layer buildings, 46,225 square meters of high-rise buildings and 2,046 square meters of retail stores. This project, when completed, is expected to consist of 968 units. We started pre-sales in September 2007 and had sold 15 units as of September 30, 2007.

Zhengzhou, Henan Province

Zhengzhou Commercial Plaza.    Zhengzhou Commercial Plaza is located on Jingsan Road of Jinshui District in Zhengzhou. We commenced construction of this project in November 2006 and expect to deliver it by

 

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August 2008. Zhengzhou Commercial Plaza covers a site area of 8,410 square meters and has a total GFA of 67,578 square meters. This project consists of two high-rise buildings. One building with an estimated total GFA of 27,516 square meters is purely for residential use. The other with estimated total GFA of 40,062 square meters is for both residential and commercial use. We started pre-sales in May 2007. As of September 30, 2007, we had sold 614 units out of the 920 saleable residential units.

Properties under Planning

Chengdu, Sichuan Province

Chengdu Xinyuan Splendid (Phase I & II).    Chengdu Xinyuan Splendid is located on Donghong Road of Jinjiang District in Chengdu, and is currently under planning. We expect to commence construction of this project in November 2007, to start pre-sales in January 2008 and to complete this project by July 2010. Phase I and Phase II of the project will cover an aggregate site area of 64,504 square meters, and are expected to have a total GFA of 447,981 square meters. This project is expected to consist of 7,179 units upon completion.

Jinan, Shandong Province

Jinan International City Garden II.    Jinan International City Garden II is located on South Industrial Road of Hitech Industry Park in Jinan, and is currently under planning. We expect to commence construction of this project in December 2007, to start pre-sales in March 2008 and to complete it by August 2009. This project will cover a site area of 30,404 square meters, and will have a total GFA of 124,627 square meters. This project is expected to consist of 2,126 units upon completion.

Suzhou, Jiangsu Province

Suzhou Xinyuan Splendid.    Suzhou Xinyuan Splendid is located on Mayun Road of Hitech District in Suzhou, and is currently under planning. We expect to commence construction of this project in January 2008, to start pre-sales in May 2008 and to deliver it by 2010. It will cover a site area of 119,089 square meters and is expected to have a total GFA of 209,580 square meters. This project is expected to consist of 3,209 units when completed.

Zhengzhou, Henan Province

Zhengzhou Longhai Road Project.    Zhengzhou Longhai Road Project is located on Longhai Road of Erqi District in Zhengzhou, and is currently under planning. We expect to commence construction of this project in October 2008, to start pre-sales in March 2009 and to deliver it by 2010. It will cover a site area of 63,328 square meters and is expected to have a total GFA of 266,888 square meters. This project is expected to consist of 2,423 units when completed.

Zhengzhou Xinyuan Huating.    Zhengzhou Xinyuan Huating is located on Funin Road of Zhongyuan District in Zhengzhou, and is currently under planning. We expect to commence construction of this project in December 2007, to start pre-sales in May 2008 and to deliver it by 2009. It will cover a site area of 16,502 square meters and is expected to have a total GFA of 49,361 square meters. This project is expected to consist of 654 units when completed.

Zhengzhou Xinyuan Colorful Garden.    Zhengzhou Xinyuan Colorful Garden is located on Hezuo Road of Erqi District in Zhengzhou, and is currently under planning. We expect to commence construction of this project in June 2008, to start pre-sales in October 2008 and to deliver it by the middle of 2010. It will cover a site area of 74,462 square meters and is expected to have a total GFA of 184,061 square meters. This project is expected to consist of 2,130 units when completed.

 

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Completed Projects

The following table sets forth each of our completed projects as of September 30, 2007.

 

Project Name		Location		Type of Products		Completion Date		Total Site Area		Total GFA(1)		Total Number of Units		Number of Units Sold
								(m2)		(m2)
Completed Projects
Zhengzhou Longhai Star Garden		Zhengzhou		M/H/S		12/2000		11,719		39,975		239		210
Zhengzhou Xinyuan Splendid:
Zhengzhou Xinyuan Splendid 1A		Zhengzhou		M/S		07/2002		35,444		62,623		484		477
Zhengzhou Xinyuan Splendid 1B		Zhengzhou		M		04/2004		21,800		43,673		333		333
Zhengzhou Xinyuan Splendid 2A		Zhengzhou		M		04/2003		23,460		39,996		271		271
Zhengzhou Xinyuan Splendid 2B		Zhengzhou		M		06/2004		19,295		27,041		86		86
Zhengzhou Xinyuan Splendid 2C		Zhengzhou		S		04/2004		9,968		21,748		132		132
Zhengzhou Xinyuan Splendid 3A3B3C		Zhengzhou		M/S		08/2005		51,014		114,774		792		792
Zhengzhou Xinyuan Splendid Haojinge		Zhengzhou		H		11/2004		8,298		31,089		166		166
Zhengzhou Xinyuan Splendid City Homestead		Zhengzhou		M		08/2005		23,606		45,378		369		369
Zhengzhou Xinyuan Splendid subtotal								192,885		386,322		2,633		2,626
Zhengzhou City Manor		Zhengzhou		M		03/2006		63,089		118,716		1,633		1,633
Zhengzhou City Family		Zhengzhou		M		12/2006		21,380		39,226		720		719
Zhengzhou Central Garden — East		Zhengzhou		M/H/S		09/2007		60,849		165,206		1,624		1,624
Zhengzhou Central Garden — West		Zhengzhou		M/H/S		09/2007		79,464		190,384		1,796		1,795
Total								429,386		939,829		8,645		8,607

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(1)

The amounts for “total GFA” in this table are the amounts of total saleable residential GFA and are derived on the following basis:

 

Ÿ

for properties that are sold, the stated GFA is based on that sales contracts relating to such property;

 

Ÿ

for unsold properties that are completed, the stated GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and

 

Ÿ

for properties that are under planning, the stated GFA is based on the land grant contract and our internal projections.

Zhengzhou, Henan Province

As of September 30, 2007, all of our completed projects were located in Zhengzhou.

Zhengzhou Longhai Star Garden.    Zhengzhou Longhai Star Garden is located on Longhai Road of Zhongyuan District in Zhengzhou. It is our first completed property development and is a residential community with European architectural style. It consists of multi-layer buildings, sub-high-rise buildings and high-rise buildings and has a central garden, a children’s playground, a Tai Chi garden, a community center and a substantial area of greenery.

We commenced construction of Longhai Star Garden in August 1998 and delivered it in December 2000. The project covers a site area of 11,719 square meters, contains two multi-layer buildings, two sub-high-rise buildings and one high-rise building, and has a total GFA of 39,975 square meters. As of September 30, 2007, we have sold 210 units out of the total 239 units and the remaining 29 units were held as properties for lease.

 

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Zhengzhou Xinyuan Splendid (multiple phases).    Zhengzhou Xinyuan Splendid is located on Xinyuan Road of Jinshui District in Zhengzhou, near Zhengzhou’s Forest Park and Zhengdong New District. Xinyuan Splendid is a self-contained community that exemplifies our integrated living concept. Among other honors Xinyuan Splendid has received, it was recognized in 2004 by the Ministry of Construction as a national model residential community for property management.

Although Xinyuan Splendid is one integrated residential community, it was developed in phases. We commenced construction of the first phase of Xinyuan Splendid in May 2001 and delivered its last phase in August 2005. The whole project, covering an area of 192,885 square meters with a total GFA of 386,322 square meters, contains 49 multi-layer buildings, 16 sub-high-rise buildings, two high-rise buildings, one kindergarten, one primary school and a clubhouse. We also sold Xinyuan Splendid phase by phase as development progressed. The pre-sales of its first phase started in July 2001, while the pre-sales of its last phase started in September 2004. As of September 30, 2007, we had sold 2,626 out of 2,633 saleable units.

Zhengzhou City Manor.    Zhengzhou City Manor is located on Mianfang Road of Erqi District in Zhengzhou, near major shopping areas, the railway station and a variety of large parks. Zhengzhou City Manor is the first large-scale residential community in Zhengzhou consisting of only multi-layer buildings.

We commenced construction of Zhenzhou City Manor in November 2004 and delivered it in March 2006. Zhengzhou City Manor has 27 multi-layer buildings, covers a site area of 63,089 square meters and has a total GFA of 118,716 square meters. We started pre-sales in January 2005. All of the 1,633 saleable units have been sold.

Zhengzhou City Family.    Zhengzhou City Family is located on Hanghai Road of Guancheng District in Zhengzhou. It is the first multi-layer residential community in Zhengzhou offering only small-to-medium sized units ranging from 33 square meters to 87 square meters. This project has five multi-layer buildings, one of which is for commercial use.

We commenced construction of Zhengzhou City Family in March 2006 and delivered it in December 2006. This project covers a site area of 21,380 square meters and has a total GFA of 39,226 square meters. We started pre-sales in April 2006. As of September 30, 2007, we had sold 719 units out of 720 saleable units.

Zhengzhou Central Garden (East and West).    Zhengzhou Central Garden is located on Jinshui Road of Zhengdong District in Zhengzhou, near the central business district of Zhengzhou. The projects cover an aggregate area of 140,313 square meters and have an aggregate GFA of 355,590 square meters, of which 97,627 square meters are for multi layer buildings, 62,570 square meters for sub-high-rise buildings, 181,789 square meters for high-rise buildings and 13,604 square meters for retail stores. The size of the units ranges from studios of approximately 39 square meters to luxury duplex units of approximately 175 square meters.

We commenced construction of Zhengzhou Central Garden (East) in November 2005, started pre-sales in December 2005 and delivered it in September 2007. We commenced construction of Zhengzhou Central Garden (West) in December 2005, started pre-sales in January 2006 and delivered it in September 2007. As of September 30, 2007, we had sold 3,419 units out of 3,420 saleable units of the projects.

 

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Jiantou Xinyuan’s Projects

As of September 30, 2007, Jiantou Xinyuan has one completed project three projects under construction. The four projects are all located in Zhengzhou, with a total GFA of 473,895 square meters. The following table sets forth detailed information for each project.

 

Project Name		Location		Type of Products		Actual or Estimated Construction Period		Actual or Estimated Pre-sale Commencement Time		Total Site Area		Total GFA(1)		Total Number of Units		Number of Units Sold
										(m2)		(m2)
Properties under construction
Zhengzhou City Mansion		Zhengzhou		M/S		03/2007-04/2008		04/2007		21,516		42,733		785		486
Zhengzhou International Plaza(2)		Zhengzhou		H		03/2007-09/2008		07/2007		10,095		41,197		518		317
Zhengzhou International City Garden Phase II		Zhengzhou		S/H		07/2007-08/2009		08/2007		92,211		282,119		3,628		1,022
Subtotal										123,822		366,049		4,931		1,825
Completed Projects
Zhengzhou International City Garden Phase I		Zhengzhou		M		03/2006-01/2007		04/2006		64,370		107,846		1,560		1,560
Total										188,192		473,895		6,491		3,385

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(1)

The amounts for “total GFA” in this table are the amounts of total saleable residential GFA and are derived on the following basis:

 

Ÿ

for properties that are sold, the stated GFA is based on that sales contracts relating to such property;

 

Ÿ

for unsold properties that are completed, the stated GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and

 

Ÿ

for properties that are under planning, the stated GFA is based on the land grant contract and our internal projections.

 

(2)

Jiantou Xinyuan owns a 52% interest in the project company developing Zhengzhou International Plaza. The remaining 48% interest in that project company is owned by an independent third party.

We hold a 45% equity interest in Jiantou Xinyuan, with 50% held by Zhengzhou General Construction Investment Company and the remaining 5% held by Zhengzhou Jiantou Project Consulting Co., Ltd. Under the joint venture contract, we and the other partners agree to share the profits according to our respective equity interests in Jiantou Xinyuan. We and the other partners also extend loans to Jiantou Xinyuan at an interest rate comparable to bank lending rates for Jiantou Xinyuan’s property development operations.

Zhengzhou City Mansion.    Zhengzhou City Mansion is located on Tongbai Road of Zhongyuan District in Zhengzhou. Jiantou Xinyuan commenced construction of this project in March 2007 and expects to deliver it in April 2008. It covers a site area of 21,516 square meters and has a total GFA of 42,733 square meters, of which 24,487 square meters are for multi-layer buildings and 18,246 square meters are for sub-high-rise

 

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buildings. Jiantou Xinyuan started pre-sales of this project in April 2007. As of September 30, 2007, 486 out of the 785 units had been sold.

Zhengzhou International Plaza.    Zhengzhou International Plaza is located on Jianshe Road of Zhongyuan District in Zhengzhou. Jiantou Xinyuan commenced construction of this project in March 2007 and expects to deliver it by September 2008. This project covers a site area of 10,095 square meters and is expected to have a total GFA of 41,197 square meters. It comprises only high-rise buildings. This project, when completed, is expected to contain 518 units. We started pre-sales in July 2007 and had sold 317 units as of September 30, 2007.

Zhengzhou International City Garden (Phase II).    Zhengzhou International City Garden (Phase II) is located on Mianfang Road of Erqi District in Zhengzhou. Jiantou Xinyuan commenced construction of this project in July 2007 and expects to deliver it by August 2009. It covers a site area of 92,211 square meters and has a total GFA of 282,119 square meters, containing 17 high-rise buildings. This project, when completed, will have 3,628 units. Pre-sales started in August 2007 and we had sold 1,022 units as of September 30, 2007.

Zhengzhou International City Garden (Phase I).    Zhengzhou International City Garden (Phase I) is located on Mianfang Road of Erqi District in Zhengzhou. Jiantou Xinyuan commenced construction of this project in March 2006 and delivered it in January 2007. This project covers a site area of 64,370 square meters and has a total GFA of 107,846 square meters. It contains 23 multi-layer buildings. Pre-sales started in April 2006. As of September 30, 2007, all of its 1,560 units had been sold.

Our Property Development Operations

We have a systematic and standardized process to project development, which we implement through several well-defined phases. A significant portion of our process is dedicated to land acquisition, which is segmented into three stages: (i) opportunity identification, (ii) initial planning and budgeting and (iii) land acquisition. The following diagram sets forth the key stages of our property development process.

Opportunity Identification

The first stage of our development process involves the identification of new opportunities for forthcoming land auctions in our selected Tier II cities around China. Our Land Development Department prepares a strategic plan that specifies our future project development plans and land acquisition requirements. They also conduct in-depth demographic and market research regarding our selected Tier II cities. We have formulated a set of criteria in selecting suitable Tier II cities to expand our operations based on certain indicators, including, among others:

 

Ÿ

population and urbanization growth rate;

 

Ÿ

general economic condition and growth rate;

 

Ÿ

disposable income and purchasing power of resident consumers;

 

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Ÿ

anticipated demand for private residential properties;

 

Ÿ

availability of future land supply and land prices;

 

Ÿ

governmental urban planning and development policies; and

 

Ÿ

overall competitive landscape.

Once a Tier II city has been identified as meeting our selection criteria, we research for forthcoming land auctions in the identified city and conduct preliminary analysis on whether a given auction opportunity will meet our project development plans, land acquisition requirements and pre-set investment return criteria. We also conduct in-depth demographic and market research regarding the specific region in which the land site is located.

Initial Planning

Once a forthcoming land auction has been identified, our Land Development Department will conduct a feasibility study based on our collected data as well as preliminary design and pre-planning of the proposed development project on the land site. We will also budget costs and financial requirements for the proposed project to identify whether the land site is suitable for our requirements.

The key factors we consider in land site selection are:

 

Ÿ

site area and suitability;

 

Ÿ

location within the city;

 

Ÿ

neighboring environment and amenities;

 

Ÿ

existing or planned infrastructure;

 

Ÿ

announced government planning for the vicinity; and

 

Ÿ

projected cost, investment and financial return ratios.

We evaluate projects through a rigorous planning and approval process. Our Chief Operations Officer, who is in charge of the process, considers detailed input from each of our Land Development Department, Budget-Planning-Design Department, Operations Department and Financial Department. The proposed project, once vetted and approved by various departments and our Chief Executive Officer, will be submitted to our board of directors for approval. Our board of directors includes directors appointed by our two institutional shareholders, Blue Ridge China and Equity International. If the proposed project is approved at the board level, we will seek to acquire the land use rights within a pre-set budget at the auction for the land site.

The flow of initial planning includes, among other things, strategic planning, market investigation and analysis, feasibility study, preliminary design, cost and profit projection and investment approval. In particular, our initial planning includes the engagement of external local design firms to draw up preliminary designs for our proposed projects. In addition, before making any decision to bid for land, we project the financial and cost control metrics for the proposed projects based on careful studies of market statistics and other relevant information, and select only those projects that satisfy pre-determined benchmarks.

Land Acquisition

Once we receive approval for a proposed project, we will proceed to bid for the land site. Although we acquire land for development primarily through the governmental auction process, if opportunities arise, we will also consider obtaining land use rights from third parties through negotiation, acquisition of entities, co-development or other joint venture arrangements.

 

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As of September 30, 2007, we had a total GFA of 770,781 square meters for property projects under construction and a total GFA of 1,282,498 square meters for property projects under planning. We continually seek attractive opportunities to acquire development sites which meet our selection criteria.

Project Planning and Design

Our project planning and design process includes concept and architectural design, construction and engineering design, budgeting, financial analysis and projections as well as arranging for financing. We believe careful planning is essential to control costs, quality and timing of our projects.

We outsource our design work to reputable third-party design firms. Our planning and development team, with 78 employees as of September 30, 2007, works closely with project managers as well as our external designers and architects to ensure that our designs comply with PRC laws and regulations, and meet our design and other project objectives. Our senior management is also actively involved in the whole process, especially in the master planning and architectural design of our projects. We use our enterprise resource planning systems to conduct preliminary planning and scheduling for each stage of the development project, including planning our outsourcing requirements for the project construction stage.

We seek to create a comfortable and convenient middle-class lifestyle concept in our projects by incorporating certain design features, such as landscaped environments. In determining the architectural designs of our projects, we consider the proposed type of products to be developed as well as the surrounding environment and neighbourhood.

In selecting external design firms, we consider, among other things, their reputation for reliability and quality, their track record with us, the design proposed and the price quoted. Design firms can participate in the tender process by our invitation only. Our planning and design team monitors the progress and quality of the design firms to ensure that they meet our requirements.

We also begin arranging financing for a project at this stage. We typically finance our property developments through a combination of internal funds, pre-sale proceeds and bank loans. The loans are negotiated with the local branches of national commercial banks. A substantial majority of our bank loans are secured by our assets, including the land to be developed.

Project Construction and Management

We outsource substantially all of our construction work to independent construction companies which are selected through our invitation to tender bids for the project. We conduct a small portion of our construction work on our own, including fixture installation and gardening and landscaping. We provide landscaping and intercom systems installation services through our subsidiaries, Zhengzhou Mingyuan Landscape Engineering Co., Ltd. and Zhengzhou Xinyuan Computer Network Engineering Co., Ltd. We acquired these two subsidiaries in August 2006. We generally hire more than one contractor for each of our projects, with each contractor responsible for a designated portion of the project on a ‘‘turnkey’’ basis. We have established a selection procedure in order to ensure compliance with our quality and workmanship standards. We take into account the construction companies’ professional qualifications, reputation, track record, past cooperation with our project companies and financial condition and resources when inviting candidates to bid. We also review the qualifications and performance of our construction contractors on an annual basis. We closely supervise and manage the entire project construction process, utilizing our enterprise resource planning systems to monitor and analyze information regarding the process on a real-time basis. We collect information throughout the development cycle on the entire project and from our third-party contractors to avoid unanticipated delays and cost overruns.

 

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Our construction contracts typically provide for fixed or capped payments, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. The contractors are typically responsible for procuring the necessary raw materials, as well as providing engineering and construction services. We procure certain ancillary fixtures for installation, such as elevators, windows and entrance doors. For our purchases of such fixtures, we use a centralized procurement process to help increase our negotiating power and lower our unit costs. Our major suppliers are suppliers of power distribution boxes, elevators, plastic-steel windows, doors and heat sinks. We maintain good relationships with our suppliers and have not encountered any significant supply shortages or disruptions in the past.

For the years ended December 31, 2004, 2005 and 2006 and the nine months ended September 30, 2007, payments to our single largest construction contractor accounted for 28.47%, 12.39%, 13.79% and 11.84%, respectively, of our total payments under our construction contracts. For the same periods, payments to our five largest construction contractors accounted for 76.4%, 50.09%, 45.17% and 41.37%, respectively, of our total payments under our construction contracts.

Pre-Sales, Sales and Marketing

Like other developers, we pre-sell properties prior to the completion of their construction. Under PRC pre-sales regulations, property developers must satisfy specific conditions before they can pre-sell their properties under construction. These mandatory conditions include:

 

Ÿ

the land premium must have been paid in full;

 

Ÿ

the land use rights certificate, the construction site planning permit, the construction work planning permit and the construction permit must have been obtained;

 

Ÿ

at least 25% of the total project development cost must have been incurred;

 

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the progress and the expected completion and delivery date of the construction must be fixed;

 

Ÿ

the pre-sale permit must have been obtained; and

 

Ÿ

the completion of certain milestones in the construction processes specified by the local government authorities.

These mandatory conditions are designed to require a certain level of capital expenditure and substantial progress in project construction before the commencement of pre-sales. Generally, the local governments also require developers and property purchasers to use standard pre-sale contracts prepared under the auspices of the government. Developers are required to file all pre-sale contracts with local land bureaus and real estate administrations after entering into such contracts.

As of September 30, 2007, we maintain a marketing and sales force for our development projects with 160 personnel specializing in marketing and sales. We train and use our own sales force rather than rely on outside brokers and agents for our projects. We believe our own dedicated sales representatives are better motivated to serve our customers and to control our property pricing and selling expenses.

Our marketing and sales teams work closely with each other in order to determine the appropriate advertising and selling plans for a particular project. We develop customer awareness through our marketing and promotion efforts and referrals from satisfied customers. We use these surveys to target groups of customers who share common characteristics or have common needs. Each sales representative is responsible for following through the entire sales process. By collecting feedback from our clients, we get a better understanding of our clients’ needs.

We utilize our customer relationship management system to track customer profiles and sales to forecast future individual requirements and general demand for our products. This allows us to have real-time information on the status of individual customer transactions and the availability of product types for each project, and to anticipate the product preferences of current and future customers.

 

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We use various advertising media to market our property developments, including newspapers, magazines, television, radio, e-marketing and outdoor billboards. We also participate in real estate exhibitions to enhance our brand name and promote our property developments.

Most of our customers purchase our properties using mortgage financing. Under current PRC law, the minimum down payment is 30% of the total purchase price for the purchase of the first self-use residential unit with total GFA of 90 square meters or more on all existing units and those yet to be completed, and a down payment of 20% on the first residential units for self use with total GFA of under 90 square meters. The loan-to-value of the mortgage loan is also subject to change according to the economic policies of the central and local governments and banks in China.

A typical sales transaction in which a portion of the purchase price is financed by a mortgage loan consists of three steps. First, the customer pays a deposit to us. Within seven days after paying the deposit, the customer will sign a purchase contract with us and make down payment to us in cash. After making the downpayment, the customer arranges for a mortgage loan for the balance of the purchase price. Once the loan is approved, the mortgage loan proceeds are paid to us directly by the bank. Finally, we deliver the property to the customer. Legal title, as evidenced by a property ownership certificate issued by local land and construction bureaus, may not pass for a period of six to 12 months following delivery and acceptance.

As is customary in the property industry in China, we provide guarantees to mortgagee banks in respect of the mortgage loans provided to the purchasers of our properties up until completion of the registration of the mortgage with the relevant mortgage registration authorities. Guarantees for mortgages on residential properties are typically discharged when the individual property ownership certificates are issued. In our experience, the issuance of the individual property ownership certificates typically takes six to 12 months, so our mortgage guarantees typically remain outstanding for up to 12 months after we deliver the underlying property.

If a purchaser defaults under the loan while our guarantee is in effect, and we repay all debt owed by the purchaser to the mortgagee bank, the mortgagee bank must assign its rights under the loan to us. We are entitled to full recourse to the property after the registration of the mortgage. In line with what we believe is industry practice, we do not conduct independent credit checks on our customers but rely on the credit checks conducted by the mortgagee banks. As of December 31, 2004, 2005 and 2006 and September 30, 2007, we guaranteed mortgage loans in the aggregate outstanding amounts of US$17.8 million, US$37.9 million, US$62.4 million and US$172.5 million, respectively.

After-sale Services and Delivery

We assist customers in arranging for and providing information relating to financing. We also assist our customers in various title registration procedures relating to their properties, and we have set up an ownership certificate team to assist purchasers to obtain their property ownership certificates. We offer various communication channels to customers to provide their feedback about our products or services. We also cooperate with property management companies that manage our properties and ancillary facilities, such as schools and clubhouses, to handle customer feedback.

We endeavor to deliver the units to our customers on a timely basis. We closely monitor the progress of construction of our property projects and conduct pre-delivery property inspections to ensure timely delivery. The time frame for delivery is set out in the sale and purchase agreements entered into with our customers, and we are subject to penalty payments to the purchasers for any delay in delivery caused by us. Once a property development has been completed, has passed the requisite government inspections and is ready for delivery, we will notify our customers and hand over keys and possession of the properties.

To ensure quality property management, we provide property management services to purchasers until they have become statutorily entitled to elect their own property management companies. As of the date of this

 

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prospectus, owners of all of our developments who have become statutorily entitled to elect their property management companies have continued to choose us to manage their properties.

Our property management services include security, landscaping, building management and management of public facilities and equipment, and additional services, such as cultural activities, housekeeping and repair. We are currently managing approximately 1,000,000 square meters, comprising more than 10,000 residential units.

Our Leased Properties and Real Estate Related Services

Ancillary to our property development operations, we also lease certain properties, including an elementary school, a clubhouse, a kindergarten and parking facilities. The rental income of our lease operations represented 0.4%, 0.2%, 0.1%, 0.1% and 0.1%, respectively, of our revenues for the years ended December 31, 2004, 2005 and 2006 and the nine months ended September 30, 2006 and 2007.

We also provide property management services, real estate agency services and other real estate related services such as landscaping and installing intercom systems, through four of our subsidiaries, Henan Xinyuan Property Management Co., Ltd., Henan Xinyuan Real Estate Agency Co., Ltd., Zhengzhou Mingyuan Landscape Engineering Co., Ltd. and Zhengzhou Xinyuan Computer Network Engineering Co., Ltd. See “—Our Property Development Operations— Project Construction and Management.” We acquired these four subsidiaries from Mr. Yong Zhang and Ms. Yuyan Yang, two of our directors and shareholders, on August 30, 2006. For the year ended December 31, 2006 and the nine months ended September 30, 2007, revenues from our real estate related services represented 0.4% and 1.0% of our total revenues for those periods, respectively.

Quality Control

We emphasize quality control to ensure that our buildings and residential unit meet our standards and provide high quality service. We select only experienced design and construction companies. We provide customers with warranties covering the building structure and certain fittings and facilities of our property developments in accordance with the relevant regulations. To ensure construction quality, our construction contracts contain quality warranties and penalty provisions for poor work quality. In the event of delay or poor work quality, the contractor may be required to pay pre-agreed damages under our construction contracts. Our construction contracts do not allow our contractors to subcontract or transfer their contractual arrangements with us to third parties. We typically withhold 5% of the agreed construction fees for two to five years after completion of the construction as a deposit to guarantee quality, which provides us assurance for our contractors’ work quality.

Our contractors are also subject to our quality control procedures, including examination of materials and supplies, on-site inspection and production of progress reports. We require our contractors to comply with relevant PRC laws and regulations, as well as our own standards and specifications. Despite the ‘‘turnkey’’ nature of the construction contracts, we closely monitor the construction work for quality, timing and cost control reasons. Our project construction management team consists of 145 employees as of September 30, 2007, all of whom are professionally qualified civil engineers or surveyors and are responsible for supervising and managing the construction costs, construction schedule and quality of the construction work. We set up a profile for each and every unit constructed and monitor the quality of such unit throughout its construction period until its delivery. We also employ independent surveyors to supervise the construction progress. In addition, the construction of real estate projects is regularly inspected and supervised by PRC governmental authorities.

Competition

The real estate industry in China is highly competitive. In the Tier II cities we focus on, the markets are relatively more fragmented than Tier I cities. We compete primarily with local and regional property developers

 

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and an increasing number of large national property developers have also started to enter these markets. Our competitors may have greater financial or other resources than us. Competitive factors include the geographical location of the projects, the types of products offered, brand recognition, price, designing and quality. See “Risk Factors—Risk Relating to the Residential Property Industry in China—We face intense competition from other real estate developers.” In the Tier II cities in which we operate, our major competitors include China Overseas Property Ltd., China Vanke Co., Ltd., Sunshine 100, China Resources Land Limited, Henan Zhengshang Real Estate Co., Ltd., Henan New Greatwall Real Estate Co., Ltd. and Longhu Real Estate Co., Ltd.

Intellectual Property Rights

We rely on a combination of trademarks, service marks, domain name registrations, copyright protection and contractual restrictions to establish and protect our brand name and logos, marketing designs and internet domain names.

We have registered the trademark of “ ” and the associated logo for the real estate related service in the PRC. We have also applied the same trademark for other goods and services directly or indirectly related to our business operations, to strengthen the protection of our trademark and brand. All these trademark applications are pending examination and approval. We have also registered the Internet domain name “www.xyre.com” and other related domain names.

In the PRC, the registration and protection of a company’s corporate name is regional and limited to its related industry. Although we have registered our corporate name “Xinyuan” in the provinces where we operate, we cannot prevent others from registering the same corporate name in other provinces or in other industries. If a company first registers “Xinyuan” as its corporate name in a province other than Henan Province, Shandong Province, Jiangsu Province, Anhui Province and Sichuan Provinces or in another industry, we will have to adopt another corporate name if we plan to enter that market or industry.

Insurance

We do not maintain insurance policies for properties that we have delivered to our customers, nor do we maintain insurance coverage against potential losses or damages with respect to our properties before their delivery to customers. In addition, our contractors typically do not maintain insurance coverage on our properties under construction. We believe that third-party contractors should bear liabilities from tortuous acts or other personal injuries on our project sites, and we do not maintain insurance coverage against such liabilities. There are certain types of losses, such as losses from natural disasters, terrorist attacks, construction delays and business interruptions, for which insurance is either not available or not available at a reasonable cost. We believe our practice is consistent with the customary industry practice in China.

Environmental Matters

As a developer of property in the PRC, we are subject to various environmental laws and regulations set by the PRC national, provincial and municipal governments. These include regulations on air pollution, noise emissions, as well as water and waste discharge. We in the past have never paid any penalties associated with the breach of any such laws and regulations. Compliance with existing environmental laws and regulations has not had a material adverse effect on our financial condition and results of operations, and we do not believe it will have such an impact in the future.

Our projects are normally required to undergo an environmental impact assessment by government-appointed third parties, and a report of such assessment needs to be submitted to the relevant environmental authorities in order to obtain their approval before commencing construction. Upon completion of each project, the relevant environmental authorities inspect the site to ensure the applicable environmental standards have been complied with, and the resulting report is presented together with other specified documents to the relevant

 

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construction administration authorities for their approval and record. Approval from the environmental authorities on such report is required before we can deliver our completed work to our customers. In the past, we have not experienced any difficulties in obtaining those approvals for commencement of construction and delivery of completed projects. However, we cannot assure you that we will not experience any difficulties in the future. See “Regulation—Regulation on Environmental Protection in Construction Projects.”

Employees

As of September 30, 2007, we had 575 full time employees. The following table sets forth the number of our full time employees categorized by function as of the period indicated:

 

		As of December 31, 2004		As of December 31, 2005		As of December 31, 2006		As of September 30, 2007
Management		2		4		12		15
Finance		15		20		45		62
Planning and development		19		22		58		78
Project construction management		33		33		73		145
Sales and marketing		44		54		112		160
Property management		14		18		26		37
Administrative and human resources		12		15		53		70
Legal and audit		—		—		3		8
Total		139		166		382		575

During the year ended December 31, 2006, our subsidiary, Henan Xinyuan Property Management Co., Ltd., also hired approximately 500 temporary employees, most of whom provided security and housekeeping services relating to property management.

As required by PRC regulations, we participate in various employee benefit plans that are organized by municipal and provincial governments, including housing funds, pension, medical and unemployment benefit plans. We are required under PRC law to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the respective local government authorities where we operate our businesses from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. The total amount of contributions we made to employee benefit plans for the years ended December 31, 2004, 2005 and 2006 and the nine months ended September 30, 2007 was US$150,388, US$236,162, US$406,060 and US$1,084,181, respectively.

On August 11, 2007, we granted share options and restricted share awards for an aggregate of 6,802,495 common shares to our directors, employees and consultants. On November 5, 2007, we granted options for an aggregate of 2,441,844 common shares to our directors, management and key employees.

We have entered into non-competition agreements with our management and key personnel, which prohibit them from engaging in any activities that compete with our business during, and for one or two years after, the period of their employment with our company. We have also entered into confidentiality agreements with all of our employees.

We offer training programs for our employees, third-party contractors and outsourced employees. We sponsor senior managers for executive MBA programs and other senior employees for part-time non-degree MBA courses at top universities in China. We also invite industry experts to give lectures to our employees and provide training to our third-party contractors.

We have not been subjected to any strikes or other labor disturbances that have interfered with our operations, and we believe that we have a good relationship with our employees. Our employees are not covered by any collective bargaining agreement.

 

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Legal Proceedings

As of the date of this prospectus, our major operating subsidiary, Henan Xinyuan Real Estate Co., Ltd., or Henan Xinyuan, was involved in the following legal proceedings.

On June 28, 2003, Henan Jiantong Industrial Co., Ltd., or Henan Jiantong, sued Henan Xinyuan in the People’s Court of Jinshui District, Zhengzhou City, claiming the payment of all the service fees and the relevant overdue interest in a total amount of US$102,287 under the contract for the installation of a computer system to monitor the outdoor security of Zhengzhou Xinyuan Splendid. Subsequently, Henan Xinyuan countercharged Henan Jiantong to repay the overpaid construction fees and the relevant damages, in the total amount of US$28,604. This legal proceeding is currently pending without any substantive judgment or verdict issued. We believe, after consultation with the legal counsel involved in such proceeding, that the aforesaid dispute will not have a material adverse effect on our financial conditions.

On March 14, 2006, Henan Oriental Construction Co., Ltd. filed a suit against Henan Xinyuan in the Intermediate People’s Court, claiming payment of construction fees and overdue interest in the amount of US$257,956. This legal proceeding is currently pending without any substantive judgment or verdict issued. We believe, after consultation with the legal counsel involved in such proceeding, that the aforesaid dispute will not have a material adverse effect on our financial conditions.

On September 16, 2004, Henan Xinyuan acquired an interest in a land site located in Zhengzhou City of Henan Province from Henan Park Property Co. Ltd. (“Park Property”) for a total purchase price of US$21,636,124. However, Park Property failed to transfer the land use right to Henan Xinyuan before the due date, December 5, 2004. On April 5, 2005, Henan Xinyuan sued Park Property for breach of the land transfer agreement. Pursuant to the final judgment of the court filed on December 12, 2005, Park Property was ordered to transfer the land use right to Henan Xinyuan. Park Property appealed the court decision. As of November 10, 2006, the court has turned down the appeal of Park Property and rendered its final verdict that Henan Xinyuan prevail. The court then enforced the legal transfer of the subject land to Henan Xinyuan, which received the official land certificate in February 2007. However, Henan Xinyuan may be required to settle the relocation and settlement costs of US$5,122,492 due to Park Property’s financial insolvency. As Park Property is currently under liquidation procedures, any additional costs incurred by Henan Xinyuan may not be fully recoverable from Park Property. We have assessed the recoverability of our investment in this land site, including the additional costs that may be incurred, and have concluded that no impairment provision is required.

 

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REGULATION

The PRC government regulates the real estate industry. This section summarizes the principal PRC regulations relating to our business.

We operate our business in China under a legal regime consisting of the National People’s Congress, State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its authority, including the Ministry of Construction, or MOC, the Ministry of Land and Resources, or MLR, the Ministry of Commerce, or MOFCOM, National Development and Reform Commission, or NDRC, the State Administration for Industry and Commerce, or SAIC, State Administration of Foreign Exchange, or SAFE, and their respective authorized local counterparts.

Regulation on Land

The Law of the PRC on Land Administration, promulgated on June 25, 1986 and amended on August 28, 2004 by the Standing Committee of National People’s Congress, distinguishes between the ownership of land and the right to use land. All land in the PRC is either state-owned or collectively-owned, depending on location. Generally, land in urban areas within a city or town is state-owned, and all land in the rural areas of a city or town and all rural land, unless otherwise specified by law, is collectively-owned.

Although all land in the PRC is owned by the governments or by the collectives, private individuals and businesses are permitted to hold, lease and develop land for a specified term without ever owning the land, the duration of which depends on the use purpose of the land. These rights to use land are termed land use rights.

Under the Interim Regulations of the PRC on Grant and Transfer of the Right to Use State-owned Land in Urban Areas, promulgated on and effective as of May 19, 1990 by the State Council, enterprises, companies and other organizations who intend to hold, lease and develop the land, or Land Users, shall pay a premium to the government as consideration for the grant of the land use rights on terms of use prescribed by the government, and a Land User may transfer, lease and mortgage or otherwise commercially exploit the land use rights within such terms of use. The land administration authority shall enter into a contract with the Land User for grant of the land use rights. The Land User shall pay the grant premium as stipulated in the grant contract. After paying the grant premium in full, the Land User shall register with the land administration authority and obtain a land use rights certificate. The certificate evidences the acquisition of the land use rights.

The Regulations on the Grant of State-Owned Land Use Rights through Competitive Bidding, Auction and Listing-for-Sale, promulgated by the MLR on May 9, 2002 and effective on July 1, 2002, provides that the land for commercial use, tourism, entertainment and commodity housing development shall be granted by way of competitive bidding, public auction or listing-for-sale. The land use rights are granted to the bidder with the highest bid/tender in accordance with the terms and conditions of the bid/tender, or to the bidder who can best fullfill the comprehensive evaluation standards of the bid. The successful bidder/tender will then enter into a grant contract with the local land administration authority.

Under the Notice of the MLR on Relevant Issues Concerning the Strengthening of Examination and Approval of Land Use in Urban Construction, issued by the MLR on September 4, 2003, land for luxury residential properties shall be strictly restricted and applications for land for building villas shall be stopped.

Under the Urgent Notice of Further Strengthening the Administration of the Land, issued by the MLR on May 30, 2006, the land administration authority is required to rigidly implement the model contract of the

 

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state-owned land use rights grant contract and model contract of the state-owned land use rights grant supplementary agreement (for trial implementation) jointly promulgated by the MLR and SAIC. The requirements of planning, construction and land use, such as the restriction of the dwelling size, plot ratio and the time limit for commencement and completion, should be ascertained and agreed to in the land use rights grant contract.

The Property Law of the PRC, promulgated on March 16, 2007 and effective as of October 1, 2007, further clarified land use rights in the PRC with the following rules:

 

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the land use rights for residence will be automatically renewed upon expiry;

 

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the car parks and garages within the building area planned for vehicle parks shall be used to meet the needs of the owners who live in the building first;

 

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the construction of buildings shall abide by relevant laws and regulations with regard to the construction planning and shall not affect the ventilation of or lighting to the neighboring buildings; and

 

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where the land use rights for construction use are transferred, exchanged, used as a capital contribution, donated to others or mortgaged, an application for modification registration shall be filed with the registration department.

Local Regulations on Land

The Measures for Implementation of Land Administration Law of Henan Province, promulgated on September 24, 1999 and amended on November 26, 2004, provides that the entities obtaining state-owned land use rights by means of grant and other means of valuable consideration may use the land only after paying the required consideration, such as the grant premium, and other relevant fees.

The Land Administration Regulations of Jiangsu Province, promulgated on October 17, 2000 and amended on April 16, 2004, provides that the grant premium of state-owned land use rights shall not be less than the lowest price fixed by the provincial government. The specific procedures and measures concerning the grant, bid invitation, auction and grant of state-owned land use rights shall be subject to the regulations of the provincial people’s government.

The Measures on the Grant of State-Owned Land Use Rights through Competitive Bidding, Auction and Listing-for-Sale of Jiangsu Province, promulgated on May 19, 2003 and effective as of July 1, 2003, provides that the land price for grant of state-owned land use rights by means of competitive bidding, auction and listing-for-sale shall be fixed by the local land authority after an institution qualified for land valuation has carried out the valuation according to the technical guidelines issued by the central and provincial governments.

The Measures of Anhui Province for Implementation of the Land Administration Law, promulgated on December 20, 1987 and amended on June 26, 2004, provides that the grant, capital contribution, transfer and mortgage of state-owned land use rights involving land price valuation shall be evaluated by an institution qualified for land valuation and report to the relevant land administration for filing.

Regulations on Establishment of a Real Estate Development Enterprise

Pursuant to the Law of the PRC on Administration of Urban Real Estate, or Urban Real Estate Law, promulgated by the Standing Committee of the National People’s Congress on July 5, 1994 and effective as of January 1, 1995, a developer is defined as “an enterprise which engages in the development and sale of real estate for the purposes of making profits.”

 

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Under the Regulations on Administration of Development of Urban Real Estate, or Development Regulation, promulgated by the State Council on and effective as of July 20, 1998, a real estate development enterprise must satisfy the following requirements:

 

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has a registered capital of not less than RMB1 million; and

 

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has four or more full time professional real estate/construction technicians and two or more full time accounting officers, each of whom shall hold the relevant qualifications.

The Development Regulations also allow people’s governments of the provinces, autonomous regions and/or municipalities directly under the central government to impose more stringent requirements regarding the registered capital and qualifications of professional personnel of a real estate development enterprise according to the local circumstances.

To establish a real estate development enterprise, the developer is required to apply for registration with the department of administration of industry and commerce. The developer must also report its establishment to the real estate administration authority in the location of the registration authority within 30 days upon receipt of its business license.

Xinyuan (China) Real Estate, Ltd., Henan Xinyuan Real Estate Co., Ltd., Suzhou Xinyuan Real Estate Development Co., Ltd., Henan Wanzhong Real Estate Co., Ltd., Shandong Xinyuan Real Estate Co., Ltd., Qingdao Xinyuan Real Estate Co., Ltd., Anhui Xinyuan Real Estate Co., Ltd., Xinyuan Real Estate (Chengdu) Co., Ltd. and Zhengzhou Jianton Xinyuan Real Estate Co., Ltd. are registered as real estate development enterprises.

Local Regulations on Establishment of a Real Estate Development Enterprise

Under the Regulations on Administration of Development of Urban Real Estate of Henan Province promulgated on May 31, 2002 by the Standing Committee of Henan People’s Congress and amended on January 24, 2005, a real estate development enterprise must satisfy the following requirements:

 

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has a registered capital of not less than RMB2 million; and

 

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has five or more full time professional real estate/construction technicians and two or more full time accounting officers, each of whom shall hold the required qualifications.

Under the Regulations on Administration of Development of Urban Real Estate of Shandong Province promulgated on and effective as of October 12, 1995 by the Standing Committee of Shandong People’s Congress, a real estate development enterprise which specializes in real estate development must satisfy the following requirements:

 

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has a registered capital of not less than RMB5 million; and

 

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has eight or more full time professional real estate/construction technicians and two or more full time accounting officers, each of whom shall hold the relevant qualifications.

Regulations on Foreign Invested Real Estate Enterprise

Industrial Restriction

Under the 2004 Foreign Investment Industrial Guidance Catalogue, promulgated on November 30, 2004 jointly by the MOFCOM and the NDRC and effective as of January 1, 2005, the development and construction of ordinary residential properties fall within the category of industries under which foreign investment is encouraged. The development of whole land lot which shall be operated only by sino-foreign equity joint ventures or co-operative joint ventures, and the construction and operation of high end hotels,

 

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villas, premium office buildings, international conference centers and large-scale theme parks fall within the category under which foreign investment is restricted. Other real estate developments fall within the category in which foreign investment is permitted.

Xinyuan (China) Real Estate, Ltd. is a wholly foreign owned enterprise and targets the development of ordinary residential properties in which foreign investment is encouraged.

Circular No. 171

Considering the increasing foreign investment in the real estate industry in recent years, the MOC, MOFCOM, NDRC, PBOC, SAIC, and SAFE jointly promulgated the Opinion on the Regulation of Entry and Administration of Foreign Investment in the Real Estate Market, or Circular No. 171, on July 11, 2006, which may impact foreign investment in the real estate industry in the following areas:

 

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Circular No. 171 requires a foreign invested real estate enterprise, or FIREE, with total investments equating to or exceeding US$10 million to have a registered capital consisting of no less than 50% of its total amount of investment. FIREEs with total investments below US$10 million shall have a registered capital in amounts pursuant to and consistent with existing regulations.

The ratio of registered capital and total investment of Xinyuan (China) Real Estate, Ltd. meets such requirement.

 

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upon payment of the land use rights grant premium, the FIREE can apply to the land administration authority for a land use rights certificate. Upon obtaining the land use rights certificate, an FIREE may then obtain a recertification of its existing Foreign Invested Enterprises Approval Certificate, or FIEAC, and the Business License, with the same validity period as that of such land use rights certificate; following which, the FIREE may apply to the tax administration for tax registration purposes.

The valid terms on the FIEAC and Business License of Xinyuan (China) Real Estate, Ltd. are 10 years.

 

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when a foreign investor merges with a domestic real estate enterprise, or acquires an FIREE’s equity or project, the investor is required to submit a guarantee which ensures the compliance with the provisions of the land use rights grant contract, construction site planning permit and construction work planning permit, and the land use rights certificate, and the modification certification issued by the construction authorities, and the tax payments certification issued by the relevant tax authorities.

 

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foreign investors which merge with domestic real estate development enterprises by share transfers or other methods, or which acquire the equity of a PRC party in joint venture enterprises, shall allocate their employees appropriately, deal with bank debts and settle the lump sum payment of the transfer price through self-owned funds. However, a foreign investor with an unfavorable record should not be allowed to conduct any of the aforesaid activities.

 

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FIREEs which have not paid up their registered capital fully, or failed to obtain a land use rights certificate, or with under 35% of the total capital required for the project, will not be allowed to obtain a loan in or outside China, and foreign exchange administration departments shall not approve any settlement of foreign loans by such enterprises.

 

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any sino or foreign investors in an FIREE shall not guarantee fixed profit returns or provide other arrangements to the same effect for any party in any form.

 

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Circular No. 50

On May 23, 2007, MOFCOM and SAFE issued Notice on Further Strengthening and Standardizing the Approval and Administration of Foreign Direct Investments in Real Estate Enterprises, which will have a significant impact on foreign investments in the PRC real estate sector. Some of the key developments in this area are as follows:

 

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the local governments/authorities that approve FIREE establishments are now required to file such approvals with MOFCOM;

 

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prior to establishing a foreign invested real estate enterprise, foreign investors are required to obtain land use rights or the ownership of a real estate project, or the investor should have entered into an indicative land grant contract or indicative project purchase agreement with the land administrative department, developer of the land or owner of the property;

 

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the practice of allowing foreign investors taking over local project companies by way of roundtrip investment is strictly controlled; and

 

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a foreign invested enterprise that intends to engage in real estate development, or an existing FIREE which intends to undertake a new real estate development project, shall first apply to the relevant authorities for such business scope and scale expansion in accordance with laws and regulations on foreign investments.

Circular No. 130

On July 10, 2007, SAFE promulgated the Notice on Publicity of the List of 1^st Group of Foreign Invested Real Estate Projects Filed with MOFCOM, which is a strict embodiment and application of Circular No. 50, under which some notices will have a significant impact on offshore financings of FIREEs. Some of the key developments in this area are as follows:

 

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an FIREE which has obtained an FIEAC (including new establishment and registered capital increase) and filed with MOFCOM after June 1, 2007 may not incur foreign debt or convert loans in foreign currency into RMB; and

 

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an FIREE which obtains an FIEAC after June 1, 2007 but fails to file with MOFCOM after June 1, 2007, may not conduct a foreign exchange registration nor a foreign exchange conversion of its registered capital.

Regulations on Qualifications of Developer

Under the Rules on the Administration of Qualifications of Real Estate Developers promulgated on March 29, 2000 by the MOC and effective as of March 29, 2000, a developer shall apply for registration of its qualifications. An enterprise may not engage in the development and sale of real estate without a qualification classification certificate for real estate development.

In accordance with the above rules, developers are classified into four classes: class I, class II, class III and class IV. A developer that passes the qualification examination will be issued a qualification certificate of the relevant class by the relevant construction authority.

A developer of any qualification classification may only engage in the development and sale of real estate within its approved scope of business and may not engage in business of another classification. A class I developer is not restricted as to the scale of the real estate projects to be developed and may undertake real estate development projects anywhere in the country. A developer of class II or lower may undertake projects with a

 

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gross area of less than 250,000 square meters and the specific scope of business shall be as confirmed by the local construction authority.

Under the Development Regulations, real estate administration authorities shall examine all applications for the registration of the qualifications of a developer when it reports its establishment, by considering its assets, professional personnel and business results. A developer shall only undertake real estate development projects in compliance with the approved qualification registration.

After a newly established developer reports its establishment to the real estate administration authority, the latter shall issue a temporary Qualification Certificate to the eligible developer within 30 days of its receipt of the above report. The developer shall apply for the qualification classification by the real estate administration authority within one month before expiry of the temporary Qualification Certificate.

Local Regulations on Qualifications of Developer

The Regulations on Administration of Development of Urban Real Estate of Henan Province provides the following:

 

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a class I developer is not restricted as to the scale of the real estate development projects it may undertake and may undertake real estate development projects anywhere in the PRC;

 

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a class II developer may undertake projects with a gross area of less than 250,000 square meters;

 

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a class III developer may undertake projects with a gross area of less than 100,000 square meters;

 

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a class IV developer may undertake projects with a gross area of less than 30,000 square meters; and

 

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a developer with temporary qualification may undertake relevant projects in accordance with its certificate.

The Rules on the Administration of Qualifications of Real Estate Developers of Shandong Province promulgated on March 8, 2005 provides the following:

 

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a class I developer is not restricted as to the scale of the real estate development projects it may undertake and may undertake real estate development projects anywhere in the PRC;

 

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a class II developer may undertake projects with a gross area of less than 250,000 square meters anywhere in the province;

 

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a class III developer may undertake projects with a gross area of less than 150,000 square meters anywhere in the province;

 

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a class IV developer may undertake projects with a gross area of less than 100,000 square meters in the city where it is located; and

 

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a developer with temporary qualification may undertake relevant projects complying with its actual conditions such as registered capital and personnel in the city where it is located.

Henan Xinyuan Real Estate Co., Ltd. is classified as a class I developer. Shandong Xinyuan Real Estate Co., Ltd. is classified as a class III developer. Suzhou Xinyuan Real Estate Development Co., Ltd., Henan Wanzhong Real Estate Co., Ltd. and Anhui Xinyuan Real Estate Co., Ltd. hold temporary qualifications.

 

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Regulations on Development of a Real Estate Project

Commencement of a Real Estate Project and the Idle Land

Under the Urban Real Estate Law, those who have obtained the land use rights through grant must develop the land in accordance with the terms of use and within the period of commencement prescribed in the contract for the land use rights grant.

According to the Measures on Disposing Idle Land promulgated by the MLR and enforced on April 28, 1999, with regards to the land for a real estate project which is obtained by grant and is within the scope of city planning, if the construction work has not been commenced within one year upon the commencement date as set forth in the land use rights grant contract, a surcharge on idle land equivalent to less than 20% of the grant premium may be levied; if the construction work has not been commenced within two years thereupon, the land can be confiscated without any compensation, unless the delay is caused by force majeure, or the acts of government or acts of other relevant departments under the government, or by indispensable preliminary work.

Planning of a Real Estate Project

According to the City Planning Law of the PRC promulgated by the Standing Committee of the National People’s Congress on December 26, 1989 and effective as of April 1, 1990, city planning authorities at the county level and above are responsible for city planning in the administrative areas under their jurisdiction. The purpose and function of a real estate project within an urban area must be consistent with the city planning issued by the city planning authority.

The Notice of the MOC on Strengthening the Planning Administration of Assignment and Transferring Right to Use State-owned Land, promulgated by the MOC on December 26, 2002, provides that after signing a land use rights grant contract, a developer shall apply for an Opinion on Construction Project’s Site Selection and a Permit for Construction Site Planning with the city planning authority. After obtaining a Permit for Construction Site Planning, a developer may commence planning and design work in accordance with the Permit for Construction Site Planning requirements and proceed to apply for a Permit for Construction Work Planning with the city planning authority.

Relocation

Under Regulations of Administration on City Housing Demolition promulgated by the State Council on June 13, 2001 and effective as of November 1, 2001, upon obtaining approvals for a construction project, a permit for construction site planning, state-owned land use rights and a verification of deposit to compensate parties that are affected by the relocation payable by the developer by a bank, a developer may apply to the local real estate administration authorities where the real estate is located for a permit for housing demolition and removal.

Upon granting a demolition and removal permit, the real estate administration department must issue a demolition and removal notice to the inhabitants of the area.

Construction of a Real Estate Project

According to the Measures for the Administration of Construction Permits for Construction Projects promulgated by the MOC on October 15, 1999 and amended and effective as of July 4, 2001, after obtaining the Permit for Construction Work Planning, a developer shall apply for a Construction Permit from the relevant construction authority.

 

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Completion of a Real Estate Project

According to the Development Regulations and the Interim Provisions on the Acceptance Examination Upon the Completion of Construction Work and Municipal Infrastructure promulgated on June 30, 2000 by the MOC and effective as of June 30, 2000, and the Interim Measures for Reporting Details Regarding Acceptance Examination Upon Completion of Construction Work and Municipal Infrastructure promulgated on April 7, 2000 by the MOC and effective as of April 7, 2000, a real estate project must comply with the relevant laws and other regulations, requirements on construction quality, safety standards and technical guidance on survey, design and construction work, as well as provisions of the relevant construction contract. After the completion of works for a project, the developer shall apply for an acceptance examination to the construction authority and shall also report details of the acceptance examination to the construction authority. A real estate development project may only be delivered after passing the acceptance examination.

Regulations on Sale of Commodity Properties

Under the Measures for Administration of Sale of Commodity Properties promulgated by the MOC on April 2001, the sale of commodity properties can include both pre-completion and post-completion sales.

Pre-completion Sales

In accordance with the Measures for the Administration of Pre-completion Sale of Commodity Properties, or Pre-completion Sale Measure, promulgated in November 1994 by the MOC and amended on July 20, 2004, a developer intending to sell a commodity building before its construction work’s completion must attend to the necessary pre-completion sale registration with the real estate administration authority of the relevant city or county to obtain a Permit for Pre-completion Sale of Commodity Properties.

Commodity properties may only be sold before completion provided that:

 

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the grant premium has been paid in full for the grant of the land use rights involved and a land use rights certificate has been obtained;

 

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a Permit for Construction Work Planning and a Construction Permit have been obtained;

 

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the funds invested in the development of the commodity properties put up for pre-completion sale represent 25% or more of the total investment in the project and the progress of works and the completion and delivery dates have been ascertained; and

 

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the pre-completion sale has been registered and a Permit for Pre-completion Sale of Commodity Properties has been obtained.

The Regulations on Administration of Development of Urban Real Estate of Henan Province also provides that commodity properties may only be sold before completion provided that half or more of the project has been completed and the construction schedule and delivery date has been specified in addition to compliance with the requirements under the Pre-completion Sale Measures.

The Regulations on Administration of Transfer of Urban Real Estate of Jiangsu Province promulgated on February 5, 2002 and amended on August 20, 2004 also provides that commodity properties may only be sold before completion in accordance with the requirements under the Pre-completion Sale Measures.

The Regulations on Administration on Urban Real Estate Transaction of Anhui Province, promulgated on May 29, 2000 and effective as of December 1, 2000, provides that the development enterprises which have obtained a Permit for Pre-completion Sale of Commodity Properties shall enter into relevant pre-sale contracts with the customers which shall be filed with the real estate administration authority of the relevant city or county.

 

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Management of Proceeds from Pre-sales of Properties

The Pre-completion Sale Measures also provides that the proceeds obtained by a real estate developer from the advance sale of commodity properties must be used for the construction of the relevant projects. The specific measures for the supervision of proceeds from the pre-sale of commodity properties shall be formulated by the real estate administration authorities.

Under the Implementing Regulations on Supervision of Proceeds from Pre-sales of Commodity Properties of Jinan City, promulgated by Jinan Committee of Construction on September 26, 2005 and effective as of October 26, 2005, the proceeds from pre-sales of properties must be used in the construction of pre-sale projects, including the purchase of construction materials and equipments, remittance of construction fees and payable taxes, and should not be used for other purposes.

In accordance with the Implementing Opinions on Strengthening the Management of Pre-sale of Urban Commodity Properties, promulgated by the People’s Government of Sichuan Province on March 23, 2000, the proceeds from pre-sales of properties must be deposited in a special bank account opened by the developers, may only be used for the relevant construction work and shall not be used for other purposes. The relevant banks shall monitor the use of the proceeds of pre-sales and ensure that the proceeds are used in the designated way.

Post-completion Sales

In accordance with the Measures for Administration of Sale of Commodity Properties promulgated by the MOC on April 4, 2001, commodity properties may be put up for post-completion sale only when the following preconditions for such sale have been satisfied:

 

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the developer offering to sell the post-completion properties has a valid business license and a qualification classification certificate;

 

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the developer has obtained a land use rights certificate or other approval documents of land use;

 

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the developer has the relevant permit for construction project planning and the permit for construction;

 

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the commodity properties have been completed, inspected and accepted as qualified;

 

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the relocation of the original residents has been settled;

 

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the supplementary and essential facilities for supplying water, electricity, heating, gas, communication, etc. have been made ready for use, and other supplementary facilities and public facilities have been made ready for use, or the schedule of construction and delivery date of such facilities have been specified; and

 

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the property management plan has been completed.

Prior to a post-completion sale of a commodity property, a real estate developer is also required to submit the Real Estate Development Project Manual and other documents showing that the preconditions for a post-completion sale have been fulfilled to the real estate development authority.

Regulations on Property Ownership Certificates

Under the Sale Measures, the developers shall submit the documents relating to the application for property ownership certificates to the local real estate administration authorities within 60 days after the delivery of the property to customers. The developers shall assist customers to apply for amendments in the procedures for land use rights and registration procedures for property ownership.

 

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In accordance with the Pre-completion Sale Measures, the purchasers shall apply for property ownership certificates to the local real estate administration authorities within 90 days after the delivery of pre-sale property to purchasers. The developers shall assist and provide the purchasers with necessary verifying documents. Where the purchasers fail to obtain the property ownership certificates within 90 days thereafter due to the developer’s faults, unless otherwise provided between the developers and the purchasers, the developers shall be liable for the breach of contract.

Regulations on Transfer, Mortgage and Lease

Transfer

According to the Urban Real Estate Law and the Provisions on Administration of Transfer of Urban Real Estate promulgated on August 7, 1995 by the MOC and amended on August 15, 2001, a real estate owner may sell, bequeath or otherwise legally transfer real estate to another person or legal entity. When transferring a building, the ownership of the building and the land use rights to the site on which the building is situated are transferred as well.

The parties to a transfer shall enter into a real estate transfer contract in writing and register the transfer with the real estate administration authority having jurisdiction over the location of the real estate within 90 days of the execution of the transfer contract.

Where the land use rights were originally obtained by grant, the real property may only be transferred on the condition that:

 

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the grant premium has been paid in full for the grant of the land use rights as provided by the grant contract and a land use rights certificate has been obtained;

 

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the development has been carried out according to the grant contract: in the case of a project for which buildings are developed, development representing more than 25% of the total investment has been completed; in the case of a whole land lot development project, construction works have been carried out as planned, water supply, sewerage, electricity supply, heat supply, access roads, telecommunications and other infrastructure or utilities have been made available, and the site has been leveled and made ready for industrial or other construction purposes.

Mortgages of Real Estate

Under the Urban Real Estate Law and the Security Law of the PRC promulgated by the Standing Committee of the National People’s Congress on June 30, 1995 and effective as of October 1, 1995, and the Measures on the Administration of Mortgage of Buildings in Urban Areas promulgated by the MOC in May 1997 and amended on August 15, 2001, when a mortgage is created on the ownership of a building on state-owned land legally obtained, a mortgage shall be simultaneously created on the land use rights of the land on which the building is erected. Land use rights occupied by the properties shall also be mortgaged at the same time. The mortgager and the mortgagee shall sign a mortgage contract in writing. Within 30 days after a real estate mortgage contract has been signed, the parties to the mortgage shall register the mortgage with the real estate administration authority in the city where the real estate is situated. A real estate mortgage contract shall become effective on the date of registration of the mortgage.

Lease

Under the Urban Real Estate Law and the Measures for Administration of Leases of Buildings in Urban Areas promulgated by the MOC on April 28, 1995 and effective as of June 1, 1995, the parties to a lease of a building shall enter into a lease contract in writing. When a lease contract is signed, amended or terminated, the parties shall register the details with the real estate administration authority in which the building is situated.

 

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Regulations on Real Estate Financing

Under the Notice of the People’s Bank of China on Regulating Home Financing Business promulgated by the PBOC on June 19, 2001, all banks must comply with the following requirements prior to granting residential property loans, individual home mortgage loans and individual commercial flat loans:

 

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housing development loans from banks shall only be granted to real estate development enterprises with approved development qualifications and high credit ratings. Such loans shall be offered to residential projects with good market potential. The borrowing enterprise must provide capital of no less than 30% of the total investment required of the project, and the project itself must have been issued with a land use rights certificate, a permit for construction site planning, a permit for construction work planning and a construction permit.

 

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in respect of the grant of individual commercial flat loans, the mortgage ratio for such application shall not exceed 60%, with a maximum loan period of 10 years and on the condition that the subject commercial properties have already been completed.

The Circular on Further Strengthening the Management of Loans for Property Business, promulgated on June 5, 2003 by the PBOC, specifies that Commercial banks shall not grant loans to property developers for the purposes of paying for the land premium.

The Guidance on Risk Management of Property Loans of Commercial Banks, issued by China Banking Regulatory Commission on September 2, 2004, provides that any developer applying for real estate development loans shall have at least 35% of capital funds required for the development.

The Opinion of the MOC and Other Departments on Adjusting the Housing Supply Structure and Stabilizing the Property Prices, issued on May 24, 2006 by the State Council, provides that:

 

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to tighten the control of advancing loan facilities, commercial banks are not allowed to advance their loan facilities to developers who do not have the required 35% or more of the total capital for the construction projects. The commercial banks should be prudent in granting loan facilities and/or revolving credit facilities in any form to the developers who have a large number of idle land parcels and unsold commodity properties. Banks shall not accept mortgages of commodity properties remaining unsold for more than three years;

 

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from June 1, 2006 and onward, purchasers are required to pay a minimum of 30% of the purchase price as down payment for self-use purposes. However, if purchasers purchase apartments with a floor area of less than 90 square meters for self-use, the existing requirement of 20% of the purchase price as down payment remains unchanged.

The Circular on Strengthening the Management of Commercial Real Estate Credit Facilities, issued on September 27, 2007 by PBOC and China Banking Regulatory Commission, provides that:

 

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the minimum down payment for any purchase of first self-use residential property with a unit GFA of less than 90 square meters is 20% of the purchase price of the property. The minimum down payment for any purchase of first self-use residential property with a unit GFA of 90 square meters or more is 30% of the purchase price of the property.

 

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the minimum down payment for any purchase of second or subsequent residential property is 40% of the purchase price, if the purchaser had obtained a bank loan for the purchase of his or her first property, and the interest rate for bank loans of such purchase shall not be less than 110% of PBOC benchmark rate of the same period and category. For further purchases of properties, there would be upward adjustments on the minimum down payment and interest rate for bank loan.

Regulations on Housing Supply and Stabilizing Housing Price

The Opinion of the MOC and Other Departments on Adjusting the Housing Supply Structure and Stabilizing the Property Prices provides the following:

 

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as of June 1, 2006, at least 70% of approved areas for property development must be used for the development of apartments measuring less than 90 square meters;

 

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as from June 1, 2006, premises sold within five years of purchase will also be subject to a 5% business tax on the sales price;

 

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commercial banks must not grant loans to any developer whose total investment capital contributed is less than 35% and must not accept any premises that have been left vacant for more than three years as security;

 

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land that has been left idle for two years or more will be repossessed by the government without any compensation payment. Also, land will be treated as being left idle if construction has been halted for more than one year and the total area developed is less than one-third of the whole project area or capital invested is less than a quarter of the total investment;

 

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there will be no supply of land for villas and other equivalent real estate development projects, while land allocation for low-density, large housing developments will remain tight; and

 

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no planning permit, construction permit or premises pre-sale permit is to be issued for projects that do not comply with the abovementioned requirements in particular composite structure projects that exceed planning requirements.

Regulations on Environmental Protection in Construction Projects

Under the Regulations on the Administration of Environmental Protection in Construction Projects, or Environmental Regulations, promulgated by the State Council on November 29, 1998 and effective as of the same date, each construction project is subject to an environmental impact assessment by the relevant authorities.

According to the Environmental Regulations, a developer is required to submit an environmental impact report, or an environmental impact report form, or an environmental impact registration form (as the case may be) to the relevant environmental protection administration for approval during the project’s feasibility analysis stage. In the meantime, if any ancillary environmental protection facilities are necessary in the construction project, such facilities are required to be designed, constructed and used in conjunction with the main project. After completion of the project, the developers are required to apply to the relevant environmental protection administrations for final acceptance examination in respect of any ancillary environmental protection facilities. Construction projects are approved for use after passing the said acceptance examination.

The Environmental Impact Assessment Law, promulgated by the National People’s Congress on October 28, 2002 and effective as of September 1, 2003, provides that if the environmental impact assessment documents of a construction project have not been examined by the relevant environmental protection administrations or are not approved after examination, the authority in charge of examination and approval of the project shall not approve construction on the project, and the construction work unit may not commence work.

On July 6, 2006, the State Environmental Protection Administration issued its Circular on Strengthening the Environmental Protection Examination and Approval and Strictly Controlling New Construction Projects, which provides for stringent examination and approval procedures for various real estate development projects. It also stipulates that no approvals may be issued for new residential projects or extensions in industry development zones, areas impacted by industrial enterprises or areas where such development poses potential harm to residents’ health.

Regulations on Property Management

The Property Management Rules, promulgated by the State Council on June 8, 2003 and effective as of September 1, 2003, provides that property owners have the right to appoint and dismiss property management enterprises. The rules also establish a regulatory system for property management enterprises, which encompasses the following regulations:

 

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the Measures for the Administration of Qualifications of Property Management Enterprises promulgated by the MOC on March 17, 2004 and effective as of May 1, 2004 provides that property management service enterprises must apply to the local branch of the MOC and undertake a

 

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qualification examination to obtain a Property Management Qualification Certificate. A property management enterprise must pass the Property Management Qualification, or PMQ, examination in order to engage in property management. Property management enterprises are classified as Class I, II or III. Different classes of management enterprises have different establishment requirements and may manage different types of premises.

 

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the Provisional Measures on the Administration of Initial Property Management Bid-inviting and Bidding, promulgated on June 26, 2003 by the MOC, provides that prior to the selection of the Property Owners’ Committee, or POC, the property developer shall select a property management enterprise to provide property management services.

 

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the NDRC and the MOC jointly promulgated the Rules on Property Management Service Fees on November 13, 2003, which provides that property management fees shall be determined by mutual consent between the POC and the property management enterprise, and set forth in writing in the property management service contract.

Local Regulations on Property Management

The Regulations of Administration on Property Management of Henan Province, promulgated on January 13, 2001 and effective as of May 1, 2001, provides that property management service enterprises must meet mandatory requirements, lawfully register and obtain a PMQ in order to engage in property management.

Henan Xinyuan Property Management Co., Ltd. is a Class II property management company. It does not manage any property outside Zhengzhou.

Regulations on Real Estate Intermediary Services

In accordance with the Administrative Regulations Regarding Urban Real Estate Intermediary Services promulgated on January 8, 1996 and amended on August 15, 2001 by the MOC, a real estate intermediary service provider is required to:

 

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pass the required examinations and obtain the Real Estate Intermediary Institution Registration Certificate, or IIRC;

 

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have its own name, a minimum number of professionals, properties and funds, and an office from which it can provide services;

 

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be approved by the local construction administration authorities;

 

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register with the local real estate administration authorities within one month after obtaining its business license; and

 

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establish branches in areas where it wishes to work outside the province in which it is registered and submit its original IIRC for filing with MOC’s local branch in such locale.

Henan Xinyuan Real Estate Agency Co., Ltd. has obtained an IIRC which states that the company has registered with the local construction administration authorities on December 22, 2005, which status will expire on March 31, 2008.

Regulations on Urban Landscaping Services

The Regulations Regarding Urban Landscape promulgated on June 22, 1992 by the State Council and the Measures on Administration of Qualifications of Urban Landscaping Enterprises promulgated on July 4, 1995 provide the following:

 

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any enterprise that wishes to provide landscaping services must apply to MOC’s local branch for an urban landscaping qualification, or ULQ, certificate; and

 

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if a landscaping enterprise wishes to provide landscaping service outside the province where it is registered, it must establish branches in such locales and submit its original ULQ certificate for filing with MOC’s respective local branch.

Local Regulations on Urban Landscaping Services

On August 7, 2006, the Construction Bureau of Henan promulgated the Implementation Measures on the Administration of Qualifications of Urban Landscaping Enterprise in Henan. These measures require a newly-established landscaping enterprise to apply to the local construction administration for a temporary Class III qualification. The requirements for a temporary Class III qualification are the same as for a Class III qualification (except no requirement for experience). A temporary Class III qualification is valid for two years, after which, the local construction administration authority shall issue a Class III qualification if enterprises successfully pass the examination. Otherwise, the local construction administration authority shall extend the temporary qualification term or withdraw the temporary Class III qualification. A ULQ Certificate is subject to an annual inspection by the local construction administration authorities.

Zhengzhou Mingyuan Landscape Engineering Co., Ltd. is now a Class III urban landscaping service company. Its qualification will expire on November 11, 2011.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth information regarding our directors and executive officers upon completion of this offering.

 

Name		Age		Position
Yong Zhang		44		Chairman and Chief Executive Officer
Yuyan Yang		44		Director and Assistant to Chief Executive Officer
Longgen Zhang		43		Director and Chief Financial Officer
Yue (Justin) Tang		36		Independent Director
Christopher J. Fiegen		39		Independent Director
Yong Cui		33		Director
Thomas Wertheimer		67		Independent Director
Thomas Gurnee		56		Independent Director
Huai Chen		55		Independent Director
Yao Wu		39		Chief Operating Officer
Xiaobing Wang		39		Chief Administration Officer

Unless otherwise indicated, the business address of each director and executive officer is No. 18 Xinyuan Road, Zhengzhou, Henan Province, 450011, the People’s Republic of China.

A description of the business experience and present position of each director and executive officer is provided below:

Yong Zhang founded our company in 1997 and is the chairman of the board of directors and our Chief Executive Officer. Mr. Zhang has more than 20 years of working experience in real estate industry. Prior to founding our company, he has worked at several construction and property development companies, including Zhengzhou City Construction and Development Inc. and China Antai Real Estate Development Inc. Mr. Zhang is also vice chairman of Henan Real Estate Association, a member of China Democratic National Construction Association and a deputy to the 12th People’s Congress of Zhengzhou City. Mr. Zhang received an executive master’s degree in business administration from Tsinghua University in 2005 and a bachelor’s degree in architecture from Henan Zhongzhou University in 1985. Mr. Zhang is married to Yuyan Yang, our director and Assistant to Chief Executive Officer.

Yuyan Yang co-founded our company in 1997 with Mr. Yong Zhang. She is our director and Assistant to Chief Executive Officer. Ms. Yang has more than 10 years’ working experience in the real estate industry. Ms. Yang received a bachelor’s degree in education management from Henan University in 1985. Ms. Yang is currently studying for an executive master’s degree in business administration at the National University of Singapore. Ms. Yang is married to Yong Zhang, chairman of the board of directors and Chief Executive Officer.

Longgen Zhang has been our director and the Chief Financial Officer since August 2006. Prior to joining us in February 2006, Mr. Zhang served as the Chief Financial Officer at Crystal Window and Door Systems, Ltd. in New York, U.S. between 2002 and 2006. He has a master’s degree in professional accounting and a master’s degree in business administration from West Texas A&M University, and a bachelor’s degree in economic management from Nanjing University in China. Mr. Zhang is a U.S. certified public accountant.

Yue (Justin) Tang is an independent director and has been on our board since August 2006. He is a co-founder of Blue Ridge China, a private equity fund formed in 2006 that invests in companies in China. He was appointed to our board of directors by Blue Ridge China. Mr. Tang was the co-founder of eLong, Inc., a leading online travel service company in China. From 2001 to 2006, Mr. Tang served as Chairman and CEO of eLong Inc., and in similar key executive positions at its predecessor company from 1999 to 2001. Prior to founding eLong, Mr. Tang held various positions in the financial services industry in the United States from 1993 to 1999. Mr. Tang studied at Nanjing University in China and received a bachelor’s degree from Concordia College in the United States. His business address is 3701 Tower A, Beijing Fortune Plaza, No. 7 Dongsanhuan Rd., Beijing 100020 PRC.

 

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Christopher J. Fiegen is an independent director and has been on our board since August 2006. He was appointed to our board of directors by Equity International. Mr. Fiegen is also the Chief Investment Officer of Equity International Management, LLC. Mr. Fiegen has been associated with Equity International since its inception in 1999 and is primarily responsible for its investment activities. He is also a director of various portfolio companies, including Mexico Retail Properties and Orascom Housing Communities. In 1997, Mr. Fiegen joined Equity Group Investments, LLC (EGI), the privately-held investment company founded and led by Samuel Zell. Mr. Fiegen graduated from University of Michigan with a bachelor’s degree in finance. His business address is Two North Riverside Plaza, Suite 700, Chicago IL 60606.

Yong Cui has been our director since August 2006. With a doctorate degree in economics from Renmin University of China, Mr. Cui has extensive experience in corporate finance. He is a senior researcher at the Finance and Securities Institute of Renmin University of China and the executive president of Beijing Huiye Huacheng Investment Consulting Co., Ltd. Mr. Cui is also an independent director of Zhongshan Vantage Gas Appliance Stock Co., Ltd., a public company listed on the Shenzhen Stock Exchange in China. His business address is Room 1-117, 8 Banbi Road South, Haidian District, Beijing, PRC.

Thomas Wertheimer will join us as independent director upon consummation of this offering. Mr. Wertheimer was a highly experienced audit partner with PricewaterhouseCoopers, and is an expert in financial and accounting issues, including reporting to the Securities and Exchange Commission, executive compensation, foreign operations, hedging and derivatives. Mr. Wertheimer is a member of board of directors of two public companies, including Fiserv Inc. (NASDAQ: FISV) and Vishay Intertechnology, Inc. (NYSE: VSH). He is also a consultant to the Public Company Accounting Oversight Board (PCAOB). Mr. Wertheimer obtained his bachelor and master’s degrees in business administration from the University of Cincinnati. His business address is 28 Wicklow Drive, Hilton Head Island, SC 29928.

Thomas Gurnee will join us as independent director upon consummation of this offering. Mr. Gurnee is the Chief Financial Officer of GEM Services Inc., a semiconductor contract manufacturer based in China. Prior to that, Mr. Gurnee served as the president of Globitech Inc., a Texas-based epitaxial semiconductor wafer manufacturer, the Chief Financial Officer of Artest Inc., a California-based seminconductor test subcontractor and the Chief Financial Officer of Sohu.com (NASDAQ: SOHU), a Beijing-based internet portal. He is also a member of the board of directors of eLong, Inc. and Longtop Financial Technologies Ltd. Mr. Gurnee obtained his bachelor degree from Stanford University and master’s degree in business administration from the University of Santa Clara. His business address is Room 6E, Hua Min Building, No. 728 West Yan’an Road, Shanghai, PRC.

Huai Chen will join us as independent director upon consummation of this offering. Mr. Chen is the director of the Policy Research Center of the PRC’s Ministry of Construction and was the deputy director of the Institute of Market Research under the PRC State Council’s Development and Research Center. Mr. Chen was a visiting professor of Stanford University and Tokai University and has a doctorate from Renmin University of China. His business address is No. 9 Sanlihe Road, Beijing, PRC .

Yao Wu joined us as our Chief Operating Officer in June 2007. Mr. Wu has more than 10 years of experience in the real estate industry, with various positions in design, property construction and operations. Before joining us, Mr. Wu was the vice general manager of the real estate department of China New Hope Group, a company involved in residential and commercial real estate development and real estate investment and management. He was a real estate consultant before joining China New Hope Group. Mr. Wu graduated from University of Shanghai for Science and Technology and obtained a bachelor’s degree in technology and economics from Xi’an Jiaotong University.

Xiaobing Wang joined us as our Chief Administration Officer in July 2007. Mr. Wang has approximately 10 years of experience in human resources and administration. He started his career in a Hong Kong company as an intern and became its manager of human resources three years later. Before joining us, Mr. Wang was the chief administration officer of Jianlong Steel Group, a major nationwide private steel maker in China. Mr. Wang obtained a master’s degree in business administration from New York Dowling College in 2000.

 

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Board of Directors

Our board of directors currently has six directors, including one director designated by Blue Ridge China and one director designated by Equity International. Upon consummation of this offering, Thomas Wertheimer, Thomas Gurnee and Huai Chen will join us as independent directors, effectively increasing the size of our board to nine members.

Committees of the Board of Directors

Our board of directors will establish an audit committee, a compensation committee and a corporate governance and nominating committee upon completion of this offering. We have adopted a charter for each of the three committees, which will become effective upon completion of this offering. Each committee’s members and functions are described below.

Audit Committee.    Our audit committee will consist of Thomas Wertheimer, Thomas Gurnee and Huai Chen, each of whom satisfies the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Mr. Wertheimer will act as the chairman of our audit committee. Our board of directors has determined that Mr. Wertheimer qualifies as an “audit committee financial expert” under applicable SEC rules. The audit committee will oversee our accounting and financial reporting processes and audits of the financial statements of our company. The audit committee will be responsible for, among other things:

 

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selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;

 

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reviewing with the independent auditors any audit problems or difficulties and management’s response;

 

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reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act, regardless of the dollar amount involved in such transactions;

 

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discussing the annual audited financial statements with management and the independent auditors;

 

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reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; and

 

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meeting separately and periodically with management and the independent auditors.

Compensation Committee.    Our compensation committee will consist of Yue (Justin) Tang, Christopher Fiegen, Thomas Wertheimer and Yong Cui. Yue (Justin) Tang, Christopher Fiegen and Thomas Wertheimer satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. Mr. Tang will act as the chairman of our compensation committee. The compensation committee will assist the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our Chief Executive Officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee will be responsible for, among other things:

 

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reviewing and approving the total compensation package for our three most senior executives;

 

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reviewing and recommending to the board the compensation of our directors; and

 

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reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

Corporate Governance and Nominating Committee.    Our corporate governance and nominating committee will consist of Huai Chen, Yue (Justin) Tang, Yong Cui and Thomas Gurnee. Huai Chen, Yue (Justin) Tang and Thomas Gurnee satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. Mr. Chen will act as the chairman of our corporate governance and nominating committee. The corporate governance and nominating committee will assist the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee will be responsible for, among other things:

 

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identifying and recommending qualified candidates to the board for selection of directors, nominees for election or re-election to the board of directors, or for appointment to fill any vacancy;

 

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reviewing annually with the board of directors the current composition of the board of directors with regards to characteristics such as independence, age, skills, experience and availability of service to us;

 

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advising the board of directors periodically with regard to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board of directors on all matters of corporate governance and on any remedial actions to be taken; and

 

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monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

Duties of Directors

Under Cayman Islands law, our directors have a fiduciary duty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess with the care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is breached.

The functions and powers of our board of directors include, among others:

 

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convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;

 

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declaring dividends and distributions;

 

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appointing officers and determining the term of office of officers;

 

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exercising the borrowing powers of our company and mortgaging the property of our company; and

 

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approving the transfer of shares of our company, including the registering of such shares in our share register.

Interested Transactions

A director may vote in respect of any contract or transaction in which he or she is interested, provided that the nature of the interest of any director in such contract or transaction is disclosed by him or her at or prior to its consideration and any vote on that matter.

Remuneration and Borrowing

The directors may determine remuneration to be paid to the directors. The compensation committee assists the directors in reviewing and approving the compensation structure for the directors. The directors may exercise all the powers of our company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities whether outright or as security for any debt obligations of our company or of any third party.

Qualification

There is no shareholding qualification for directors.

Terms of Directors and Officers

A director may be removed by special resolution passed by our shareholders before the expiration of such director’s term. Officers are elected by and serve at the discretion of the board of directors.

 

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Indemnification Agreements

We have entered into indemnification agreements with our directors. Each of the indemnification agreements provides the directors with contractual rights to indemnification and expense advancement rights.

Pursuant to our amended and restated memorandum and articles of association and the indemnification agreement, our directors who have entered into the agreement are indemnified to the fullest extent permitted under the law and public policy of the Cayman Islands for all judgments, fines, settlements, legal fees and other expenses actually and reasonably incurred in connection with pending or threatened legal proceedings because of such director’s position with us or another entity that the director serves at our request, subject to various conditions. Prior to completion of this offering, we will enter into a substantially similar indemnification agreement with each of our other directors and officers. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the indemnification agreements, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Employment Agreements

We have entered into employment agreements with all of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate his or her employment for cause at any time, with prior written notice, for certain acts of the employee, including but not limited to a conviction of a felony, or willful gross misconduct by the employee in connection with his employment, and in each case if such acts have resulted in material and demonstrable financial harm to us. An executive officer may, with prior written notice, terminate his or her employment at any time for any material breach of the employment agreement by us that is not remedied promptly after receiving the remedy request from the employee. Furthermore, either party may terminate the employment agreement at any time without cause upon advance written notice to the other party. Upon termination, the employee is generally entitled to severance pay.

Each executive officer has agreed to hold, both during and subsequent to the terms of his or her agreement, in confidence and not to use, except in pursuance of his or her duties in connection with the employment, any of our confidential information, commercial secrets and know-how. We have also entered into non-competition agreements with our executive officers.

The following sets forth specific information regarding the material terms of the employment and non-competition agreements we have entered into with our executive officers.

Yong Zhang

On August 24, 2006, we entered into an employment agreement, a confidentiality agreement and a non-competition agreement with Yong Zhang, our Chairman and Chief Executive Officer. Under the terms of these agreements, in consideration of his performance of duties, obligation of non-competition, obligation of confidentiality and other obligations, Yong Zhang is paid a monthly salary of RMB 66,666. Any breach of the confidentiality agreement or non-competition agreement by Yong Zhang will be deemed as a breach of his employment agreement.

The initial term of Yong Zhang’s employment is five years, which may be renewed by Yong Zhang and us. Each party must provide the other party with 180-days prior written notice in order to terminate the agreement during its term. Yong Zhang will have non-competition obligations under the non-competition agreement for a period of two years after the termination of his employment agreement. However, during that two-year period, we have the obligation to pay to Yong Zhang 10% of his last year annual salary each year, unless the applicable law or regulation provides otherwise.

 

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Yuyan Yang

On March 1, 2007, we entered into an employment agreement with Yuyan Yang, our director and Assistant to Chief Executive Officer. Under the terms of the agreement, in consideration of her performance of duties, obligation of non-competition and confidentiality discussed below, and other obligations, Yuyan Yang is paid a monthly salary of RMB 10,800. Any breach of the confidentiality agreement or non-competition agreement by Yuyan Yang will be deemed as a breach of her employment agreement. The initial term of Yuyan Yang’s employment is one year, which may be renewed by Yuyan Yang and us. Each party must provide the other party 30-days prior written notice in order to terminate the agreement during its term.

On August 24, 2006, we entered into a confidentiality agreement and a non-competition agreement with Yuyan Yang. Under these agreements, Yuyan Yang has the obligation to keep confidential information confidential and the obligation of non-competition during her term of employment. Yuyan Yang will have non-competition obligations under the non-competition agreement for a period of two years after the termination of her employment agreement. However, during that two-year period, we have the obligation to pay to Yuyan Yang 10% of her last year annual salary each year, unless the applicable law or regulation provides otherwise.

Longgen Zhang

On August 21, 2006, we entered into an employment agreement and a confidentiality, non-competition and non-solicitation agreement with Longgen Zhang, our director and Chief Financial Officer, which agreements were assigned to and assumed by us on April 9, 2007. Under the terms of the employment agreement, in consideration for performance of his obligations and for his non-competition and other obligations under the confidentiality agreement, Longgen Zhang is paid an annual before-tax compensation of RMB 1.8 million. We have the option, but not the obligation, to pay him an amount as additional consideration for his non-competition and other obligations. Pursuant to the employment agreement and the determination of our board of directors, Longgen Zhang was also granted restricted share awards and options for a total of 600,000 common shares under our 2007 equity incentive plan and options for 229,807 common shares under our 2007 long term incentive plan.

The initial term of Longgen Zhang’s employment is one year, and automatically renews annually on the same terms and conditions for successive periods of one year each, unless terminated prior to renewal. Each party must provide the other party with three months written notice in order to terminate the agreement during its term. However, in the case of any termination, we may elect to make, instead of providing prior notice, a lump sum severance payment to Longgen Zhang in an amount equal to the pro-rated portion of the annual compensation for the notice period, so long as the termination is in accordance with applicable law. Longgen Zhang will have non-competition obligations for a period of one year after the termination of his employment agreement.

Yao Wu

On June 29, 2007, we entered into an employment agreement, a confidentiality agreement and a non-competition agreement with Yao Wu, our Chief Operating Officer. Under the terms of these agreements, in consideration of his performance of duties, obligation of non-competition, obligation of confidentiality and other obligations, Yao Wu is paid an annual after-tax salary of RMB 912,000. Any breach of the confidentiality agreement by Yao Wu will be deemed as a breach of his employment agreement. Pursuant to the employment agreement and the determination of our board of directors, Yao Wu was granted options for a total of 122,361 common shares under our 2007 equity incentive plan and options for 180,546 common shares under our 2007 long term incentive plan.

The initial term of Yao Wu’s employment is eight months, which may be renewed by Yao Wu and us. Each party must provide the other party with 30-days prior written notice in order to terminate the agreement during its term. Yao Wu will have non-competition obligations under the non-competition agreement for a period of two years after the termination of the employment agreement. However, during that two-year period, we have the obligation to pay to Yao Wu 10% of his last year annual salary each year, unless the applicable law or regulation provides otherwise.

 

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Xiaobing Wang

On July 29, 2007, we entered into an employment agreement, a confidentiality agreement and a non-competition agreement with Xiaobing Wang, our Chief Administrative Officer. Under the terms of these agreements, in consideration of his performance of duties, obligation of non-competition, obligation of confidentiality and other obligations, Xiaobing Wang is paid an annual after-tax salary of RMB 1,080,000. Any breach of the confidentiality agreement by Xiaobing Wang will be deemed as a breach of his employment agreement. Pursuant to the employment agreement and the determination of our board of directors, Xiaobing Wang was granted options for a total of 116,771 common shares under our 2007 equity incentive plan and options for 159,149 common shares under our 2007 long term incentive plan.

The initial term of Xiaobing Wang’s employment is seven months, which may be renewed by Xiaobing Wang and us. Each party must provide the other party with 30-days prior written notice in order to terminate the agreement during its term. Xiaobing Wang will have non-competition obligations under the non-competition agreement for a period of two years after the termination of the employment agreement. However, during that two-year period, we have the obligation to pay to Xiaobing Wang 10% of his last year annual salary each year, unless the applicable law or regulation provides otherwise.

Compensation of Directors and Executive Officers

For the year ended December 31, 2006 and the nine months ended September 30, 2007, the aggregate cash compensation that we paid to directors and executive officers was US$46,978 and US$175,000, respectively, and the total amount that we set aside for pension or retirement or other benefits of the directors and executive officers was US$12,592 and US$43,178, respectively. For share-based compensation, see “—2007 Equity Incentive Plan” and “—2007 Long Term Incentive Plan.”

2007 Equity Incentive Plan

In August 2006, our shareholders agreed to allocate 6,802,495 common shares for our employee bonus scheme. In August 2007, we adopted our 2007 equity incentive plan to attract, retain and motivate key employees, directors and consultants of our company and our subsidiaries. Our plan provides for the grant of restricted share awards of common shares and options to purchase our common shares. The maximum aggregate number of common shares which may be issued pursuant to all awards, including options, is 6,802,495 common shares, subject to adjustment to accounting for changes in the capitalization of our company. Our board of directors believes that our company’s expansion plans and its long-term success is dependent upon our ability to attract and retain superior individuals who, by virtue of their ability, experience and qualifications, make important contributions to our business.

Termination. The terms of a participant’s award are set forth in the participant’s award agreement. Our board of directors, or any committee designated under it, will determine the terms and conditions of an award in the relevant award agreement. The duration of any award may not exceed ten years from the date of grant. If a participant’s service with our company terminates for any reason prior to this offering, any outstanding unvested or vested but unexercised option or restricted share award to the participant will expire and be forfeited for no consideration on the date of the participant’s termination of service. If a participant’s service with our company terminates for any reason following this offering, unless otherwise provided in the award agreement or determined by our board of directors, or any committee designated under it, any outstanding unvested or vested but unexercised option or restricted share award to the participant will expire and be forfeited for no consideration on the date of the participant’s termination of service. In the event any award under the plan expires, terminates, or is forfeited, the common shares underlying the award will revert to our company to be available for the purposes of the plan.

Administration. Our 2007 equity incentive plan is administered by our board of directors, or any committee designated under it. Our board of directors, or any designated committee, is authorized to interpret,

 

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establish or amend the plan at any time for any reason. They will determine the terms and conditions of any award, including, but not limited to, the exercise price for any option, restrictions and vesting conditions, including time-based vesting conditions and performance based vesting conditions, forfeiture provisions and other applicable terms. In addition, they will also specify in the award agreement whether the option constitutes an incentive share option, or ISO, or a non-qualifying stock option. Awards under our 2007 equity incentive plan may also be awarded under certain performance-based criteria based on conditions our board of directors, or any designated committee under it, deems appropriate.

Option Exercise and Conditions. The consideration paid for our common shares upon exercise of an option or purchase of common shares underlying an award or option may be paid in cash or cash equivalents. Our board of directors may accept any form of legal consideration that satisfies Cayman Islands corporate law requirements regarding adequate consideration for restricted share awards. Participation in our 2007 equity incentive plan may also be subject to certain terms and conditions, including, but not limited to, withholding tax arrangements and certain restrictions on transfer.

Amendment and Termination. Our board of directors, or any designated committee, is authorized to interpret the plan and to establish, amend, suspend or terminate the plan at any time for any reason. However, any amendment to increase the number of common shares available for issuance under the plan or materially change the class of persons who are eligible for grants under the plan is subject to approval by our shareholders. Our board of directors at any time may amend the terms of any award provided that the amendment does not impair the rights of a participant under an award, in which case, our board of directors would need the participant’s consent. Our board of directors has the right to terminate or suspend our plan for any reason.

On August 11, 2007, we granted share options and restricted share awards to 346 directors, management, employees and consultants for an aggregate of 6,802,495 common shares at a weighted average exercise price of US$1.08. These options have various vesting periods ranging from four to 60 months.

 

Name		Common Shares Underlying Options Granted		Exercise Price of Options Granted (US$ per share)			Common Shares Underlying Restricted Share Awards Granted(1)		Date of Grant		Date of Expiration
Yong Zhang		146,891		2.5000					August 11, 2007		August 10, 2017
Yuyan Yang							1,545,956		August 11, 2007		August 10, 2017
Longgen Zhang		400,000		0.8115					August 11, 2007		August 10, 2017
		99,404		2.5000					August 11, 2007		August 10, 2017
							100,596		August 11, 2007		August 10, 2017
Yong Cui							333,333		August 11, 2007		August 10, 2017
Yao Wu		22,361		2.5000					August 11, 2007		August 10, 2017
							100,000		August 11, 2007		August 10, 2017
Xiaobing Wang		16,771		2.5000					August 11, 2007		August 10, 2017
							100,000		August 11, 2007		August 10, 2017
Other employees and consultants(2) as a group		2,512,990		2.5000			1,424,193		August 11, 2007		August 10, 2017

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(1)

All restricted share awards were granted at purchase price of US$0.0001 per common share.

(2)

None of these employees and consultants is our director or executive officer.

2007 Long Term Incentive Plan

In November 2007, we adopted our 2007 long term incentive plan which provides for the grant of options, restricted shares, restricted stock units, stock appreciation rights and other stock-based awards to purchase our common shares. The maximum aggregate number of common shares which may be issued pursuant to all awards, including options, is 10 million common shares, subject to adjustment to accounting for changes in

 

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the capitalization of our company. Our board of directors may grant awards under this plan prior to this offering, provided that no awards granted may vest prior to the completion of this offering.

Termination. The terms of a participant’s award are set forth in the participant’s award agreement. Our board of directors, or any committee designated under it, will determine the terms and conditions of an award in the relevant award agreement. The duration of any award may not exceed ten years from the date of grant. If a participant’s service with our company terminates for any reason prior to this offering, any outstanding unvested award to the participant will expire and be forfeited for no consideration on the date of the participant’s termination of service. If a participant’s service with our company terminates for any reason following this offering, unless otherwise provided in the award agreement or determined by our board of directors, or any committee designated under it, the unvested portion of any outstanding awards to the participant will be immediately forfeited without consideration, the vested portion of any outstanding restricted stock units or other stock-based awards will be settled upon termination and the participant will have a period of three months to exercise the vested portion of any outstanding options or stock appreciation rights.

Administration. Our 2007 long term incentive plan is administered by our board of directors, or any committee designated under it. Our board of directors, or any designated committee, is authorized to interpret, establish or amend the plan at any time for any reason. They will determine the terms and conditions of any award, including, but not limited to, the exercise price for any option, restrictions and vesting conditions, including time-based vesting conditions and performance based vesting conditions, forfeiture provisions and other applicable terms. In addition, they will also specify in the award agreement whether the option constitutes an incentive share option, or ISO, or a non-qualifying stock option. Awards under our 2007 long term incentive plan may also be awarded under certain performance-based criteria based on conditions our board of directors, or any designated committee under it, deems appropriate.

Award Exercise and Conditions. The consideration paid for our common shares upon exercise of an option may be paid in cash or cash equivalents, or, subject to prior approval by our board of directors in its discretion, shares, promissory note, irrevocable direction to sell or pledge shares and to deliver proceeds as payment, or any combination of the foregoing methods. The consideration paid for our common shares upon exercise of stock appreciation rights, restricted stock units and other stock-based awards may be paid in cash, shares or any combination thereof. The restricted shares will be awarded for no additional consideration or such additional consideration as our board may determine satisfies Cayman Islands corporate law requirements. Each award of restricted shares will entitle the participant to all voting, dividends and other ownership rights in such shares, subject to any limitation on dividends rights specified in the award agreement. The participant will possess no incidents of ownership with respect to the shares underlying the restricted stock units granted. Participation in our 2007 long term incentive plan may also be subject to certain terms and conditions, including, but not limited to, withholding tax arrangements and certain restrictions on transfer.

Amendment and Termination. Our board of directors, or any designated committee, is authorized to interpret the plan and to establish, amend, suspend or terminate the plan at any time for any reason. However, any amendment to increase the number of common shares available for issuance under the plan, or materially change the class of persons who are eligible for grants under the plan are subject to approval by our shareholders. Our board of directors at any time may amend the terms of any award provided that the amendment does not impair the rights of a participant under an award, in which case, our board of directors would need the participant’s consent. Our board of directors has the right to terminate or suspend our plan for any reason.

On November 5, 2007, we granted options under the 2007 long term incentive plan to our directors, management and key employees for an aggregate of 2,441,844 common shares at the exercise price that will be equal to the initial public offering price of the ADSs as set forth on the cover of this prospectus. These awards have vesting periods of up to 36 months, and will expire no later than the 10th anniversary of the date of grant. The number of common shares underlying options granted to Yong Zhang, Yuyan Yang, Longgen Zhang, Yao Wu and Xiaobing Wang was 473,493, 134,956, 229,807, 180,546 and 159,149, respectively.

 

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PRINCIPAL SHAREHOLDERS

The following table sets forth information with respect to the beneficial ownership of our common shares, as of the date of this prospectus, by:

 

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each of our directors and executive officers; and

 

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each person known to us to own beneficially more than 5.0% of our common shares.

 

		Common Shares Beneficially Owned Prior to This Offering(1)(2)				Shares Beneficially Owned After This Offering(1)(2)(3)
		Number		%		Number		%
Directors and Executive Officers:
Yong Zhang(4)		61,086,284				61,086,284
Yuyan Yang(5)		61,086,284				61,086,284
Longgen Zhang		*		*		*		*
Yue (Justin) Tang(6)		—		—		—		—
Christopher J. Fiegen(7)		—		—		—		—
Yong Cui		*		*		*		*
Yao Wu		*		*		*		*
Xiaobing Wang		*		*		*		*
All directors and executive officers as a group		61,421,831				61,421,831
Principal Shareholders:
Blue Ridge China Partners, L.P.(8)		27,905,867				27,905,867
EI Fund II China, LLC(9)		18,603,912				18,603,912

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*

Will beneficially own less than 1.0% of our outstanding common shares upon exercise of all options granted.

(1)

Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, and includes voting or investment power with respect to the securities.

(2)

Percentage of beneficial ownership of each listed person prior to the offering is based on              common shares outstanding as of the date of this prospectus, including common shares convertible from our outstanding Series A convertible redeemable preference shares, common shares issuable upon the exercise of the Burnham warrants, common shares issuable upon the conversion of the convertible notes, common shares underlying the warrants issued to the holders of floating rate notes, assuming an initial public offering price of US$             per ADS (the mid-point of the price range set forth on the front cover of this prospectus), as well as the common shares underlying share options and other awards exercisable by such person within 60 days of the date of this prospectus. Percentage of beneficial ownership of each listed person after the offering is based on              common shares outstanding immediately after completion of this offering, including common shares issuable upon the conversion of the convertible notes, common shares underlying the warrants issued to the holders of floating rate notes, assuming an initial public offering price of US$             per ADS (the mid-point of the price range set forth on the front cover of this prospectus), as well as the common shares underlying share options and other awards exercisable by such person within 60 days of the date of this prospectus.

(3)

Assumes no exercise of the underwriters’ over-allotment option.

(4)

Includes 12,000,000 common shares owned by Yuyan Yang, Mr. Zhang’s spouse, and 1,028,060 common shares issuable upon the exercise of options held by Star World Finance Limited, a British Virgin Islands company wholly owned and controlled by Ms. Yang.

(5)

Includes 48,000,000 common shares owned by Yong Zhang, Ms. Yang’s spouse, and 24,421 common shares issuable upon the exercise of options held by Shining Gold Trading Limited, a British Virgin Islands company wholly owned and controlled by Mr. Zhang.

(6)

An entity controlled by Yue (Justin) Tang is a limited partner of the General Partner of Blue Ridge China Partners, L.P., or Blue Ridge China, giving Mr. Tang an indirect economic interest in a minority portion of the shares owned by Blue Ridge China. Such entity has certain veto rights, including with respect to Blue Ridge China’s determinations as to making and disposing of investments. Mr. Tang disclaims beneficial

 

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ownership (having or sharing investment or voting control) in the Blue Ridge China shares, and disclaims any pecuniary interest in the Blue Ridge China shares except to the extent of his proportionate indirect interest in Blue Ridge China.

(7)

Christopher J. Fiegen has an economic interest in a minority portion of the shares owned by EI Fund II China, LLC, or Equity International. Mr. Fiegen disclaims beneficial ownership in all of our shares owned by Equity International, except to the extent of his pecuniary interest therein.

(8)

Includes 18,483,240 Series A preference shares, which will automatically be converted into our common shares upon completion of this offering. The securities are beneficially owned by Blue Ridge China and by its general partner, Blue Ridge China Holdings, L.P., or BRCH, a Cayman Islands exempted limited partnership, and BRCH’s general partner, Blue Ridge Capital Offshore Holdings LLC, or BRCOH, a New York limited liability company. John A. Griffin is the sole managing member of BRCOH and in that capacity directs its operations and (through BRCOH and BRCH) has voting and investment control over Blue Ridge China. Blue Ridge China, BRCH, BRCOH, and Mr. Griffin may therefore all be deemed to beneficially own such securities. BRCH’s, BRCOH’s, and Mr. Griffin’s pecuniary interest in such securities is limited to its or his proportionate pecuniary interest in Blue Ridge China. The address of Blue Ridge China Partners, L.P. is c/o M&C Corporate Services Limited, P.O. Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands.

(9)

Includes 12,322,160 Series A preference shares, which will automatically be converted into our common shares upon completion of this offering. The securities are owned directly by EI Fund II China, LLC. Samuel Zell, through several trusts for the benefit of Mr. Zell’s family, has investment and voting control over EI Fund II China, LLC and may therefore be deemed to beneficially own such securities. Mr. Zell’s and each such trust’s pecuniary interest in such securities is limited to his or its proportionate pecuniary interest in EI Fund II China, LLC. The address of EI Fund II China, LLC is Two North Riverside Plaza, Suite 700, Chicago, IL 60606.

Upon the completion of this offering, pursuant to their terms, our Series A preference shares will be mandatorily converted into our common shares which will have the same voting rights as our other common shares. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

 

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RELATED PARTY TRANSACTIONS

Series A Convertible Redeemable Preference Shares

See “Description of Share Capital—History of Share Issuances—Series A Convertible Redeemable Preference Shares and Warrants.”

Restructuring and Share Exchange

On April 9, 2007, we entered into a Share Exchange and Assumption Agreement with Xinyuan Real Estate, Ltd., or Xinyuan Ltd., Mr. Yong Zhang, Ms. Yuyan Yang, Blue Ridge China and Equity International, pursuant to which Xinyuan Ltd. became our wholly owned subsidiary. As a part of the transaction, Mr. Yong Zhang and Ms. Yuyan Yang agreed to exchange their 48,000,000 and 12,000,000 common shares in Xinyuan Ltd., respectively, for an equivalent number of our newly issued shares of the same class.

As part of the transaction, Blue Ridge China agreed to exchange its 18,483,240 Series A convertible redeemable preference shares, or Series A preference shares, and 9,422,627 common shares of Xinyuan Ltd. for an equivalent number of equal class of our newly issued shares, and Equity International agreed to exchange its 12,322,160 Series A preference shares and 6,281,752 common shares of Xinyuan Ltd. for an equivalent number of equal class of our newly issued shares. Our Series A preference shares are convertible into our common shares at any time and will automatically be converted into our common shares upon completion of this offering on a one-to-one basis, subject to certain adjustments set forth in our amended and restated memorandum and articles of association.

As part of the transaction, Xinyuan Ltd. cancelled warrants issued to Burnham Securities and Joel B. Gardner to purchase an aggregate of 1,853,172 common shares at a price of US$0.81155 per share and we issued substantially similar warrants to Burnham Securities and Mr. Gardner. The Burnham warrants are required to be exercised, if not previously exercised, immediately prior to this offering, or the warrants will expire.

Shareholders Agreement

We entered into a shareholders agreement, dated as of April 9, 2007, with Blue Ridge China, Equity International, Mr. Yong Zhang, Ms. Yuyan Yang, Xinyuan Ltd., Burnham Securities and Mr. Gardner. The agreement was amended and restated on October 31, 2007. Under the terms of the amended and restated shareholders agreement, the following rights generally will apply:

Right of First Refusal Among Series A Preference Shareholders. If any holder of Series A Preference Shares, or their respective permitted transferees, decide to transfer all or any part of its common shares, Series A Preference Shares and Series A Warrants, as amended, each is required to first deliver notice of its intention to sell and offer to sell to the other such securities at the same price and under the same terms and conditions as stated in the proposed transfer, provided the other holds at least fifty percent (50%) of the Series A preference shares owned by it as of the date of the shareholders agreement, any common shares issued upon conversion of the Series A preference shares it owns as of such date, and the common shares it owned as of the date of the shareholders agreement. Within 30 days after delivery of the notice, the other Series A preference shareholders can offer to buy such securities. If there is a greater demand to buy such securities than those that are available, the securities will be divided on a pro rata basis. If the demand is less than the amount of such securities available, the remaining such securities will be distributed pro rata to the shareholders who made offers to purchase. This right of first refusal does not apply to sales to the public after this offering.

Co-Sale Rights. Prior to the third anniversary of this offering, if either Mr. Yong Zhang or Ms. Yuyan Yang proposes to transfer any common shares, he or she must provide us and the other parties to the agreement

 

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written notice detailing the number of common shares to be sold or transferred, the consideration to be paid, the name and address of each prospective purchaser or transferee, and a copy of the proposed transfer documents. Within 30 days of such notification, Blue Ridge China, Equity International, Burnham Securities and Mr. Gardner have the right to participate in the sale on the same terms and conditions indicated in the notice. Their pro-rata share is the ratio of the sum of the number of securities held by Blue Ridge China, Equity International, Burnham Securities or Mr. Gardner that were issued pursuant to the Share Exchange and Assumption Agreement, on an as converted and as exercised basis, as the case may be.

Right of First Refusal on Common Shares by Certain Shareholders. If any shareholder other than Mr. Yong Zhang, Ms. Yuyan Yang or a holder of Series A preference shares desires to transfer all or any portion of its securities, the selling shareholder must first deliver to us a notice identifying the transferee and containing an offer to sell the shares to us at the same price, upon the terms as set forth in the proposed transfer. This right of first refusal does not apply to sales to the public after this offering.

Registration Rights. Blue Ridge China and Equity International are also entitled to certain registration rights, including demand registration, piggyback registration and Form F-3 or Form S-3 registration. See “Description of Share Capital—Registration Rights.”

Burnham Warrants Purchase Right. Under the terms of the agreement, if any Burnham warrants remain unexercised upon expiration of the Burnham warrants, Yong Zhang will become entitled to purchase, within 60 days, the common shares underlying the unexercised warrants at a purchase price of US$0.0001 per share.

Termination of Agreement. The shareholders agreement will terminate upon the expiration of any period of four consecutive weeks after this offering during which the weekly trading volume in each such week of the common shares on the New York Stock Exchange, the National Association of Securities Dealers Automated Quotation System or applicable major international securities exchange exceeds one-half the number of common shares (on a fully diluted basis) then held by Blue Ridge China and Equity International immediately after giving effect to this offering.

Shareholders’ Loan

On December 7, 2006, we borrowed a bridge loan in the principal amount of US$35 million from Blue Ridge China (US$21 million) and Equity International (US$14 million). This loan bore interest at the rate of 12.5% per annum and the outstanding loan amount was convertible into our common shares. In April 2007, we repaid this loan using a portion of the net proceeds from the issuance of the floating rate notes.

Acquisition of Subsidiaries

On August 30, 2006, we acquired from Mr. Yong Zhang and Ms. Yuyan Yang the 100% equity interest in each of Henan Xinyuan Property Management Co., Ltd., or Xinyuan Property Management, Henan Mingyuan Landscape Engineering Co., Ltd., or Mingyuan Landscape, Zhengzhou Xinyuan Computer Network Engineering Co., Ltd., or Xinyuan Network, and Henan Xinyuan Real Estate Agency., Ltd. The consideration was paid in cash of US$2.1 million.

On March 16, 2006, we acquired from Ms. Yuyan Yang a 20% equity interest in Henan Wanzhong Real Estate Co., Ltd. The consideration was paid in cash in the amount of US$0.2 million. After the acquisition, Henan Wanzhong Real Estate Co., Ltd. became our wholly owned subsidiary.

Historical Transactions with Certain Subsidiaries

We have contracted with Mingyuan Landscape to design and build garden landscapes and infrastructures for our properties under construction. During the years ended December 31, 2004 and 2005, and the period from January 1, 2006 through August 31, 2006, we purchased US$412,408, US$1,354,902 and

 

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US$707,908, respectively, of services from Mingyuan Landscape. As of December 31, 2004 and 2005, we recorded balances due from Mingyuan Landscape in the amount of US$476,664 and US$380,468, respectively. As of December 31, 2004 and 2005, we also recorded balances due to Mingyuan Landscape in the amount of US$46,110 and US$299,153, respectively.

We have contracted with Xinyuan Property Management to manage the properties we delivered to our customers. As of December 31, 2004 and 2005, we recorded balances due from Xinyuan Property Management in the amount of US$687,283 and US$523,484, respectively. As of December 31, 2004 and 2005, we also recorded balances due to Xinyuan Property Management in the amount of US$518,841 and US$890,010, respectively.

We have contracted with Xinyuan Network to install and maintain intercom systems in the residential communities we developed. During the years ended December 31, 2004 and 2005 and the period from January 1, 2006 through August 31, 2006, we purchased nil, US$223,071 and US$108,619, respectively, of services from Xinyuan Network. As of December 31, 2004 and 2005, we also recorded balances due to Xinyuan Network in the amount of US$48,330 and US$130,300, respectively.

Because of our acquisition of Mingyuan Landscape, Xinyuan Property Management and Xinyuan Network in 2006, the balances due to or from these subsidiaries have been eliminated upon consolidation.

Transactions with Jiantou Xinyuan

We hold a 45% equity interest in Jiantou Xinyuan, with the remaining 55% held by third-party partners. Under the joint venture contract, we and the other partners agree to share the profits according to our respective equity interest in Jiantou Xinyuan.

We extended loans to and paid real estate construction costs on behalf of Jiantou Xinyuan. As of December 31, 2004, 2005 and 2006 and September 30, 2007, we recorded balances due from Jiantou Xinyuan in the amount of nil, US$6.7 million, US$7.7 million and US$6.1 million, respectively. In May and June 2007, we made two loans to Jiantou Xinyuan in the amount of RMB58.7 million and RMB58.3 million, respectively. These loans bore interest at the rate of 6.57% per annum and have fixed terms of one year. In addition, in 2006, we borrowed cash under a loan from Jiantou Xinyuan in the principal amount of US$3.7 million with an interest at 6.44% per annum and we repaid the loan in full in February 2007. In the nine months ended September 30, 2007, we recorded balances due to Jiantou Xinyuan in the amount of US$0.3 million, which represented the agency fee advances from Jiantou Xinyuan.

Cash Advances

We make cash advances to Mr. Yong Zhang and Ms. Yuyan Yang for traveling expenses and other expenses. The cash advances bear no interest and have no fixed payment terms. As of December 31, 2004, 2005 and 2006, we recorded balances due from these two shareholders in the amount of US$197,180, US$151,777 and US$40,934, respectively. All such advances were fully repaid in May 2007. As of September 30, 2007, we recorded balances due from employees in the amount of US$660,142, which mainly represented the outstanding payments from the sales of properties to our employees and the cash advances paid to employees for their traveling expenses.

Share Incentives

See “Management—2007 Equity Incentive Plan” and “Management—2007 Long Term Incentive Plan.”

Consulting Agreement with Our Director

We entered into a consulting agreement with a consulting company that is beneficially owned by Yong Cui, one of our directors, in April 2005. Under this agreement, the consulting company agreed to provide certain

 

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financial consulting services to us. We paid consulting fees of RMB0.25 million, and RMB0.23 million to the consulting company in 2005 and 2006, respectively. This consulting agreement was renewed in December 2006, under which we have agreed to pay an annual fee of RMB0.24 million. This agreement will expire in April 2012.

Registration Rights

We have granted registration rights to the holders of our Series A preference shares, certain warrants and convertible notes or their assignees. For a detailed description of the registration rights, see “Description of Share Capital—Registration Rights.” These registration rights will remain in effect after completion of this offering.

Review and Approval of Related Party Transactions

Pursuant to our audit committee charter, all transactions or arrangements with related parties, as such term is defined under Item 404 of Regulation S-K, including directors, executive officers, beneficial owners of 5% or more of our voting securities and their respective affiliates, associates and related parties, will require the prior review and approval of our audit committee, regardless of the dollar amount involved in such transactions or arrangements.

 

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DESCRIPTION OF SHARE CAPITAL

We are a Cayman Islands company and our affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and the Companies Law (2007 Revision) of the Cayman Islands, which is referred to as the Companies Law below.

As of the date hereof, our authorized share capital consists of 450,000,000 common shares, with a par value of US$0.0001 each, and 50,000,000 Series A preference shares, with a par value of US$0.0001 each. As of the date hereof, there are 75,704,379 common shares issued and outstanding and 30,805,400 Series A preference shares issued and outstanding. All of our issued and outstanding Series A preference shares will automatically be converted into common shares, at a conversion rate of one preference share to one common share, upon completion of this offering.

Upon the closing of this offering, we will adopt a new amended and restated memorandum and articles of association and our authorized share capital will consist of 500,000,000 common shares, with a par value of US$0.0001 each. The following are summaries of material provisions of our proposed amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our common shares that we expect will become effective upon the closing of this offering.

Common shares

General.    All of our outstanding common shares are fully paid and non-assessable. Certificates representing the common shares are issued in registered form. Our shareholders who are nonresidents of the Cayman Islands may freely hold and vote their shares.

Dividends.    The holders of our common shares are entitled to such dividends as may be declared by our shareholders or board of directors subject to the Companies Law. All dividends or distributions will be paid out of our realized or unrealized profits, or out of the share premium account or others permitted by the Companies Law.

Voting Rights.    Each common share is entitled to one vote on all matters upon which the common shares are entitled to vote. Voting at any meeting of shareholders is by show of hands unless a poll is demanded or required by the rules of the designated stock exchange. A poll may be demanded by the chairman of the meeting or a shareholder or shareholders present in person or, in the case of a shareholder being a corporation, by its duly authorized representative or by proxy, and holding not less than one-tenth of the issued share capital of our voting shares.

A quorum required for a meeting of shareholders consists of two or more shareholders being present in person or by proxy or, if a corporation or other non-natural person, by its duly authorized representative, representing not less than fifty per cent of the total voting rights of common shares entitled to vote at a general meeting. Shareholders’ meetings are held annually and may be convened by our board of directors on its own initiative. Advance notice of at least twenty days is required for the convening of a general meeting.

No business may be transacted at a general meeting, other than business that is specified in a notice given at the direction of, or otherwise properly brought before the annual meeting by, our board of directors or is properly brought by a shareholder who provides us with advance notice, in accordance with our memorandum and articles of association, describing the business desired to be conducted at the general meeting.

An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the common shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to the common shares. A special resolution is required for important matters such as a change of name or an amendment to our memorandum or articles of association.

Transfer of Shares.    Subject to the restrictions of our articles of association, as more fully described below, any of our shareholders may transfer all or any of his or her common shares if approved by the board in writing and the name of the transferee is entered into the register of shareholders to become effective.

 

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If a shareholder dies, the legal representative of the deceased shareholder is the only person recognized as having title to his share interest. Any person entitled to a share as a result of death or bankruptcy or liquidation or dissolution of a shareholder (or in any other way than by transfer) may, upon providing evidence of such right, elect to become the holder of the share or nominate someone as the transferee. In either case, our directors have the same right to decline or suspend registration as they would have in the case of a transfer of the share by the shareholder before his death or bankruptcy, unless the transferee is an immediate family member of the shareholder or a trust for their benefit. If notice from such person to either elect to be registered himself or to transfer the share is not received within 90 days, our directors may withhold payment of all dividends, bonuses or other payouts related to the share until the requirements of the notice have been satisfied.

Liquidation.    On a return of capital on winding-up or otherwise (other than on conversion, redemption or purchase of shares), assets available for distribution among the holders of common shares will be distributed among the holders of the common shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately.

Redemption of Shares.    Subject to the provisions of the Companies Law and our memorandum and articles of association and to any special rights conferred on the holders of any shares or class of shares, we may issue shares on terms that they are subject to redemption at our option or at the option of the holders, on such terms and in such manner as may be determined by special resolution, determine before the issue of the shares.

Variations of Rights of Shares.    The rights attached to any class of shares may, subject to the provisions of the Companies Law, be varied with the consent of the majority of shareholders with voting rights of that class, or with the sanction of a special resolution passed at general meeting of the holders of the shares of that class.

Inspection of Books and Records.    Holders of our common shares have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements. See “Where You Can Find Additional Information.”

Designations and classes of shares.    Upon the closing of this offering all of our issued shares will be common shares. Our articles provide that our authorized unissued shares shall be at the disposal of our board of directors, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and upon such terms and conditions as our board may in its absolute discretion determine. In particular, our board of directors is empowered to redesignate from time to time authorized and unissued common shares as other classes or series of shares, to authorize from time to time the issuance of one or more series of preferred shares and to fix the designations, powers, preferences and relative, participating, optional and other rights, if any, and the qualifications, limitations and restrictions thereof, if any, including without limitation, the number of shares constituting each such class or series, dividend rights, conversion rights, redemption privileges, voting powers and liquidation preferences, and to increase or decrease the size of any such class or series.

History of Share Issuances

The following is a summary of our share issuances.

Share Exchange.    In April 2007, in connection with the issuance of the floating rate notes and convertible notes, we conducted a restructuring pursuant to a one-for-one share exchange, whereby all of the then-existing shareholders of Xinyuan Real Estate, Ltd. exchanged their respective securities of Xinyuan Ltd. for an equivalent number and class of our securities.

 

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Common Shares.    In April 2007, pursuant to the share exchange in April 2007, we issued a total of 75,704,379 common shares, par value US$0.0001 per share, to Yong Zhang, Yuyan Yang, Blue Ridge China and Equity International. These common shares were issued in exchange for (i) 60,000,000 common shares, par value US$0.0001 per share, issued in January 2006 at a price of US$0.0001 per share by Xinyuan Ltd. to Yong Zhang, 12,000,000 of which were immediately transferred to Yuyan Yang, and (ii) 15,704,379 common shares issued in November 2006 at a price of US$0.9551 per share by Xinyuan Ltd. to Blue Ridge China and Equity International in a private placement.

Series A Convertible Redeemable Preference Shares and Warrants.    In April 2007, pursuant to the share exchange in April 2007, we issued a total of 30,805,400 Series A preference shares and warrants to Blue Ridge China and Equity International. These Series A preference shares and warrants were issued in exchange for an equivalent number and class of shares and warrants issued in August 2006 at a price of US$0.81155 per share by Xinyuan Ltd. to Blue Ridge China and Equity International in a private placement. Upon the completion of this offering, the outstanding Series A preference shares will automatically be converted to common shares at the ratio of one common share to one Series A preference share, or 30,805,400 common shares, subject to anti-dilution adjustments for any events occuring prior to the conversion into common shares.

The terms of our Series A preference shares contain a contingent conversion option that allows holders to receive additional common shares if the value of our common shares in connection with this offering is less than two times the original Series A preference shares issuance price of US$0.81155, plus an accreted amount of 10% compounded annually to the date of the offering. On November 13, 2007, in order to provide more clarity with respect to accounting treatment of the Series A preference shares in our financial statements, we requested that Blue Ridge China and Equity International, the only holders of the Series A preference share waive this option. They agreed in writing to the waiver, on the belief that the option conditions will be satisfied and therefore not triggered. Accordingly, we expect to issue 30,805,400 common shares upon the conversion of all of our Series A preference shares at the completion of this offering. We will recognize a deemed dividend to the holders of the Series A preference shares in connection with this waiver of the contingent conversion option. This deemed dividend will not affect our net income or cash flows, however, it will reduce our net income attributable to ordinary shareholders and earnings per share (ADS) for the year ending December 31, 2007. The dividend will be calculated based on the difference between the fair value of the Series A preference shares immediately after the waiver of the contingent conversion option and the carrying value of the Series A preference shares immediately prior to the waiver. The carrying value of the Series A preference shares immediately prior to the waiver was US$24,785,612. We have determined that on November 13, 2007, a 4% marketability discount be applied to an assumed initial offering price of US$            , the mid-point of the indicative price range for the offering, to arrive at a fair value of US$             for each Series A preference share. At this estimated fair value, we will record the modified Series A preference shares at an amount of approximately US$             million and the deemed dividend to the Series A preference shareholders at approximately US$             million, which will reduce the net income attributable to ordinary shareholders and retained earnings by the same amount of US$             million for the year ending December 31, 2007.

See “Description of Debt and Equity—Linked Securities” for a description of warrants, including the Burnham warrants, the Series A warrants, as amended, floating rate notes and convertible notes that we have issued. See “Management—2007 Equity Incentive Plan” and “Management—2007 Long Term Incentive Plan” for descriptions of our 2007 equity incentive plan and our 2007 long term incentive plan.

Differences in Corporate Law

The Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.

 

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Mergers and Similar Arrangements.    The Cayman Islands law does not provide for mergers as that expression is understood under United States corporate law. However, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:

 

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the company is not proposing to act illegally or beyond the scope of its authority and the statutory provisions as to majority vote have been complied with;

 

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the shareholders have been fairly represented at the meeting in question;

 

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the arrangement is such that a businessman would reasonably approve; and

 

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the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law or that would amount to a “fraud on the minority.”

When a take-over offer is made and accepted by holders of 90% of the shares within four months, the offerer may, within a two month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.

If the arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares.

Shareholders’ Suits.    We are not aware of any reported class action or derivative action having been brought in a Cayman Islands court. In principle, we will normally be the proper plaintiff and a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:

 

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a company is acting or proposing to act illegally or ultra vires;

 

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the act complained of, although not ultra vires, could be effected duly if authorized by more than a simple majority vote which has not been obtained; and

 

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those who control the company are perpetrating a “fraud on the minority.”

Anti-takeover Provisions.    Some provisions of our second amended and restated memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to redesignate authorized and unissued common shares as other shares or series of shares, to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders. However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our second amended and restated memorandum and articles of association, as amended and restated from time to time, for what they believe in good faith to be in the best interests of our company.

Directors’ Fiduciary Duties and Powers.    As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company, and therefore it is considered that

 

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he or she owes the following duties to the company—a duty to act bona fide in the best interests of the company, a duty not to make a profit out of his or her position as director (unless the company permits him or her to do so) and a duty not to put himself or herself in a position where the interests of the company conflict with his or her personal interests or his or her duty to a third party. A director of a Cayman Island company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However, there are indications that the courts are moving towards an objective standard with regard to the required skill and care.

Under our memorandum and articles of association, directors who are in any way, whether directly or indirectly, interested in a contract or proposed contract with our company shall declare the nature of their interest at a meeting of the board of directors. Following such declaration, a director may vote in respect of any contract or proposed contract notwithstanding his interest. Directors are not required to hold shares; however, a minimum share requirement for directors may be established at a general meeting. Directors may exercise all powers of our company to borrow money, under our memorandum and articles of association, in a variety of ways, including issuing bonds and other securities either outright or as security for any debt liability or obligation of our company or of any third party.

Shareholder Action by Written Resolution.    Under Cayman Islands law, a corporation may eliminate the ability of shareholders to approve corporate matters by way of written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matters at a general meeting without a meeting being held. Our memorandum and articles of association allow shareholders to act by written resolutions.

Removal of Directors.    Under our memorandum and articles of association, directors may be removed by a special resolution.

Dissolution; Winding Up.    Under our memorandum and articles of association, if our company is wound up, the liquidator of our company may distribute the assets only by the vote of holders of a two-thirds majority of our outstanding shares being entitled to vote in person or by proxy at a shareholder meeting or by unanimous written resolution.

Amendment of Governing Documents.    Under Cayman Islands law and our memorandum and articles of association, our governing documents may only be amended with the vote of holders of two-thirds of our shares entitled to vote in person or by proxy at a shareholder meeting or, as permitted by our articles of association, by unanimous written consent.

Rights of Non-Resident or Foreign Shareholders.    There are no limitations imposed by foreign law or by our memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.

Registration Rights

We have granted registration rights to the holders of our Series A preference shares or their assignees in connection with their subscription for the Series A preference shares in April 2007. Set forth below is a description of the registration rights granted to the holders of the Series A convertible redeemable preference shares or their assignees.

Demand Registration Rights.    At any time beginning six months after the completion of this offering, holders of at least 50% of the total number of common shares issued upon conversion of Series A preference shares, common shares issued upon conversion of Series A preference shares, and common shares purchased by Blue Ridge China and Equity International pursuant to the Share Exchange and Assumption Agreement have the right to demand that we file a registration statement covering the offer and sale of their securities, so long as the

 

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aggregate amount of securities to be sold under the registration statement is not less than US$7.5 million. However, we are not obligated to effect more than two such demand registrations. We have the ability to defer the filing of a registration statement, not more than once in any twelve month period, for up to three months if we furnish to holders of the registrable securities a certificate stating that the board of directors determines that a registration statement filed at such time would have an adverse effect on any proposal or plan by us or any of our subsidiaries to engage in any material corporate transaction.

Piggyback Registration Rights.    If we propose to file a registration statement with respect to an offering of securities of our company, then we must offer each holder of the registrable securities the opportunity to include their shares in the registration statement. We must use our reasonable best efforts to cause the underwriters in any underwritten offering to permit any such shareholder who so requests to include their shares. Such requests are not counted as demand registrations.

Form F-3 Registration Rights.    Upon our company becoming eligible for use of Form F-3 or S-3, Blue Ridge China and Equity International (for so long as they hold a specified number of shares) have the right to request, not more than three times, that we register all or a part of its shares under Form F-3 or S-3, so long as the aggregate amount of securities to be sold under the registration statement is no less than US$1 million.

In addition, pursuant to the equity registration rights agreement entered into in connection with the issuance of US$75 million floating rate notes and related warrants and US$25 million convertible notes, dated as of April 13, 2007, we granted to the holders of the warrants and the convertible notes certain registration rights, which primarily include:

 

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Demand Registration Rights.    Beginning 180 days after the completion of this offering, upon request of the holders of at least 33% of the outstanding registrable securities, we shall effect registration on Form F-1 with respect to the registrable securities held by them and any additional registrable securities requested to be included in such registration by any other holders, provided we shall only be obligated to effect three such registrations.

 

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Form F-3 Registration Rights.    Upon request of the holders of at least 10% of the outstanding registrable securities with an anticipated aggregate offering price of not less than US$5 million, we shall effect registrations on Form F-3 with respect to the registrable securities held by them and any additional registrable securities requested to be included in such registration by any other holders to the extent we are eligible to use such form to offer securities.

 

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Piggyback Registration Rights.    The holders of the registrable securities are entitled to “piggyback” registration rights, whereby they may require us to register all or any part of the registrable securities that they hold at the time when we register any of our common shares. Such registrations are not counted as demand registrations.

Under the equity registration rights agreement, we have the right to defer effecting the requested registration for up to 90 days if we find the request will be materially detrimental to our company and our shareholders, provided that we can only exercise this right once in any 12-month period and we are not allowed to register any securities for our own account or for any other shareholder during the 90-day deferral period.

 

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DESCRIPTION OF AMERICAN DEPOSITARY SHARES

American Depositary Receipts

JPMorgan Chase Bank, N.A., as depositary, will issue the ADSs which you will be entitled to receive in the Offering. Each ADS will represent an ownership interest in              shares which we will deposit with the custodian, as agent of the depositary, under the deposit agreement among ourselves, the depositary and yourself as an ADR holder. In the future, each ADS will also represent any securities, cash or other property deposited with the depositary but which they have not distributed directly to you. Unless specifically requested by you, all ADSs will be issued on the books of our depositary in book-entry form and periodic statements will be mailed to you which reflect your ownership interest in such ADSs. In our description, references to American depositary receipts or ADRs shall include the statements you will receive, which reflect your ownership of ADSs.

The depositary’s office is located at 4 New York Plaza, New York, NY 10004.

You may hold ADSs either directly or indirectly through your broker or other financial institution. If you hold ADSs directly, by having an ADS registered in your name on the books of the depositary, you are an ADR holder. This description assumes you hold your ADSs directly. If you hold the ADSs through your broker or financial institution nominee, you must rely on the procedures of such broker or financial institution to assert the rights of an ADR holder described in this section. You should consult with your broker or financial institution to find out what those procedures are.

As an ADR holder, we will not treat you as a shareholder of ours and you will not have any shareholder rights. Cayman Island law governs shareholder rights. Because the depositary or its nominee will be the shareholder of record for the shares represented by all outstanding ADSs, shareholder rights rest with such record holder. Your rights are those of an ADR holder. Such rights derive from the terms of the deposit agreement to be entered into among us, the depositary and all registered holders from time to time of ADSs issued thereunder. The obligations of the depositary and its agents are also set out in the deposit agreement. Because the depositary or its nominee will actually be the registered owner of the shares, you must rely on it to exercise the rights of a shareholder on your behalf. The deposit agreement and the ADSs are governed by New York law.

The following is a summary of the material terms of the deposit agreement. Because it is a summary, it does not contain all the information that may be important to you. For more complete information, you should read the entire deposit agreement and the form of ADR which contains the terms of your ADSs. You can read a copy of the deposit agreement which is filed as an exhibit to the registration statement of which this prospectus forms a part. You may also obtain a copy of the deposit agreement at the SEC’s Public Reference Room which is located at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. You may also find the registration statement and the attached deposit agreement on the SEC’s website at http://www.sec.gov.

Share Dividends and Other Distributions

How will I receive dividends and other distributions on the shares underlying my ADSs?

We may make various types of distributions with respect to our securities. The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on shares or other deposited securities, after converting any cash received into U.S. dollars and, in all cases, making any necessary deductions provided for in the deposit agreement. You will receive these distributions in proportion to the number of underlying securities that your ADSs represent.

 

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Except as stated below, to the extent the depositary is legally permitted it will deliver such distributions to ADR holders in proportion to their interests in the following manner:

 

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Cash.    The depositary will distribute any U.S. dollars available to it resulting from a cash dividend or other cash distribution or the net proceeds of sales of any other distribution or portion thereof (to the extent applicable), on an averaged or other practicable basis, subject to (i) appropriate adjustments for taxes withheld, (ii) such distribution being impermissible or impracticable with respect to certain registered holders and (iii) deduction of the depositary’s expenses in (1) converting any foreign currency to U.S. dollars to the extent that it determines that such conversion may be made on a reasonable basis, (2) transferring foreign currency or U.S. dollars to the United States by such means as the depositary may determine to the extent that it determines that such transfer may be made on a reasonable basis, (3) obtaining any approval or license of any governmental authority required for such conversion or transfer, which is obtainable at a reasonable cost and within a reasonable time, and (4) making any sale by public or private means in any commercially reasonable manner. If exchange rates fluctuate during a time when the depositary cannot convert a foreign currency, you may lose some or all of the value of the distribution.

 

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Shares.    In the case of a distribution in shares, the depositary will issue additional ADRs to evidence the number of ADSs representing such shares. Only whole ADSs will be issued. Any shares which would result in fractional ADSs will be sold and the net proceeds will be distributed in the same manner as cash to the ADR holders entitled thereto.

 

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Rights to receive additional shares.    In the case of a distribution of rights to subscribe for additional shares or other rights, if we provide satisfactory evidence that the depositary may lawfully distribute such rights, the depositary will distribute warrants or other instruments representing such rights. However, if we do not furnish such evidence, the depositary may:

 

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sell such rights if practicable and distribute the net proceeds as cash; or

 

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if it is not practicable to sell such rights, do nothing and allow such rights to lapse, in which case ADR holders will receive nothing.

We have no obligation to file a registration statement under the Securities Act in order to make any rights available to ADR holders.

 

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Other Distributions.    In the case of a distribution of securities or property other than those described above, the depositary may either (i) distribute such securities or property in any manner it deems equitable and practicable or (ii) to the extent the depositary deems distribution of such securities or property not to be equitable and practicable, sell such securities or property and distribute any net proceeds in the same way it distributes cash.

If the depositary determines that any distribution described above is not practicable with respect to any specific ADR holder, the depositary may choose any practicable method of distribution for such ADR holder, including the distribution of foreign currency, securities or property, or it may retain such items, without paying interest on or investing them, on behalf of the ADR holder as deposited securities, in which case the ADSs will also represent the retained items.

Any U.S. dollars will be distributed by checks drawn on a bank in the United States for whole dollars and cents. Fractional cents will be withheld without liability for interest thereon and dealt with by the depositary in accordance with its then current practices.

The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADR holders.

 

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There can be no assurance that the depositary will be able to convert any currency at a specified exchange rate or sell any property, rights, shares or other securities at a specified price, nor that any of such transactions can be completed within a specified time period.

Deposit, Withdrawal and Cancellation

How does the depositary issue ADSs?

The depositary will issue ADSs if you or your broker deposit shares or evidence of rights to receive shares with the custodian and pay the fees and expenses owing to the depositary in connection with such issuance. In the case of the ADSs to be issued under this prospectus, we will arrange with the underwriters named herein to deposit such shares.

Shares deposited in the future with the custodian must be accompanied by certain delivery documentation, including instruments showing that such shares have been properly transferred or endorsed to the person on whose behalf the deposit is being made.

The custodian will hold all deposited shares (including those being deposited by or on our behalf in connection with the offering to which this prospectus relates) for the account of the depositary. ADR holders thus have no direct ownership interest in the shares and only have such rights as are contained in the deposit agreement. The custodian will also hold any additional securities, property and cash received on or in substitution for the deposited shares. The deposited shares and any such additional items are referred to as “deposited securities.”

Upon each deposit of shares, receipt of related delivery documentation and compliance with the other provisions of the deposit agreement, including the payment of the fees and charges of the depositary and any taxes or other fees or charges owing, the depositary will issue an ADR or ADRs in the name or upon the order of the person entitled thereto evidencing the number of ADSs to which such person is entitled. All of the ADSs issued will, unless specifically requested to the contrary, be part of the depositary’s direct registration system, and a registered holder will receive periodic statements from the depositary which will show the number of ADSs registered in such holder’s name. An ADR holder can request that the ADSs not be held through the depositary’s direct registration system and that a certificated ADR be issued.

How do ADR holders cancel an ADS and obtain deposited securities?

When you turn in your ADSs at the depositary’s office, or when you provide proper instructions and documentation in the case of direct registration ADSs, the depositary will, upon payment of certain applicable fees, charges and taxes, deliver the underlying shares at the custodian’s office or effect delivery by such other means as the depositary deems practicable, including transfer to an account of an accredited financial institution on your behalf. At your risk, expense and request, the depositary may deliver deposited securities at such other place as you may request.

The depositary may only restrict the withdrawal of deposited securities in connection with:

 

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temporary delays caused by closing our transfer books or those of the depositary or the deposit of shares in connection with voting at a shareholders’ meeting, or the payment of dividends;

 

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the payment of fees, taxes and similar charges; or

 

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compliance with any U.S. or foreign laws or governmental regulations relating to the ADRs or to the withdrawal of deposited securities.

This right of withdrawal may not be limited by any other provision of the deposit agreement.

 

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Record Dates

The depositary may fix record dates for the determination of the ADR holders who will be entitled (or obligated, as the case may be):

 

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to receive any distribution on or in respect of shares,

 

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to give instructions for the exercise of voting rights at a meeting of holders of shares,

 

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for the determination of the registered holders who shall be responsible for the fee assessed by the depositary for administration of the ADR program and for any expenses as provided for in the ADR, or

 

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to receive any notice or to act in respect of other matters,

all subject to the provisions of the deposit agreement.

Voting Rights

How do I vote?

If you are an ADR holder and the depositary asks you to provide it with voting instructions, you may instruct the depositary how to exercise the voting rights for the shares which underlie your ADSs. After receiving voting materials from us, the depositary will notify the ADR holders of any shareholder meeting or solicitation of consents or proxies. This notice will state such information as is contained in the voting materials and describe how you may instruct the depositary to exercise the voting rights for the shares which underlie your ADSs and will include instructions for giving a discretionary proxy to a person designated by us. For instructions to be valid, the depositary must receive them in the manner and on or before the date specified. The depositary will try, as far as is practical, subject to the provisions of and governing the underlying shares or other deposited securities, to vote or to have its agents vote the shares or other deposited securities as you instruct. The depositary will only vote or attempt to vote as you instruct. The depositary will not itself exercise any voting discretion. Furthermore, neither the depositary nor its agents are responsible for any failure to carry out any voting instructions, for the manner in which any vote is cast or for the effect of any vote.

There is no guarantee that you will receive voting materials in time to instruct the depositary to vote and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.

Reports and Other Communications

Will I be able to view our reports?

The depositary will make available for inspection by ADR holders any written communications from us which are both received by the custodian or its nominee as a holder of deposited securities and made generally available to the holders of deposited securities. We will furnish these communications in English when so required by any rules or regulations of the Securities and Exchange Commission.

Additionally, if we make any written communications generally available to holders of our shares, including the depositary or the custodian, and we request the depositary to provide them to ADR holders, the depositary will mail copies of them, or, at its option, English translations or summaries of them to ADR holders.

 

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Fees and Expenses

What fees and expenses will I be responsible for paying?

The depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect of share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for withdrawal of deposited securities in any manner permitted by the deposit agreement, US$5.00 for each 100 ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by public or private sale) sufficient securities and property received in respect of a share distribution, rights and/or other distribution prior to such deposit to pay such charge.

The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by our company or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADRs), whichever is applicable:

 

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a fee of US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;

 

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a fee of US$0.02 or less per ADS (or portion thereof) for any cash distribution made pursuant to the deposit agreement;

 

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a fee of US$0.05 per ADS (or portion thereof) per calendar year for services performed by the depositary in administering our ADR program (which fee may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs as of the record date or record dates set by the depositary during each calendar year and shall be payable in the manner described in the next succeeding provision);

 

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any other charge payable by any of the depositary, any of the depositary’s agents, including, without limitation, the custodian, or the agents of the depositary’s agents in connection with the servicing of our shares or other deposited securities (which charge shall be assessed against registered holders of our ADRs as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such registered holders or by deducting such charge from one or more cash dividends or other cash distributions);

 

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a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities (treating all such securities as if they were shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those holders entitled thereto;

 

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stock transfer or other taxes and other governmental charges;

 

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cable, telex and facsimile transmission and delivery charges incurred at your request;

 

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transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities;

 

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expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars; and

 

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such fees and expenses as are incurred by the depositary (including without limitation expenses incurred in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in delivery of deposited securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable laws, rules or regulations.

 

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We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary. The fees described above may be amended from time to time.

The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide services to any holder until the fees and expenses owing by such holder for those services or otherwise are paid.

Payment of Taxes

ADR holders must pay any tax or other governmental charge payable by the custodian or the depositary on any ADS or ADR, deposited security or distribution. If an ADR holder owes any tax or other governmental charge, the depositary may (i) deduct the amount thereof from any cash distributions, or (ii) sell deposited securities and deduct the amount owing from the net proceeds of such sale. In either case the ADR holder remains liable for any shortfall. Additionally, if any tax or governmental charge is unpaid, the depositary may also refuse to effect any registration, registration of transfer, split-up or combination of deposited securities or withdrawal of deposited securities (except under limited circumstances mandated by securities regulations). If any tax or governmental charge is required to be withheld on any non-cash distribution, the depositary may sell the distributed property or securities to pay such taxes and distribute any remaining net proceeds to the ADR holders entitled thereto.

By holding an ADR or an interest therein, you will be agreeing to indemnify us, the depositary, its custodian and any of our or their respective directors, employees, agents and affiliates against, and hold each of them harmless from, any claims by any governmental authority with respect to taxes, additions to tax, penalties or interest arising out of any refund of taxes, reduced rate of withholding at source or other tax benefit obtained in respect of or arising out of, your ADSs.

Reclassifications, Recapitalizations and Mergers

If we take certain actions that affect the deposited securities, including (i) any change in par value, split-up, consolidation, cancellation or other reclassification of deposited securities or (ii) any recapitalization, reorganization, merger, consolidation, liquidation, receivership, bankruptcy or sale of all or substantially all of our assets, then the depositary may choose to:

(1) amend the form of ADR;

(2) distribute additional or amended ADRs;

(3) distribute cash, securities or other property it has received in connection with such actions;

(4) sell any securities or property received and distribute the proceeds as cash; or

(5) none of the above.

If the depositary does not choose any of the above options, any of the cash, securities or other property it receives will constitute part of the deposited securities and each ADS will then represent a proportionate interest in such property.

 

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Amendment and Termination

How may the deposit agreement be amended?

We may agree with the depositary to amend the deposit agreement and the ADSs without your consent for any reason. ADR holders must be given at least 30 days notice of any amendment that imposes or increases any fees or charges (other than stock transfer or other taxes and other governmental charges, transfer or registration fees, cable, telex or facsimile transmission costs, delivery costs or other such expenses), or prejudices any substantial existing right of ADR holders. If an ADR holder continues to hold an ADR or ADRs after being so notified, such ADR holder is deemed to agree to such amendment. Notwithstanding the foregoing, if any governmental body or regulatory body should adopt new laws, rules or regulations which would require amendment or supplement of the deposit agreement or the form of ADR to ensure compliance therewith, we and the depositary may amend or supplement the deposit agreement and the ADR at any time in accordance with such changed laws, rules or regulations, which amendment or supplement may take effect before a notice is given or you otherwise receive notice. No amendment, however, will impair your right to surrender your ADSs and receive the underlying securities, except in order to comply with mandatory provisions of applicable law.

How may the deposit agreement be terminated?

The depositary may, and shall at our written direction, terminate the deposit agreement and the ADR by mailing notice of such termination to the registered holders of ADRs at least 30 days prior to the date fixed in such notice for such termination; provided, however, if the depositary shall have (i) resigned as depositary under the deposit agreement, notice of such termination by the depositary shall not be provided to registered holders unless a successor depositary shall not be operating hereunder within 45 days of the date of such resignation, and (ii) been removed as depositary under the deposit agreement, notice of such termination by the depositary shall not be provided to registered holders of ADRs unless a successor depositary shall not be operating hereunder on the 90^th day after our notice of removal was first provided to the depositary. After termination, the depositary’s only responsibility will be (i) to deliver deposited securities to ADR holders who surrender their ADRs, and (ii) to hold or sell distributions received on deposited securities. As soon as practicable after the expiration of six months from the termination date, the depositary will sell the deposited securities which remain and hold the net proceeds of such sales, without liability for interest, in trust for the ADR holders who have not yet surrendered their ADRs. After making such sale, the depositary shall have no obligations except to account for such proceeds and other cash. The depositary will not be required to invest such proceeds or pay interest on them.

Limitations on Obligations and Liability to ADR holders

Limits on our obligations and the obligations of the depositary; limits on liability to ADR holders and holders of ADSs

Prior to the issue, registration, registration of transfer, split-up, combination, or cancellation of any ADRs, or the delivery of any distribution in respect thereof, the depositary and its custodian may require you to pay, provide or deliver:

 

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payment with respect thereto of (i) any stock transfer or other tax or other governmental charge, (ii) any stock transfer or registration fees in effect for the registration of transfers of shares or other deposited securities upon any applicable register and (iii) any applicable fees and expenses described in the deposit agreement;

 

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the production of proof satisfactory to the depositary and/or its custodian of (i) the identity of any signatory and genuineness of any signature and (ii) such other information, including without limitation, information as to citizenship, residence, exchange control approval, beneficial ownership of any securities, payment of applicable taxes or governmental charges, or legal or beneficial ownership and the nature of such interest, information relating to the registration of the shares on the

 

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books maintained by or on our behalf for the transfer and registration of shares, compliance with applicable law, regulations, provisions of or governing shares and terms of the deposit agreement and the ADRs, as it may deem necessary or proper; and

 

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compliance with such regulations as the depositary may establish consistent with the deposit agreement.

The issuance of ADRs, the acceptance of deposits of shares, the registration, registration of transfer, split-up or combination of ADRs or the withdrawal of shares, generally or in particular instances, may be limited when the ADR register or any register for shares is closed or when any such action is deemed advisable by the depositary; provided that the ability to withdraw shares may only be limited under the following circumstances: (i) temporary delays caused by closing transfer books of the depositary or our transfer books or the deposit of shares in connection with voting at a shareholders’ meeting, or the payment of dividends, (ii) the payment of fees, taxes, and similar charges, and (iii) compliance with any laws or governmental regulations relating to ADRs or to the withdrawal of shares.

The deposit agreement expressly limits the obligations and liability of the depositary, ourselves and our respective agents. Neither we nor the depositary nor any such agent will be liable if:

 

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present or future law, rule or regulation of the United States, the Cayman Islands, the People’s Republic of China or any other country, or of any governmental or regulatory authority or securities exchange or market or automated quotation system, the provisions of or governing any deposited securities, any present or future provision of our charter, any act of God, war, terrorism or other circumstance beyond our, the depositary’s or our respective agents’ control shall prevent, delay or subject to any civil or criminal penalty any act which the deposit agreement or the ADRs provide shall be done or performed by us, the depositary or our respective agents (including, without limitation, voting);

 

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it exercises or fails to exercise discretion under the deposit agreement or the ADR;

 

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it performs its obligations without gross negligence or bad faith;

 

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it takes any action or refrains from taking any action in reliance upon the advice of or information from legal counsel, accountants, any person presenting shares for deposit, any registered holder of ADRs or any other person believed by it to be competent to give such advice or information; or

 

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it relies upon any written notice, request, direction or other document believed by it to be genuine and to have been signed or presented by the proper party or parties.

Neither the depositary nor its agents have any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs. We and our agents shall only be obligated to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited securities or the ADRs, which in our opinion may involve us in expense or liability, if indemnity satisfactory to us against all expense (including fees and disbursements of counsel) and liability is furnished as often as may be required. The depositary and its agents may fully respond to any and all demands or requests for information maintained by or on its behalf in connection with the deposit agreement, any registered holder or holders of ADRs, any ADSs or otherwise to the extent such information is requested or required by or pursuant to any lawful authority, including without limitation laws, rules, regulations, administrative or judicial process, banking, securities or other regulators.

The depositary will not be responsible for failing to carry out instructions to vote the deposited securities or for the manner in which the deposited securities are voted or the effect of the vote. In no event shall we, the depositary or any of our respective agents be liable to holders of ADSs or interests therein for any indirect, special, punitive or consequential damages.

The depositary may own and deal in deposited securities and in ADSs.

 

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Disclosure of Interest in ADSs

To the extent that the provisions of or governing any deposited securities may require disclosure of or impose limits on beneficial or other ownership of deposited securities, other shares and other securities and may provide for blocking transfer, voting or other rights to enforce such disclosure or limits, you agree to comply with all such disclosure requirements and ownership limitations and to comply with any reasonable instructions we may provide in respect thereof. We reserve the right to request you to deliver your ADSs for cancellation and withdrawal of the deposited securities so as to permit us to deal with you directly as a holder of deposited securities and, by holding an ADS or an interest therein, you will be agreeing to comply with such instructions.

Books of Depositary

The depositary or its agent will maintain a register for the registration, registration of transfer, combination and split-up of ADRs, which register shall include the depositary’s direct registration system. You may inspect such records at such office during regular business hours, but solely for the purpose of communicating with other holders in the interest of business matters relating to the deposit agreement. Such register may be closed from time to time, when deemed expedient by the depositary or when requested by us.

The depositary will maintain facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADRs. These facilities may be closed from time to time, to the extent not prohibited by law.

Pre-release of ADSs

The depositary may issue ADSs prior to the deposit with the custodian of shares (or rights to receive shares). This is called a pre-release of the ADSs. A pre-release is closed out as soon as the underlying shares (or rights to receive shares from us or from any registrar, transfer agent or other entity recording share ownership or transactions) are delivered to the depositary. The depositary may pre-release ADSs only if:

 

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the depositary has received collateral for the full market value of the pre-released ADSs (marked to market daily); and

 

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each recipient of pre-released ADSs agrees in writing that he or she

 

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owns the underlying shares,

 

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assigns all rights in such shares to the depositary,

 

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holds such shares for the account of the depositary and

 

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will deliver such shares to the custodian as soon as practicable, and promptly if the depositary so demands.

In general, the number of pre-released ADSs will not evidence more than 30% of all ADSs outstanding at any given time (excluding those evidenced by pre-released ADSs). However, the depositary may change or disregard such limit from time to time as it deems appropriate. The depositary may retain for its own account any earnings on collateral for pre-released ADSs and its charges for issuance thereof.

Appointment

In the deposit agreement, each holder and each person holding an interest in ADSs, upon acceptance of any ADSs (or any interest therein) issued in accordance with the terms and conditions of the deposit agreement will be deemed for all purposes to:

 

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be a party to and bound by the terms of the deposit agreement and the applicable ADR or ADRs, and

 

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appoint the depositary its attorney-in-fact, with full power to delegate, to act on its behalf and to take any and all actions contemplated in the deposit agreement and the applicable ADR or ADRs, to adopt any and all procedures necessary to comply with applicable laws and to take such action as the depositary in its sole discretion may deem necessary or appropriate to carry out the purposes of the deposit agreement and the applicable ADR and ADRs, the taking of such actions to be the conclusive determinant of the necessity and appropriateness thereof.

 

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have          outstanding ADSs representing approximately         % of our common shares in issue. All of the ADSs sold in this offering will be freely transferable by persons other than our “affiliates” without restriction or further registration under the Securities Act. Sales of substantial amounts of our ADSs in the public market could adversely affect prevailing market prices of our ADSs. Prior to this offering, there has been no public market for our common shares or the ADSs, and while our application to list our ADSs on the New York Stock Exchange has been approved, we cannot assure you that a regular trading market will develop in the ADSs. We do not expect that a trading market will develop for our common shares not represented by the ADSs.

Lock-Up Agreements

Our directors, executive officers and certain shareholders have signed lock-up agreements under which they have agreed, subject to some exceptions, not to transfer or dispose of, directly or indirectly, any of our common shares, in the form of ADSs or otherwise, or any securities convertible into or exchangeable or exercisable for our common shares, in the form of ADSs or otherwise, for a period of 180 days after the date of this prospectus. The 180-day lock-up period may be extended under certain circumstances described in “Underwriting.” After the expiration of the 180-day period, the common shares or ADSs held by our directors, executive officers or principal shareholders may be sold subject to the restrictions under Rule 144 under the Securities Act or by means of registered public offerings.

Rule 144

In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned our common shares for at least one year is entitled to sell within any three-month period a number of common shares that does not exceed the greater of the following:

 

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1% of the then outstanding common shares, in the form of ADSs or otherwise, which will equal approximately          common shares immediately after this offering; or

 

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the average weekly trading volume of our common shares in the form of ADSs or otherwise, during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC.

Sales under Rule 144 must be made through unsolicited brokers’ transactions. They are also subject to manner of sale provisions, notice requirements and the availability of current public information about us.

Rule 144(k)

Under Rule 144(k), a person who is not our affiliate at any time during the three months preceding a sale, and who has beneficially owned the common shares, in the form of ADSs or otherwise, proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell those common shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, “144(k) shares” may be sold at any time.

Rule 701

Beginning 90 days after the date of this prospectus, persons other than affiliates who purchased common shares under a written compensatory plan or contract may be entitled to sell such shares in the United States in reliance on Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying

 

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with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 subject only to its manner-of-sale requirements. However, the Rule 701 shares would remain subject to lock-up arrangements and would only become eligible for sale when the lock-up period expires.

We have granted options and restricted share awards to directors, management, employees and consultants to purchase an aggregate of 6,802,495 common shares under our 2007 equity incentive plan. We have granted options for an aggregate of 2,441,844 commons shares to our directors, management and key employees under our 2007 long term incentive plan.

Registration Rights

Upon completion of this offering, certain holders of our common shares, in the form of ADSs or otherwise, or their transferees will be entitled to request that we register their shares under the Securities Act, following the expiration of the lockup agreements described above. See “Description of Share Capital—Registration Rights.”

 

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DESCRIPTION OF DEBT AND EQUITY-LINKED SECURITIES

Burnham Warrants

In April 2007, we issued warrants to purchase a total of 1,853,172 common shares at US$0.81155 per share, exercisable prior to August 25, 2011 or the date of completion of this offering, to Burnham Securities Inc. and Joel B. Gardner, in consideration of financial advisory and investment banking services rendered. We recorded the fair value at US$55,595 as paid-in capital. The warrants will be exercised for the issuance of 1,853,172 common shares prior to completion of this offering.

Series A Performance Warrants

In conjunction with the issuance of the Series A preference shares in April 2007, we issued warrants to Blue Ridge China and Equity International that entitle the holders to purchase additional Series A preference shares if we fail to meet specified profit performance targets in our fiscal years 2007 and 2008. If cumulative net income for the two years 2007 and 2008 is less than US$80 million, the holders of the warrants are entitled to purchase up to a maximum additional number of 3,987,009 fully paid Series A preference shares at an exercise price of US$0.01 per share. If cumulative net income for such years equals or exceeds US$80 million, or if we consummate a qualified initial public offering prior to March 31, 2008, then the warrants will expire without being exercised. Accordingly, we expect the warrants to expire upon the completion of this offering. The fair value assigned to the warrants as at the date of issuance was US$496,000.

Floating Rate Notes and Warrants

In an offshore transaction in April 2007, we issued US$75,000,000 principal amount of units, each unit consisting of one Guaranteed Senior Secured Floating Rate Note due 2010, referred to below as floating rate notes, in the principal amount of US$100,000 and one warrant to subscribe for common shares. Commencing on the date of closing of the placement, the floating rate notes and the warrants trade separately. The fair value assigned to the warrants as at the date of issuance was US$7.36 million.

We used a portion of the proceeds of the floating rate notes to repay the US$35 million bridge loans from Blue Ridge China and Equity International, together with accrued interest. We used the balance of the proceeds, together with the proceeds of the 2% Guaranteed Convertible Subordinated Notes due 2012, to acquire land use rights. The aggregate net proceeds from the issuance of the units and the convertible notes was US$95.8 million.

Guaranteed Senior Secured Floating Rate Notes due 2010

General

On April 13, 2007, we issued US$75,000,000 principal amount of Guaranteed Senior Secured Floating Rate Notes due 2010. The floating rate notes and the related guarantee are direct, unconditional obligations, senior in right and priority of payment to all subordinated debt of ourselves and our subsidiary, Xinyuan Real Estate, Ltd., respectively.

Interest Rate

The floating rate notes bear interest at a LIBOR rate determined by reference to rate for deposits in U.S. dollars for a six-month interest period plus a margin of 6.80%, payable semi-annually in arrears. As of September 30, 2007, the applicable interest rate was 12.1625%. Under circumstances described below in “—Certain Covenants and Events of Default,” we may be required to pay additional interest, which will accrue at 0.5% per annum in addition to the otherwise applicable interest rate on the floating rate notes.

 

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Maturity and Redemption

We are required to repurchase or redeem the outstanding floating rate notes on April 13, 2010 at a price equal to 100% of the principal amount, plus accrued but unpaid interest. We may redeem up to 100% of the outstanding principal amount of the floating rate notes at a price equal to 112% of the principal amount, plus accrued but unpaid interest to the date of redemption, using a portion of the net proceeds of this offering or the proceeds of debt incurred by us or any of our subsidiaries. In addition, we are permitted to redeem all of the floating rate notes at 100% of their principal amount, plus accrued but unpaid interest, in the event that changes in tax laws in the Cayman Islands or the jurisdiction of incorporation of any future guarantor would require us or such future guarantor to pay additional amounts under the floating rate notes or guarantee.

We are also required, at the option of the holders, to repurchase the floating rate notes in the event of a change of control, which includes the failure of our controlling shareholders to hold at least 27.5% of the total voting power of our voting stock or to be the beneficial holder of the largest percentage of voting power of our voting stock; the failure of Mr. Yong Zhang to maintain the ability to control our company; the occurrence of any transaction pursuant to which the holders of a majority of our voting stock (including preferred shares) no longer hold a majority after such transaction; and a change in the composition of a majority of the members of our Board of Directors. The repurchase price is 101% of the principal amount of the floating rate notes outstanding, plus accrued and unpaid interest to the repurchase date.

Guarantee and Security

Payment of the floating rate notes is guaranteed on a senior, unsubordinated basis by Xinyuan Real Estate Ltd., or Xinyuan Ltd., our subsidiary incorporated in the Cayman Islands, and is also to be guaranteed by any of our future direct or indirect subsidiaries. However, our subsidiaries domiciled in the PRC do not and will not guarantee the floating rate notes, unless a change of PRC law permits them to provide such guarantees without government approval.

The floating rate notes are secured by (i) the pledge of all of our shares in Xinyuan Ltd., (ii) the pledge of all of Xinyuan Ltd.’s shares in Xinyuan (China) Real Estate, Ltd., or the WFOE, and (iii) the pledge of a loan from Xinyuan Ltd. to the WFOE. We have submitted to the PRC regulatory authority the pledge of interests in the WFOE, referred to below as the WFOE share pledge.

Certain Covenants and Events of Default

The indenture governing the floating rate notes contains certain financial and operating covenants that, among other things, require us to maintain specified financial ratios and measures and limit our ability and the ability of our subsidiaries to:

 

Ÿ

incur additional debt;

 

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pay dividends on or make distributions in respect of our or any of our subsidiaries’ capital stock or make other restricted payments, including certain investments;

 

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create or permit to exist any liens on the collateral security securing the notes, or create or permit to exist any liens on any of our own property or assets or those of our subsidiaries without ensuring that the notes are secured equally and ratably with the debt secured by such liens;

 

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sell assets other than in the ordinary course of business;

 

Ÿ

permit our subsidiaries to enter into financing arrangements that could result in restrictions on the ability of such subsidiaries to pay dividends or other distributions;

 

Ÿ

enter into transactions with our affiliates unless such transactions are in our best interest, are no less favorable to us than those that could be obtained in a comparable arm’s-length transaction with a non-affiliate and that meet certain procedural requirements;

 

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Ÿ

sell or permit our subsidiaries to issue or sell shares of stock of any of our subsidiaries;

 

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engage in business activities that are not related to our core businesses;

 

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engage in certain sale and leaseback transactions; and

 

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make capital expenditures.

We have delivered to the collateral agent an officers’ certificate attaching written evidence that we have submitted the WFOE share pledge to the local Henan Province government counterpart of MOFCOM, and we are required, within 15 days of receiving MOFCOM approval, to deliver an officers’ certificate attaching written evidence that we have submitted the WFOE share pledge to the local counterpart of SAFE for approval (if required) and the SAIC for registration. If we fail to deliver these officers’ certificates and written evidence by such dates, we are required to pay additional interest on the floating rate notes until we have delivered the officers’ certificates and written evidence. Additional interest will accrue at the rate of 0.5% per annum.

The indenture governing the notes also includes customary events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the floating rate notes to become or to be declared to be due and payable. In such case, the trustee for the note holders may exercise remedies including enforcement of the collateral security and requiring performance under the guarantee. See “Risk Factors—Our current debt indentures contain certain financial and operating covenants that restrict our ability to pay dividends, raise further debt and take other corporate actions.”

Warrants

Each warrant entitles its holder to purchase the number of our common shares equal to the quotient obtained by dividing (i) US$40,000 by (ii) the warrant exercise price, which will be equal to 80% of the price per common share derived from this offering of our ADSs, subject to adjustment for dilutive events pursuant to customary anti-dilution provisions. The warrants are exercisable on or after the date of this offering until the later of the date that is three years after April 13, 2007 or the date that is six months after the closing of this offering.

2% Guaranteed Convertible Subordinated Notes due 2012

General

On April 13, 2007, we issued US$25,000,000 principal amount of 2% Guaranteed Convertible Subordinated Notes due 2012, or the convertible notes, in an offshore transaction not subject to the registration requirements of the Securities Act. Our payment obligations and those of the guarantor under the convertible notes and the related guarantee are subordinated in right and priority of payment to the payment in full, including redemption, of the floating rate notes, other than scheduled interest payments on the convertible notes.

Interest Rate

The convertible notes bear interest at the rate of 2% per annum, payable semi-annually in arrears. Under the circumstances described under “—Guaranteed Senior Secured Floating Rate Notes due 2010—Certain Covenants and Events of Default,” we may be required to pay additional interest, which will accrue at 0.5% per annum in addition to the otherwise applicable interest rate on the convertible notes.

Maturity and Redemption

Holders have the right to require us to repurchase the convertible notes of any exercising holder on October 15, 2010 at a price equal to 120% of the principal amount of, plus any accrued and unpaid interest on, the convertible notes of such holder. In addition, we are permitted to redeem all of the convertible notes at 100%

 

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of their principal amount, plus accrued but unpaid interest, in the event that changes in tax laws in the Cayman Islands or the jurisdiction of incorporation of any future guarantor would require us or such future guarantor to pay additional amounts under the convertible notes or guarantee. In such case, the convertible notes may be converted into common shares.

We are also required, at the option of the holders, to repurchase the convertible notes in the event of a change of control, as described under “—Guaranteed Senior Secured Floating Rate Notes due 2010—Maturity and Redemption,” at a repurchase price of 101% of the principal amount of the convertible notes outstanding, plus accrued and unpaid interest to the repurchase date. In addition, after this offering each holder of convertible notes has the right to require us to repurchase such holder’s convertible notes at 100% of the outstanding principal amount of such convertible notes, with accrued but unpaid interest, if our ADSs cease to be traded on a national or regional securities exchange or if, as a result of our merger, consolidation or amalgamation with another person, our ADSs cease to be so traded.

The convertible notes are secured by (i) the pledge of all of our shares in Xinyuan Ltd., (ii) the pledge of all of Xinyuan Ltd.’s shares in the WFOE and (iii) the pledge of a loan from Xinyuan Ltd. to the WFOE. We have submitted the WFOE share pledge to the PRC regulatory authority.

Conversion Rights and Conversion Rate

At any time after this offering, holders of convertible notes have the right to convert their subordinate convertible notes into common shares at the rate of 38,388.48 common shares for each US$100,000 principal amount of convertible notes, subject to adjustment pursuant to customary anti-dilution provisions in the indenture. If all of the convertible notes were converted at the initial conversion rate, a total of 9,597,120 common shares would be issued.

Certain Covenants and Events of Default

The indenture governing the convertible notes contains financial and operating covenants and events of default that are essentially identical to those contained in the indenture for the floating rate notes, except that the indenture for the convertible notes also includes covenants and events of default relating to the conversion of the convertible notes into our common shares.

 

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TAXATION

The following summary of the material Cayman Islands and U.S. federal income tax consequences of an investment in our ADSs or common shares is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or common shares, such as the tax consequences under state, local, non-U.S., and non-Cayman Islands tax laws. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of Maples and Calder, our Cayman Islands counsel. Subject to the qualifications herein, the discussion of U.S. federal income tax law is the opinion of Baker & McKenzie LLP, our U.S. counsel.

Cayman Islands Taxation

The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. No Cayman Islands stamp duty will be payable unless an instrument is executed in, brought to, or produced before a court of the Cayman Islands. The Cayman Islands are not parties to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.

U.S. Federal Income Taxation

Introduction

The following discussion, subject to the qualifications herein, is the opinion of Baker & McKenzie LLP, our U.S. counsel, on the material U.S. federal income tax consequences of the purchase, ownership and disposition of the common shares or ADSs (evidenced by ADRs) by U.S. Holders (as defined below). This discussion applies only to U.S. Holders that purchase the common shares or ADSs in the offering and hold the common shares or ADSs as capital assets. This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect, or to different interpretation. This discussion does not address all of the tax considerations that may be relevant to specific U.S. Holders in light of their particular circumstances or to U.S. Holders subject to special treatment under U.S. federal income tax law (such as banks, other financial institutions, insurance companies, tax-exempt entities, retirement plans, regulated investment companies, partnerships, dealers in securities, brokers, U.S. expatriates, persons subject to the alternative minimum tax, persons who have acquired the shares or ADSs as part of a straddle, hedge, conversion transaction or other integrated investment, persons that have a “functional currency” other than the U.S. dollar or persons that own (or are deemed to own) 10% or more (by voting power) of our stock). If a partnership holds common shares or ADSs, the consequences to a partner will generally depend upon the status of the partner and upon the activities of the partnership. A partner of a partnership holding common shares or ADSs should consult its own tax adviser regarding the U.S. tax consequences of its investment in the common shares or ADSs through the partnership. This discussion does not address any U.S. state or local or non-U.S. tax considerations or any U.S. federal estate, gift or alternative minimum tax considerations.

As used in this discussion, the term “U.S. Holder” means a beneficial owner of the common shares or ADSs that is, for U.S. federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation, or other entity classified as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or of any state or political subdivision thereof or therein, including the District of Columbia, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of the source thereof, or (iv) a trust with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or certain electing trusts that were in existence on August 19, 1996 and were treated as domestic trusts on that date.

 

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In general, for U.S. federal income tax purposes, a U.S. Holder of an ADS will be treated as the owner of the common shares represented by the ADSs and exchanges of common shares for ADSs, and ADSs for common shares, will not be subject to U.S. federal income tax.

PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSIDERATIONS APPLICABLE TO THEM RELATING TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE COMMON SHARES OR ADSs, INCLUDING THE APPLICABILITY OF U.S. FEDERAL, STATE AND LOCAL TAX LAWS OR NON-U.S. TAX LAWS, ANY CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.

Dividends

Subject to the discussion below under “—Passive Foreign Investment Company” and “—Controlled Foreign Corporation,” the gross amount of any distribution made by us on the common shares or ADSs generally will be treated as a dividend includible in the gross income of a U.S. Holder as ordinary income to the extent of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, when received by the U.S. Holder, in the case of common shares, or when received by the Depositary, in the case of ADSs. To the extent the amount of such distribution exceeds our current and accumulated earnings and profits as so computed, it will be treated first as a non-taxable return of capital to the extent of such U.S. Holder’s adjusted tax basis in such common shares or ADSs and, to the extent the amount of such distribution exceeds such adjusted tax basis, will be treated as gain from the sale of such common shares or ADSs. We, however, may not calculate earnings and profits in accordance with U.S. tax principles. In this case, all distributions by us to U.S. Holders will generally be treated as dividends.

Certain dividends received by non-corporate U.S. Holders, including individuals, in taxable years beginning before January 1, 2011, generally will be subject to a maximum income tax rate of 15%. This reduced income tax rate is applicable to dividends paid by “qualified foreign corporations” and only with respect to common shares or ADSs held for a minimum holding period of at least 61 days during a specified 121-day period, and if certain other conditions are met. We expect to be considered a qualified foreign corporation because our ADSs will be listed on the New York Stock Exchange. Accordingly, subject to the discussions below under “—Passive Foreign Investment Company” and “—Controlled Foreign Corporation,” dividends paid by us generally should be eligible for the reduced income tax rate. Dividends paid by us will not be eligible for the “dividends received” deduction generally allowed to corporate shareholders with respect to dividends received from U.S. corporations. The U.S. Treasury Department has announced its intention to promulgate rules pursuant to which U.S. Holders of the common shares or ADSs and intermediaries through whom such common shares or ADSs are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because such rules have not yet been issued, it is not clear whether we will be in a position to comply with them. U.S. Holders should consult their own tax advisors regarding the availability of the reduced dividend tax rate in the light of their particular circumstances.

Dividends paid by us will constitute income from sources outside the United States for U.S. foreign tax credit limitation purposes and will be categorized as “passive category income” or, in the case of certain U.S. Holders, as “general category income” for U.S. foreign tax credit purposes. The rules relating to the U.S. foreign tax credit are complex. U.S. Holders should consult their own tax advisors regarding the effect of these rules in their particular circumstance.

A distribution of additional common shares or ADSs to U.S. Holders with respect to their common shares or ADSs that is made as part of a pro rata distribution to all shareholders generally will not be subject to U.S. federal income tax.

 

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Sale or Other Disposition of Ordinary common shares or ADSs

Subject to the discussion below under “—Passive Foreign Investment Company” and “—Controlled Foreign Corporation,” a U.S. Holder generally will recognize gain or loss for U.S. federal income tax purposes upon a sale or other disposition of the common shares or ADSs in an amount equal to the difference between the amount realized from such sale or disposition and the U.S. Holder’s adjusted tax basis in such common shares or ADSs. Such gain or loss generally will be a capital gain or loss and will be long-term capital gain (taxable at a reduced rate for non-corporate U.S. Holders, including individuals) or loss if, on the date of sale or disposition, such common shares or ADSs were held by such U.S. Holder for more than one year. The deductibility of capital losses is subject to significant limitations. Any gain or loss on the sale or disposition will be treated as U.S. source income or loss for U.S. foreign tax credit limitation purposes.

Controlled Foreign Corporation

Special rules may apply to certain U.S. Holders if we are considered a controlled foreign corporation. A controlled foreign corporation, or CFC, is a foreign corporation in which U.S. Holders, who own directly, indirectly or constructively at least 10% of the voting power of the foreign corporation (each a U.S. 10% shareholder), collectively own more than 50% of the total combined voting power or total value of the corporation. Given our current ownership, there is a possibility that we may be a CFC following the issuance of the ADSs. In general, if we were a CFC for an uninterrupted period of 30 days or more during a taxable year, a U.S. 10% shareholder on the last day of our taxable year on which we were a CFC must include in income its pro rata share of our subpart F income and may be required to include in income its pro rata share of investment by us in U.S. property. Subpart F income includes, among other things, interest, dividends and other types of passive investment income. Further, if we were a CFC, some or all of the gain from the sale of our stock by a U.S. 10% shareholder may be characterized as ordinary income rather than capital gain and the taxation of distributions made by us to such a shareholder would be subject to special rules. The particular consequences of CFC status for a U.S. 10% shareholder cannot be determined until the last day of our taxable year on which we were a CFC. However, our status as a CFC would not affect the tax treatment of a U.S. Holder that is not a U.S. 10% shareholder. Because CFC status is a factual determination dependent on the circumstances existing on the relevant date and thereafter, our U.S. counsel expresses no opinion with respect to our CFC status following the issuance of the ADSs. Prospective investors should consult their own tax advisors to determine whether an ownership interest in us would cause them to become a U.S. 10% shareholder of our company or any of our subsidiaries and to determine the impact of such a classification.

Passive Foreign Investment Company

Based on the composition of our assets and income and the current expectations regarding the amount of the proceeds of the Offering, we believe that we should not be treated as a PFIC for U.S. federal income tax purposes with respect to our 2007 taxable year and we do not intend or anticipate becoming a PFIC for any future taxable year. The determination of PFIC status is a factual determination that must be made annually at the close of each taxable year. Because PFIC status is a factual determination based on actual results for the entire taxable year, our U.S. counsel expresses no opinion with respect to our PFIC status and expresses no opinion with respect to our expectations contained in this paragraph. Changes in the nature of our income or assets, the manner and rate at which we spend the Offering’s proceeds, or a decrease in the trading price of the common shares or ADSs may cause us to be considered a PFIC in the current or any subsequent year. However, as noted above, there can be no certainty in this regard until the close of the 2007 taxable year.

In general, a non-U.S. corporation will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (i) at least 75% of its gross income is “passive income” or (ii) on average at least 50% of the value of its assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, dividends, interest, royalties, rents and gains from commodities and securities transactions. Passive income does not include rents and royalties derived from the active conduct of a trade or business.

 

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If we are a PFIC in any year during which a U.S. Holder owns the common shares or ADSs, such U.S. Holder may experience certain adverse tax consequences. Such U.S. Holder could be liable for additional taxes and interest charges upon i) distributions received by the U.S. Holder on our common shares or ADSs during the year, but only to the extent that the aggregate of the distributions for the taxable year exceeds 125% of the average amount of distributions received by the U.S. Holder in the preceding three years, or (ii) upon a sale or other disposition of the common shares or ADSs at a gain, whether or not we continue to be a PFIC (each an “excess distribution”). The tax will be determined by allocating the excess distribution ratably to each day of the U.S. Holder’s holding period. The amount allocated to the current taxable year and any taxable year with respect to which we were not a PFIC will be taxed as ordinary income (rather than capital gain) earned in the current taxable year. The amount allocated to other taxable years will be taxed at the highest marginal rates applicable to ordinary income for such taxable years and, in addition, an interest charge will be imposed on the amount of such taxes.

These adverse tax consequences may be avoided if the U.S. Holder is eligible to and does elect to annually mark-to-market the common shares or ADSs.

If a U.S. Holder makes a mark-to-market election, such holder will generally include as ordinary income the excess, if any, of the fair market value of the ADSs or common shares at the end of each taxable year over their adjusted basis, and will be permitted an ordinary loss in respect of the excess, if any, of the adjusted basis of the ADSs or common shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Any gain recognized on the sale or other disposition of the ADSs or common shares will be treated as ordinary income. The mark-to-market election is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter on a qualified exchange or other market, as defined in the applicable Treasury regulations. We expect the ADSs or common shares to be “marketable stock” because our ADSs will be listed on the New York Stock Exchange.

We do not intend to prepare or provide the information that would entitle U.S. Holders to make a qualified electing fund election.

If we are regarded as a PFIC, a U.S. Holder of common shares or ADSs must make an annual return on IRS Form 8621, reporting distributions received and gains realized with respect to these interests. The reduced tax rate for dividend income, as discussed above under “—Dividends,” is not applicable to dividends paid by a PFIC.

Prospective investors should consult their own tax advisors regarding the U.S. federal income tax consequences of an investment in a PFIC.

Backup Withholding Tax and Information Reporting Requirements

Dividend payments made to U.S. Holders and proceeds paid from the sale or other disposition of their common shares or ADSs may be subject to information reporting to the Internal Revenue Service and possible U.S. federal backup withholding at a current rate of 28%. Certain exempt recipients (such as corporations) are not subject to these information reporting requirements. Backup withholding will not apply to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification, or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide IRS Form W-9 (Request for Taxpayer Identification Number and Certification).

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s U.S. federal income tax liability. A U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the Internal Revenue Service in a timely manner and furnishing any required information.

Prospective investors should consult their own tax advisors as to their qualification for an exemption from backup withholding and the procedure for obtaining this exemption.

 

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UNDERWRITING

We intend to offer the ADSs through the underwriters named below. Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as the representative of the underwriters. Subject to the terms and conditions of the underwriting agreement, the underwriters named below, through their representative, have severally agreed to purchase from us, and we have agreed to sell to them, the respective number of ADSs indicated in the following table.

 

Underwriters		Number of ADSs
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Deutsche Bank Securities Inc.
Allen & Company LLC
Total

Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as the sole global coordinator and sole book runner for the offering. The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the ADSs offered by this prospectus are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and the independent accountants. The underwriters are committed to take and pay for all of the ADSs offered by us if any ADSs are taken.

We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, and the applicable securities laws, and to contribute to payments the underwriters may be required to make in respect of these liabilities, losses and expenses.

We have granted to the underwriters an option to purchase up to                     additional ADSs within 30 days from the date of this prospectus, at the initial public offering price less the underwriting discount set forth on the cover page of this prospectus, solely to cover any over-allotments. To the extent that the underwriters exercise this option, each of the underwriters will become obligated, subject to certain conditions, to purchase a number of additional ADSs proportionate to that underwriter’s initial amount reflected in the table above. If the underwriters’ option is exercised in full, the total price to the public would be US$                    , the total underwriters’ discounts and commissions would be US$                     and total proceeds to us, before the deduction of expenses, would be US$                    .

The following table shows the public offering price, underwriting discount and proceeds before expenses to us. Such amounts are shown assuming either no exercise or full exercise of the underwriters’ over-allotment option to purchase the additional ADSs.

 

		Per Share		Without Option		With Option
		US$		US$		US$
Public offering price
Underwriting discount
Proceeds, before expenses, to us

We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately US$            , all of which will be borne by us.

The underwriters propose to offer the ADSs directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of US$              per ADS. The underwriters may allow, and such dealers may reallow, a concession not in excess of US$             per ADS to certain other dealers. After the initial public offering of the ADSs, the offering price and other selling terms may be changed. The representative of the underwriters has advised us that the underwriters do not intend to confirm sales to discretionary accounts in excess of             % of the ADSs offered in this offering.

 

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We have agreed that we will not for a period of 180 days after the date of this prospectus, without the prior written consent of the representative of the underwriters, (1) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any of our ADSs or common shares or any securities that are convertible into or exercisable or exchangeable for our ADSs or common shares; (2) file with the SEC a registration statement under the Securities Act relating to any of our ADSs or common shares; or (3) enter into any swap or other agreement or transaction that transfers, in whole or in part, directly or indirectly, the economic consequences of ownership of our ADSs or common shares (whether any such swap or transaction is settled by delivery of ADSs, common shares or other securities in cash or otherwise), except for the (1) sale and transfer of ADSs and the underlying common shares in the current offering; (2) issuance of common shares upon the exercise of employee stock options existing on the date of this prospectus and the filing of a Form S-8 in connection with our equity incentive plans; or (3) issuance of common shares upon the exercise of a warrant or the conversion of a security outstanding on the date of this prospectus.

Our officers, directors and certain shareholders have also agreed with the underwriters on lock-up restrictions which for a period of 180 days after the date of this prospectus restrict them from (1) directly or indirectly, offering, pledging, selling, contracting to sell, selling any option or contract to purchase or underwrite, purchasing any option or contract to sell, granting any option, right or warrant to purchase or otherwise transferring or disposing of any of our ADSs or common shares or any securities that are convertible into or exercisable or exchangeable for our ADSs or common shares; (2) filing or causing to be filed with the SEC any registration statement under the Securities Act relating to any of our ADSs or common shares (other than registration statements on Form S-8 with respect to our equity incentive plans); or (3) entering into any swap or other agreement or transaction that transfers, in whole or in part, directly or indirectly, the economic consequences of ownership of our ADSs or common shares (whether any such swap or transaction is settled by delivery of ADSs, common shares or other securities in cash or otherwise), except for the (1) sale and transfer of ADSs and the underlying common shares in the current offering; (2) exercise of stock options existing on the date of this prospectus; (3) any bona fide gift or gifts, provided that the donee agrees in writing with Merrill Lynch, Pierce, Fenner & Smith Incorporated to be bound by the terms of this lock-up restriction; (4) any disposition to any foundation, trust, partnership or limited liability company, as the case may be, solely for his or her direct or indirect benefit and/or for direct or indirect benefit of his or her immediate family, provided that such entity agrees in writing with Merrill Lynch, Pierce, Fenner & Smith Incorporated to be bound by the terms of this lock-up restriction and provided further that any such disposition shall not be made for value; and (5) any disposition by a partnership to a partner of such partnership or by a limited liability company to a member of such limited liability company, as the case may be, provided that such partner or member agrees in writing with Merrill Lynch, Pierce, Fenner & Smith Incorporated to be bound by the terms of this lock-up restriction and provided further that any such disposition shall not be made for value.

These lock-up provisions apply to ADSs, common shares and to securities convertible into or exchangeable or exercisable for or repayable with ADSs or common shares. They also apply to ADSs and common shares owned now or acquired later by the person executing the lock-up agreement or for which the person executing the lock-up agreement later acquires the power of disposition.

The 180-day lock-up period for us as well as for our officers, directors and certain shareholders will be extended if (A) during the last 17 days of the 180-day lock-up period, we issue earnings release or material news is released or a material event relating to us occurs or (B) prior to the expiration of the 180-day lock-up period, we announce that we will release earnings results or become aware that material news will be released or a material event will occur during the 16-day period beginning on the last day of the 180-day lock-up period. In either case the expiration of the lock-up period will be extended until the expiration of the 18-day period beginning on the date of the release of the earnings results or material news or the occurrence of the material event.

 

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Prior to the offering, there has been no public market for the ADSs. The offering price will be determined through negotiations among us and the underwriters. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are

 

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the valuation multiples of publicly traded companies that the representative of the underwriters believe to be comparable to us,

 

Ÿ

our financial information,

 

Ÿ

the history of, and the prospects for, our company and the industry in which we compete,

 

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an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues,

 

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the present state of our development, and

 

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the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

There can be no assurance that an active trading market for our ADSs will develop. It is also possible that after the offering, our ADSs will not trade in the public market at or above the initial public offering price.

A prospectus in electronic format will be made available on the website maintained by one or more of the underwriters of this offering and may also be made available on websites maintained by other underwriters. One or more of the underwriters may distribute prospectuses electronically. Neither we nor the underwriters will rely on third-party providers to comply with the prospectus delivery requirements. The representative may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representative to underwriters that may make Internet distributions on the same basis as other allocations.

Our ADSs have been approved for listing on New York Stock Exchange under the symbol “XIN.” To meet New York Stock Exchange distribution standards for the offering, the underwriters have undertaken to distribute the ADSs in a manner so as to create a minimum of 400 round lots of ADSs, and offer a minimum public float of 1.1 million ADSs in the United States with an anticipated aggregate market value not less than US$60 million.

The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated is 4 World Financial Center, 250 Vesey Street, New York, New York 10080. The address of Deutsche Bank Securities Inc. is 60 Wall Street, New York, NY 10005. The address of Allen & Company LLC is 711 Fifth Avenue, New York, NY 10022.

Reserved ADSs

At our request, the underwriters have reserved up to 5% of the ADSs being offered, at the initial public offering price, through a directed share program, for our vendors, employees, family members of employees, customers and other third parties. There can be no assurance that any of the reserved ADSs will be purchased.

The number of ADSs available for sale to the general public in this offering will be reduced to the extent that the reserved ADSs are purchased in the directed share program. Any reserved ADSs not purchased through the directed share program will be offered by the underwriters to the general public on the same basis as the other ADSs in this offering.

 

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Price Stabilization, Short Positions and Penalty Bids

Until the distribution of the ADSs is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our ADSs. However, the representative of the underwriters may engage in transactions that stabilize the price of the ADSs, such as bids or purchases to peg, fix or maintain that price.

In connection with this offering, the underwriters may make short sales of our ADSs and may purchase our ADSs on the open market to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of the ADSs than they are required to purchase in this offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional ADSs from us to cover over-allotments. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing the ADSs in the open market. In determining the source of the ADSs to close out the covered short position, the underwriters will consider, among other things, the price of the ADSs available for purchase in the open market as compared to the price at which they may purchase additional ADSs pursuant to the over-allotment option granted to them. “Naked” short sales are any sales in excess of such over-allotment option. The underwriters must close out any naked short position by purchasing the ADSs in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the ADSs in the open market after pricing that could adversely affect investors who purchase in this offering. Purchases of the ADSs to stabilize its price or to reduce a short position may have the effect of raising or maintaining the market price of the ADSs or preventing or retarding a decline in the market price of the ADSs. As a result, the price of the ADSs may be higher than the price that otherwise might exist in the open market.

The representative may also impose a penalty bid on underwriters and selling group members. This means that if the representative purchases ADSs in the open market to reduce the underwriter’s short position or to stabilize the price of such ADSs, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those ADSs. The imposition of a penalty bid may also affect the price of the ADSs in that it discourages resales of those ADSs.

Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the ADSs. In addition, neither we nor any of the underwriters makes any representation that the representative will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Other relationships

Merrill Lynch, Pierce, Fenner & Smith Incorporated and its affiliates has in the past provided, and may in the future provide, investment banking and other financial services to us and our affiliates in the ordinary course of business, including services provided in connection with our private placement of securities in April 2007, for which they received or will receive customary compensation.

Certain of the other underwriters or their affiliates may in the future provide investment banking and other financial services to us and our affiliates in the ordinary course of business and will receive customary compensation in connection therewith.

Selling Restrictions

General

No action has been or will be taken by us or by any underwriter in any jurisdiction except in the United States that would permit a public offering of our ADSs, or the possession, circulation or distribution of a prospectus or any other material relating to us and our ADSs in any country or jurisdiction where action for that purpose is required. Accordingly, our ADSs may not be offered or sold, directly or indirectly, and neither this

 

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prospectus nor any other material or advertisements in connection with this offering may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction.

This prospectus may be used by the underwriters and other dealers in connection with offers and sales of the ADSs, including sales of ADSs initially sold by the underwriters in the offering being made outside of the United States, to persons located in the United States.

European Economic Area

In relation to each member state of the European Economic Area which has implemented the Prospectus Directive, which we refer to as a Relevant Member State, with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, which we refer to as the Relevant Implementation Date, no offer of ADSs has been made and/or will be made to the public in that Relevant Member State prior to the publication of a prospectus in relation to the ADSs which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of ADSs may be made to the public in that Relevant Member State at any time: (1) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; (2) to any legal entity which has two or more of (i) an average of at least 250 employees during the last financial year; (ii) a total balance sheet of more than €43,000,000 and (iii) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or (3) in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this provision, the expression an “offer of ADSs to the public” in relation to any ADSs in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the ADSs to be offered so as to enable an investor to decide to purchase or subscribe for the ADSs, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression Prospectus Directive means Directive 2003/71/ EC and includes any relevant implementing measure in each Relevant Member State.

United Kingdom

No offer of ADSs has been made or will be made to the public in the United Kingdom within the meaning of Section 102B of the Financial Services and Markets Act 2000, as amended, or FSMA, except to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities or otherwise in circumstances which do not require the publication by us of a prospectus pursuant to the Prospectus Rules of the Financial Services Authority, or FSA. Each underwriter: (i) has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of FSMA) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which Section 21 of FSMA does not apply to us; and (ii) has complied with and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the ADSs in, from or otherwise involving the United Kingdom.

Singapore

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the ADSs may not be circulated or distributed, nor may the ADSs be offered or sold, nor be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (1) to an institutional investor under Section 274 of the Securities

 

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and Futures Act, Chapter 289 of Singapore (the “SFA”), (2) to a relevant person pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA or (3) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the ADSs are subscribed or purchased under Section 275 by a relevant person which is: (1) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (2) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of which is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for six months after that corporation or that trust has acquired the ADSs under Section 275 except: (1) to an institutional investor (for corporations, under Section 274 of the SFA) or to a relevant person defined in Section 275(2) of the SFA, or any person pursuant to an offer that is made on terms that such shares, debentures and units of shares and debentures of that corporation or such rights and interest in that trust are acquired at a consideration of not less than US$200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets, and further for corporations, Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA, (2) where no consideration is given for the transfer; or (3) where the transfer is by operation of law.

Hong Kong

The ADSs may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the ADSs may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to ADSs which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

Japan

The ADSs have not been and will not be registered under the Securities and Exchange Law of Japan, or the Securities and Exchange Law, and ADSs will not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to any exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.

Cayman Islands

This prospectus does not constitute an invitation or offer to the public in the Cayman Islands of the ADSs, whether by way of sale or subscription. The underwriters have not offered or sold, and will not offer or sell, directly or indirectly, any ADSs in the Cayman Islands.

 

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People’s Republic of China

This prospectus has not been and will not be circulated or distributed in the PRC, and ADSs may not be offered or sold, and will not be offered or sold to any person for re-offering or resale, directly or indirectly, to any resident of the PRC except pursuant to applicable laws and regulations of the PRC. For the purpose of this paragraph only, the PRC does not include Taiwan and the special administrative regions of Hong Kong and Macau.

United Arab Emirates

This prospectus is not intended to constitute an offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates (UAE). The ADSs have not been and will not be registered under Federal Law No. 4 of 2000 Concerning the Emirates Securities and Commodities Authority and the Emirates Security and Commodity Exchange, or with the UAE Central Bank, the Dubai Financial Market, the Abu Dhabi Securities Market or with any other UAE exchange.

The offering, the ADSs and interests therein have not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities in the UAE, and do not constitute a public offer of securities in the UAE in accordance with the Commercial Companies Law, Federal Law No. 8 of 1984 (as amended) or otherwise.

In relation to its use in the UAE, this prospectus is strictly private and confidential and is being distributed to a limited number of investors and must not be provided to any person other than the original recipient, and may not be reproduced or used for any other purpose. The interests in the ADSs may not be offered or sold directly or indirectly to the public in the UAE.

Kingdom of Bahrain

The offering is restricted in the Kingdom of Bahrain to banks, financial institutions and professional investors and any person receiving this prospectus in the Kingdom of Bahrain and not falling within those categories is ineligible to purchase the ADSs.

State of Kuwait

The ADSs have not been authorized or licensed for offering, marketing or sale in the State of Kuwait. The distribution of this prospectus and the offering and sale of the ADSs in the State of Kuwait is restricted by law unless a license is obtained from the Kuwait Ministry of Commerce and Industry in accordance with Law 31 of 1990. Persons into whose possession this prospectus comes are required by us and the underwriters to inform themselves about and to observe such restrictions. Investors in the State of Kuwait who approach us or any of the underwriters to obtain copies of this prospectus are required by us and the underwriters to keep such prospectus confidential and not to make copies thereof or distribute the same to any other person and are also required to observe the restrictions provided for in all jurisdictions with respect to offering, marketing and the sale of the ADSs.

Kingdom of Saudi Arabia

No action has been or will be taken in the Kingdom of Saudi Arabia that would permit a public offering or private placement of the ADSs in the Kingdom of Saudi Arabia, or possession or distribution of any offering materials in relation thereto. The ADSs may only be offered and sold in the Kingdom of Saudi Arabia in accordance with Part 5 (Exempt Offers) of the Offers of Securities Regulations dated 20/8/1425 AH corresponding to 4/10/2004 (the “Regulations”) and, in accordance with Part 5 (Exempt Offers) Article 17(a)(3) of the Regulations, the ADSs will be offered to no more than 60 offerees in the Kingdom of Saudi Arabia with

 

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each such offeree paying an amount not less than Saudi Riyals one million or its equivalent. Investors are informed that Article 20 of the Regulations places restrictions on secondary market activity with respect to the ADSs. Any resale or other transfer, or attempted resale or other transfer, made other than in compliance with the above-stated restrictions shall not be recognized by us.

Australia

This prospectus has not been lodged with the Australian Securities & Investments Commission, or ASIC, or the Australian Securities Exchange Limited, or ASX, and no prospectus or other disclosure document (as defined in the Corporation Act 2001 of Australia) in relation to the securities has been or will be lodged with ASIC or ASX. The ADSs offered under this prospectus have not been and will not be registered under the applicable securities laws of Australia. The ADSs offered under this prospectus will not be offered for issue or sale in Australia (including an offering or invitation which is received by a person in Australia) unless (i) the minimum aggregate consideration payable by each offeree is at least A$500,000 (or its equivalent in an alternate currency) (disregarding moneys lent by the offeror or its associates) or the offer otherwise does not require disclosure to investors under Part 6D.2 of the Corporations Act, and (ii) such action complies with applicable laws and directives and does not require any document to be lodged with ASIC.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions and the availability of professional and support services. However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include that the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition, Cayman Islands companies do not have standing to sue before the federal courts of the United States. Our constituent documents do not contain provisions requiring that disputes be submitted to arbitration, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders.

All of our current operations are conducted in China, and substantially all of our assets are located in China. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon us or such persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed CT Corporation System as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

Maples and Calder, our counsel as to Cayman Islands law, and TransAsia Lawyers, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

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recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

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entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Maples and Calder has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as debt in the courts of the Cayman Islands under the common law doctrine of obligation. Civil liability provisions of the U.S. federal and state securities law permit punitive damages against us; however, according to Maples and Calder, the Cayman Island courts would not recognize or enforce judgments against us to the extent the judgment is punitive or penal. It is uncertain as to whether a judgment obtained from the U.S. courts under civil liability provisions of the securities law would be determined by the Cayman Islands courts as penal or punitive in nature. Such a determination has yet to be made by any Cayman Islands court.

TransAsia Lawyers has advised us further that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions, provided that the foreign judgments do not violate the basic principles of laws of the PRC or its sovereignty, security or social and public interests. As there is currently no treaty or other agreement of reciprocity between China and the United States governing the recognition of a judgment, there is uncertainty as to whether a PRC court would enforce a judgment rendered by a court in the United States.

 

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EXPENSES RELATING TO THIS OFFERING

Set forth below is an itemization of the total expenses, excluding underwriting discounts and commissions, that are expected to be incurred in connection with the offer and sale of the ADSs by us. With the exception of the Securities and Exchange Commission registration fee, the Financial Industry Regulatory Authority filing fee and the New York Stock Exchange listing fee, all amounts are estimates.

 

Securities and Exchange Commission Registration Fee		$
New York Stock Exchange Listing Fee
Financial Industry Regulatory Authority Filing Fee
Printing Expenses
Legal Fees and Expenses
Accounting Fees and Expenses
Depositary Expense
Miscellaneous
Total		$

LEGAL MATTERS

The validity of the ADSs and certain other legal matters in connection with this offering will be passed upon for us by Baker & McKenzie LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by Shearman & Sterling LLP. The validity of the common shares represented by the ADSs offered in this offering will be passed upon for us by Maples and Calder. Legal matters as to Chinese law will be passed upon for us by TransAsia Lawyers and for the underwriters by King & Wood. Baker & McKenzie LLP may rely upon Maples and Calder with respect to matters governed by Cayman Islands’ law and TransAsia Lawyers with respect to matters governed by Chinese law.

EXPERTS

Ernst & Young Hua Ming, independent registered public accounting firm, has audited our consolidated financial statements at December 31, 2004, 2005, and 2006 and for each of the three years in the period ended December 31, 2006, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young Hua Ming’s report, given on their authority as experts in accounting and auditing.

 

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WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form F-1, including relevant exhibits and securities under the Securities Act with respect to underlying common shares represented by the ADSs to be sold in this offering. A related registration statement on F-6 will be filed with the SEC to register the ADSs. This prospectus, which constitutes a part of the registration statement, does not contain all of the information contained in the registration statement. You should read the registration statement and its exhibits and schedules for further information with respect to us and our ADSs.

Immediately upon completion of this offering we will become subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we will be required to file reports, including annual reports on Form 20-F, and other information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements to shareholders. All information filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at 100 F. Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Additional information may also be obtained over the Internet at the SEC’s website at www.sec.gov.

 

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Xinyuan Real Estate Co., Ltd. and Subsidiaries

Consolidated Financial Statements

As of and for the years ended December 31, 2004, 2005 and 2006

CONTENTS

 

		Pages
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2004, 2005 and 2006		F-3 – F-4
Consolidated Statements of Operations for the years ended December 31, 2004, 2005 and 2006		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006		F-6
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2004, 2005 and 2006		F-7
Notes to Consolidated Financial Statements		F-8 – F-50

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

of Xinyuan Real Estate Co., Ltd.

We have audited the accompanying consolidated balance sheets of Xinyuan Real Estate Co., Ltd. (the “Company”) and its subsidiaries (collectively the “Group”) as of December 31, 2004, 2005 and 2006, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years then ended. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Group’s internal controls over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Xinyuan Real Estate Co., Ltd. and subsidiaries at December 31, 2004, 2005 and 2006, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.

Ernst & Young Hua Ming

Shanghai, The People’s Republic of China

August 28, 2007

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

				December 31,
		Notes		2004		2005		2006
				US$		US$		US$
ASSETS
Current assets
Cash and cash equivalents				5,249,225		14,928,747		34,914,210
Restricted cash				11,399,358		5,385,441		32,010,858
Accounts receivable				—		146,217		202,875
Other receivables				802,747		675,410		1,289,601
Other deposits and prepayments				1,243,280		1,779,055		2,932,534
Advances to suppliers				1,125,693		770,475		2,628,914
Inventories				—		—		252,253
Real estate property development completed		3		4,448,644		2,341,766		4,454,045
Real estate property under development		3		38,516,589		55,746,719		87,619,265
Investment held for sale				—		111,521		—
Due from shareholders		13		197,180		151,777		40,934
Due from related parties		13		1,163,965		7,554,361		7,728,227
Due from employees		13		974,512		433,962		313,807
Other current assets				—		331,856		38,013
Total current assets				65,121,193		90,357,307		174,425,536
Real estate property under development		3		8,886,374		9,110,393		19,184,534
Real estate properties held for lease, net		4		7,654,971		7,408,429		5,540,542
Property and equipment, net		5		1,074,928		1,135,313		3,469,022
Other long-term investment		6		241,648		241,648		241,648
Interests in an equity investee		7		—		446,086		—
Goodwill		8		—		—		1,105,408
Property management rights		8		—		—		910,665
Other assets				25,227		3,207		78,417
TOTAL ASSETS				83,004,341		108,702,383		204,955,772

The accompanying notes are an integral part of these financial statements.

 

F-3

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS—(Continued)

As of December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

				December 31,
		Notes		2004		2005		2006
				US$		US$		US$
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable				4,676,567		7,288,552		13,280,910
Short-term bank loans		9		30,145,593		24,410,795		22,667,025
Customer deposits		11		31,023,639		43,834,021		25,531,985
Deferred tax liabilities				—		—		1,211,337
Income tax payable				1,860,805		2,158,318		7,104,573
Other payables and accrued liabilities				2,483,826		2,992,522		10,056,978
Payroll and welfare payable				140,754		11,224		197,552
Due to related parties		13		613,281		1,319,463		3,763,843
Due to employees		13		1,910,329		213,093		25,612
Due to shareholders		13		—		—		35,000,000
Total current liabilities				72,854,794		82,227,988		118,839,815
Long-term bank loans		10		3,141,425		7,434,760		12,806,229
Warrant liability of Series A Convertible Redeemable Preference Shares		14		—		—		631,000
Deferred tax liabilities		12		111,672		2,018,066		3,786,681
Total liabilities				76,107,891		91,680,814		136,063,725
Minority interest				—		21,820		—
Commitments and contingencies		17
Preference shares
Preference shares, US$0.0001 par value:
Authorized—50,000,000 shares
Issued and outstanding—30,805,400 shares for 2006 (2004 and 2005: nil), with aggregate amount of liquidation preference of US$51,666,817		14		—		—		22,309,126
Shareholders’ equity
Common shares, US$0.0001 par value:
Authorized—450,000,000 shares
Issued and outstanding—75,704,379 shares for 2006 (2004 and 2005: 60,000,000 shares); 106,509,779 shares for proforma (unaudited)		14		6,000		6,000		7,570
Additional paid-in capital				2,409,618		2,657,445		17,264,455
Statutory reserves				1,024,971		3,703,840		4,066,854
Retained earnings				3,454,888		10,338,810		23,679,944
Accumulated other comprehensive earnings				973		293,654		1,564,098
Total shareholders’ equity				6,896,450		16,999,749		46,582,921
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY				83,004,341		108,702,383		204,955,772

The accompanying notes are an integral part of these financial statements.

 

F-4

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

				Year ended December 31,
		Notes		2004			2005			2006
				US$			US$			US$
Revenue:
Real estate sales, net of sales taxes of US$2,085,456 in 2004, US$3,596,896 in 2005 and US$8,334,327 in 2006, respectively				35,320,585			61,769,436			141,577,738
Real estate lease income				143,908			132,127			204,411
Other revenue				168,017			40,487			585,072
Total revenue				35,632,510			61,942,050			142,367,221
Cost of revenue:
Cost of real estate sales				(26,123,957	)		(42,199,481	)		(107,267,400	)
Cost of real estate lease income				(252,143	)		(432,848	)		(442,020	)
Other costs							—			(486,307	)
Total cost of revenue				(26,376,100	)		(42,632,329	)		(108,195,727	)
Gross profit				9,256,410			19,309,721			34,171,494
Selling and distribution expenses				(1,603,955	)		(2,175,143	)		(2,996,226	)
General and administrative expenses				(1,004,114	)		(1,695,400	)		(3,625,800	)
Operating income				6,648,341			15,439,178			27,549,468
Interest income				66,955			191,000			461,335
Interest expense				(820,149	)		(834,469	)		(727,041	)
Share of loss in an equity investee		7		—			—			(446,086	)
Income from operations before income taxes				5,895,147			14,795,709			26,837,676
Income taxes		12		(1,952,145	)		(5,247,809	)		(10,717,338	)
Net income before minority interest				3,943,002			9,547,900			16,120,338
Minority interest				—			14,891			2,572
Net income				3,943,002			9,562,791			16,122,910
Accretion of Series A convertible redeemable preference shares				—			—			(942,301	)
Net income attributable to ordinary shareholders				3,943,002			9,562,791			15,180,609
Earnings per share:
Basic and diluted		15		0.07			0.16			0.21
Shares used in computation:
Basic and diluted		15		60,000,000			60,000,000			72,694,467
Pro forma earnings per share (unaudited):
Basic and diluted		15		—			—			0.17
Pro forma shares used in computation (unaudited):
Basic and diluted		15		—			—			92,612,479

The accompanying notes are an integral part of these financial statements.

 

F-5

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

		Year ended December 31,
		2004			2005			2006
		US$			US$			US$
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		3,943,002			9,562,791			16,122,910
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		375,971			546,832			734,421
Loss on disposal of property and equipment		—			6,578			—
Deferred tax (benefit) expense		(69,604	)		1,879,505			2,520,756
Share of loss in an equity investee					—			446,086
Minority interests’ share of net loss of a subsidiary		—			(14,891	)		(2,572	)
Changes in operating assets and liabilities:
Accounts receivable		53,786			(144,371	)		(56,658	)
Real estate property development completed		3,071,143			2,752,417			551,209
Real estate property under development		(29,659,594	)		(16,636,682	)		(43,923,966	)
Inventories		—			—			141,776
Advances to suppliers		(372,271	)		379,146			(1,858,439	)
Other receivables		(100,897	)		145,991			124,712
Other deposits and prepayments		(854,912	)		(825,296	)		(2,281,851	)
Other assets		(362	)		21,900			218,633
Accounts payable		1,404,671			2,460,968			5,928,319
Customer deposits		17,755,699			11,865,584			(18,623,686	)
Income tax payable		1,794,108			246,790			2,567,764
Other payables and accrued liabilities		409,354			308,133			9,711,363
Net cash (used in) provided by operating activities		(2,249,906	)		12,555,395			(27,679,223	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments		—			(556,958	)		—
Acquisition of subsidiaries, net of cash acquired		—			—			(1,578,630	)
Proceed from disposal of investment		—			—			111,521
Disposal/(improvement) of real estate properties held for lease		—			64,999			(835,069	)
Purchases of property and equipment		(103,145	)		(174,245	)		(719,728	)
Net cash (used in) provided by investing activities		(103,145	)		(666,204	)		(3,021,906	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common shares		—			—			14,552,985
Proceeds from issuance of preference shares		—			—			21,918,420
Capital contribution from minority interests		—			277,895			—
Capital contribution from shareholders		1,208,570			—			—
Distribution paid to shareholders		—			—			(1,476,461	)
(Increase)/decrease of restricted cash		(7,606,896	)		6,225,708			(26,625,417	)
Repayments of short-term bank loans		—			(36,985,832	)		(24,846,605	)
Proceeds from short-term bank loans		20,479,424			28,360,291			15,930,558
Repayments of long-term bank loans		(5,859,894	)		—			—
Proceeds from long-term bank loans		—			6,362,101			12,543,746
Proceeds from shareholders’ loans		—			—			35,000,000
Advances from shareholders		68,954			49,807			110,844
(Loan to)/repayments from related parties		(558,284	)		(5,598,543	)		2,270,514
Loan to employees		(2,951,851	)		(1,165,701	)		(83,544	)
Net cash provided by (used in) financing activities		4,780,023			(2,474,274	)		49,295,040
NET INCREASE IN CASH AND CASH EQUIVALENTS		2,426,972			9,414,917			18,593,911
Effect of exchange rate changes on cash and cash equivalents		(180	)		264,605			1,391,552
Cash and cash equivalents, at beginning of year		2,822,433			5,249,225			14,928,747
CASH AND CASH EQUIVALENTS, AT END OF YEAR		5,249,225			14,928,747			34,914,210
SUPPLEMENTARY INFORMATION ON CASH FLOWS
Income taxes paid		362,051			3,265,849			4,820,426
Total interest paid		1,302,114			1,706,655			2,032,322

The accompanying notes are an integral part of these financial statements.

 

F-6

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

		Number of shares		Issued common shares at par		Additional paid-in capital		Statutory reserves		Comprehensive income			Accumulated earnings			Accumulated other comprehensive earnings			Total
				US$		US$		US$		US$			US$			US$			US$
BALANCE AT DECEMBER 31, 2003		60,000,000		6,000		1,201,048		46,143		—			490,714			1,179			1,745,084
Capital contribution from shareholders		—		—		1,208,570		—		—			—			—			1,208,570
Foreign currency translation loss, net of tax		—		—		—		—		(206	)		—			(206	)		(206	)
Net income		—		—		—		—		3,943,002			3,943,002			—			3,943,002
Appropriation of statutory reserves		—		—		—		978,828		—			(978,828	)		—			—
BALANCE AT DECEMBER 31, 2004		60,000,000		6,000		2,409,618		1,024,971		3,942,796			3,454,888			973			6,896,450
Acquisition of minority interest in a subsidiary (Note 1)		—		—		247,827		—		—			—			—			247,827
Foreign currency translation gain, net of tax		—		—		—		—		292,681			—			292,681			292,681
Net income		—		—		—		—		9,562,791			9,562,791			—			9,562,791
Appropriation of statutory reserves		—		—		—		2,678,869		—			(2,678,869	)		—			—
BALANCE AT DECEMBER 31, 2005		60,000,000		6,000		2,657,445		3,703,840		9,855,472			10,338,810			293,654			16,999,749
Issuance of Burnham Warrants		—		—		55,595		—		—			—			—			55,595
Issuance of common shares		15,704,379		1,570		14,551,415		—		—			—			—			14,552,985
Foreign currency translation gain, net of tax		—		—		—		—		1,270,444			—			1,270,444			1,270,444
Net income		—		—		—		—		16,122,910			16,122,910			—			16,122,910
Accretion of Series A convertible redeemable preference shares		—		—		—		—		—			(942,301	)		—			(942,301	)
Distribution paid to shareholders		—		—		—		—		—			(1,476,461	)		—			(1,476,461	)
Appropriation of statutory reserves		—		—		—		363,014		—			(363,014	)		—			—
BALANCE AT DECEMBER 31, 2006		75,704,379		7,570		17,264,455		4,066,854		17,393,354			23,679,944			1,564,098			46,582,921

The accompanying notes are an integral part of these financial statements.

 

F-7

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

1. Background information of business and organization

Xinyuan Real Estate Limited (“Xinyuan”) was incorporated on January 27, 2006 as a privately held company under the law of the Cayman Islands by Mr. Yong Zhang and his wife Ms. Yuyan Yang (collectively, the “Zhang Family”).

Henan Xinyuan Real Estate Co., Ltd (“Henan Xinyuan”) was incorporated on May 19, 1997 by the Zhang Family as a privately held company under the law of the People’s Republic of China (the “PRC” or “China”). Henan Xinyuan is principally engaged in the construction, development and sale of residential real estate units in Henan province of the PRC.

On March 16, 2006, Henan Xinyuan acquired an additional 20% interest in Henan Wanzhong Real Estate Co., Ltd. (“Henan Wanzhong”), which was incorporated on February 6, 2005, from Ms. Yuyan Yang to bring its total interest therein to 100%.

Pursuant to a reorganization plan (the “Reorganization”), Xinyuan incorporated Xinyuan Real Estate (China) Development Co., Ltd (the “WFOE”) with issued and fully subscribed share capital of US$5 million on April 10, 2006. On August 7, 2006, the WFOE and the Zhang Family entered into an equity transfer agreement in which the Zhang Family transferred all of its equity interests in Henan Xinyuan to the WFOE, a wholly owned subsidiary of Xinyuan in exchange for US$1.25 million. Henan Xinyuan registered the change of shareholders along with its amended articles of association with the local Administration of Industry and Commerce (“AIC”) on August 7, 2006. A new business license for Henan Xinyuan was issued on August 10, 2006.

According to relevant PRC laws and regulations, an equity transfer is completed upon registration with the local AIC and the issuance of a new business license. Therefore, the equity transfer of Henan Xinyuan from the Zhang Family to the WFOE was considered to be legally completed on August 10, 2006. The Reorganization, as well as the acquisition of the 20% minority interest in Henan Wanzhong, were accounted for as a legal reorganization of entities under common control, in a manner similar to a pooling-of-interest. Accordingly, the accompanying consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented. The assets and liabilities of the parties to the reorganization have been stated at their historical amounts in the consolidated financial statements. Cash consideration paid by Xinyuan to the Zhang Family for the acquisition of equity interests in Henan Xinyuan and Henan Wanzhong is recorded as a distribution to shareholders. The financial statements for the years ended December 31, 2004 and 2005 have been restated, as appropriate, to reflect these transactions.

On August 25, 2006, the Company issued 18,483,240 Series A convertible redeemable preference shares and one warrant to Blue Ridge China Partners, L.P. (“Blue Ridge China”) and 12,322,160 Series A convertible redeemable preference shares and one warrant to EI Fund II China, LLC (“Equity International”) for US$15 million and US$10 million, respectively. After the preference shares subscription, Blue Ridge China and Equity International collectively owned 34% voting rights in the Company and obtained certain substantive participating rights as defined in Emerging Issues Task Force (“EITF”) No. 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights”. Because of these substantive participating rights, the Zhang Family is no longer considered the controlling shareholder of the Company starting August 25, 2006 for accounting purposes.

 

F-8

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

On August 30, 2006, Henan Xinyuan acquired a 100% equity interest in each of Henan Xinyuan Property Management Co., Ltd. (“Xinyuan Property Management”), Henan Xinyuan Real Estate Agency Co., Ltd. (“Xinyuan Agency”), Zhengzhou Mingyuan Landscape Engineering Co., Ltd. (“Mingyuan Landscape”) and Zhengzhou Xinyuan Computer Network Engineering Co., Ltd. (“Xinyuan Network”) (collectively, the “Ancillary Companies”) from the Zhang Family for a cash consideration of US$2.1 million. The terms of the acquisitions of the Ancillary Companies were not finalized as part of the Reorganization. The acquisition was accounted for using the purchase method of accounting as the Zhang Family, subsequent to August 25, 2006, is deemed, for accounting purposes, no longer have control over the Group due to the substantive participating rights of Blue Ridge China and Equity International. The acquired assets and liabilities of the Ancillary Companies were recorded at fair value on the acquisition date.

As discussed further in Note 19(b), on April 9, 2007, a second reorganization was transacted through an even exchange of securities. The exchange was accounted for as an exchange of shares that lacks substance, in a manner similar to a pooling of interest. As a result of this share exchange, Xinyuan became the wholly owned subsidiary of Xinyuan Real Estate Co., Ltd. Accordingly, the accompanying consolidated financial statements have been prepared as if the corporate structure, comprising Xinyuan Real Estate Co., Ltd. and Subsidiaries, subsequent to April 9, 2007 had been in existence throughout the periods presented.

The Company’s subsidiaries and an equity investee are set out below:

 

Company name		Place and date of incorporation		Registered/ paid-up capital RMB’000		Percentage of equity directly attributable to the Group			Principal activities
Subsidiary companies:
WFOE*		The PRC April 10, 2006		182,886		100	%		Investment holding company
Henan Xinyuan		The PRC May 19, 1997		50,000		100	%		Real estate development
Henan Wanzhong Real Estate Co., Ltd.**		The PRC February 6, 2005		10,000		100	%		Real estate development
Qingdao Xinyuan Xingrui Real Estate Co., Ltd.*		The PRC February 9, 2006		10,000		100	%		Real estate development
Shandong Xinyuan Real Estate Co., Ltd.*		The PRC June 2, 2006		20,000		100	%		Real estate development
Henan Xinyuan Property Management Co., Ltd.#		The PRC December, 28 1998		3,000		100	%		Providing property management services
Henan Xinyuan Real Estate Agency Co., Ltd.#		The PRC November 6, 2005		1,000		100	%		Real estate sales, purchase and lease services
Zhengzhou Xinyuan Landscape Engineering Co., Ltd.#		The PRC February 17, 2004		1,000		100	%		Landscaping engineering and management

 

F-9

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

Company name		Place and date of incorporation		Registered/ paid-up capital RMB’000		Percentage of equity directly attributable to the Group			Principal activities
Subsidiary Companies:
Zhengzhou Xinyuan Computer Network Engineering Co., Ltd.#		The PRC May 26, 2004		2,000		100	%		Installation of intercom systems
Suzhou Xinyuan Real Estate Co., Ltd.*		The PRC November 24, 2006		50,000		100	%		Real estate development
Anhui Xinyuan Real Estate Co., Ltd.*		The PRC December 7, 2006		20,000		100	%		Real estate development
Beijing Xinyuan Jinhe Investment & Development Co., Ltd.##		The PRC April 6, 2005		30,000		99	%		Investment
Equity investee:
Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd. (“Jiantou Xinyuan”)		The PRC June 13, 2005		8,000		45	%		Real estate development

---

#

These companies were acquired on 30 August 2006, for total consideration of US$2.1 million. See Note 8.

##

The company was liquidated during 2006.

*

Newly incorporated in 2006 by the Group.

**

The percentage of equity directly attributable to the Group was increased from 80% to 100% in 2006.

Except where otherwise indicated, equity holdings remained unchanged throughout the years ended December 31, 2004, 2005 and 2006.

2. Summary of significant accounting policies

(a) Basis of presentation and consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain comparative figures have been reclassified to conform to 2006 presentation. The consolidated financial statements include the financial statements of the Company, its subsidiaries, Variable Interest Entities for which the Company is the Primary Beneficiary (collectively, the “Group”). All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.

Subsidiaries and other controlled entities are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where

 

F-10

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

there is a loss of control of a subsidiary or other controlled entity, the consolidated financial statements include the results for the part of the reporting year during which the Group has control.

(b) Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, fair values, revenue recognition, taxes, budgeted costs and other similar charges. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.

(c) Fair value of financial instruments

Fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The Group considers the carrying amount of cash, restricted cash, accounts receivable, advances to suppliers, other receivables, accounts payable, other payables and amounts due from/to shareholders, related parties and employees and bank loans to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. The Group considers the carrying amount of bank loans to approximate their fair values based on the interest rates of the instruments and the current market rate of interest.

For investments that are actively traded in organized financial markets, fair value is determined by reference to market bid price at the close of business on the balance sheet date. For investments where there is no quoted market price, fair value is determined either:

(i) by reference to the current market value of another financial instrument which is substantially the same; or

(ii) is calculated based on the expected cash flows of the underlying net asset of the investment.

(d) Foreign currency translation

The Group’s financial information is presented in US dollars. The functional currency of the Company is US dollars. The functional currency of the Company’s subsidiaries is Renminbi (“RMB”), the currency of the PRC. The financial statements of the Company’s subsidiaries have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation”. The financial information is first prepared in RMB and then is translated into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in shareholders’ equity.

 

		December 31
		2004		2005		2006
Year end RMB: US$ exchange rate		8.2765		8.0702		7.8087
Average yearly RMB: US$ exchange rate		8.2766		8.1734		7.9721

 

F-11

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollars at the rates used in translation.

(e) Cash and cash equivalents

The Group considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Group maintains bank accounts in the PRC and Hong Kong. The Group does not maintain any bank accounts in the United States. All PRC bank balances are denominated in Renminbi (RMB). Hong Kong bank balances are denominated in U.S. dollar.

Cash includes cash on hand and demand deposits in accounts maintained with state-owned and private banks within the PRC and Hong Kong. Total cash in banks at December 31, 2006 amounted to US$34,914,210 (2004: US$5,249,255; 2005: US$14,928,747), of which no deposits are covered by insurance. The Group has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

(f) Restricted cash

The Group is required to maintain certain deposits with banks that provide mortgage loans to the Group (see Note 9) and the Group’s customers in order to purchase residential units from the Group (see Note 11). These balances are subject to withdrawal restrictions and totaled US$15,859,805 as of December 31, 2006 (2004: US$11,399,358; 2005: US$5,385,441). As of December 31, 2006, a subsidiary of the Group held US$16,151,053 in a restricted cash account, representing funds from loans with an aggregate amount of US$22.4 million that had not been spent for construction. This account was designated to finance permitted project development expenditures which are subject to approval by the lender. These deposits are not covered by insurance. The Group has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

(g) Real estate property development completed and under development

Real estate properties consist of finished residential unit sites and residential unit sites under development. The Group leases the land for the residential unit sites under land use right leases with various terms from the PRC. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.

Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, engineering costs, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units based on the ratio of the sales value of units to the estimated total sales value times the total project costs.

Costs of amenities transferred to buyers are allocated as common costs of the project that are allocated to specific units as a component of total construction costs. For amenities retained by the Group, costs in excess of the related fair value of the amenity are also treated as common costs. Results of operation of amenities retained by the Group are included in current operating results.

Management evaluates the recoverability of its real estate developments taking into account of several factors including, but not limited to, management’s plans for future operations, prevailing market prices for similar properties and projected cash flows. There were no impairment losses for the years ended December 31, 2004, 2005 and 2006.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

(h) Revenue recognition

Real estate sales are reported in accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate”.

Revenue from the sales of development properties where the construction period is 12 months or less is recognized by the full accrual method at the time of the closing of an individual unit sale. This occurs when title to or possession of the property are transferred to the buyer. A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration has been exchanged, (c) any permanent financing of which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property, and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property, and the buyer’s receivable, if any, is not subject to future subordination. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method in which all costs are capitalized as incurred, and payments received from the buyer are recorded as a deposit liability.

Revenue and profit from the sale of development properties where the construction period is more than 12 months is recognized by the percentage-of-completion method on the sale of individual units when the following conditions are met:

a. Construction is beyond a preliminary stage.

b. The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit.

c. Sufficient units have already been sold to assure that the entire property will not revert to rental property.

d. Sales prices are collectible.

e. Aggregate sales proceeds and costs can be reasonably estimated.

If any of the above criteria is not met, proceeds are accounted for as deposits until the criteria are met and/or the sale consummated.

Changes to total estimated contract cost or losses, if any, are recognized in the period in which they are determined. Revenue recognized to date in excess of amounts received from customers is classified as current assets under Real Estate Property under development. Amounts received from customers in excess of revenue recognized to date are classified as current liabilities under customer deposits. As of December 31, 2006, the amounts received from customers in excess of revenue recognized was US$18.5 million (2004 and 2005: US$nil).

Any losses incurred or identified on real estate transaction are recognized in the period in which the transaction occurs.

Real estate lease income is recognized on a straight-line basis over the terms of the tenancy agreements. Business tax of 5% and depreciation cost of the property are recorded as the cost of rental income.

Other revenue includes property management service fees of US$373,216 (2004 and 2005: US$nil).

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

(i) Accounts receivable

Accounts receivable consists of balances due from customers for the sale of residential units in the PRC. In cases where the customers deposit more than 50% of the total purchase price, the Group may defer the remaining purchase price. These deferred balances are unsecured, bear no interest and are due within six months from the date of the sale.

Accounts receivable are reviewed periodically as to whether their carrying value has become impaired. The Group considers the assets to be impaired if the collectability of the balances become doubtful. As of December 31, 2004, 2005 and 2006, the allowance for doubtful debts was US$ nil.

(j) Other receivables

Other receivables consist of various cash advances to unrelated companies and individuals with which the Group has business relationships.

Other receivables are reviewed periodically as to whether their carrying value has become impaired. The Group considers the assets to be impaired if the collectability of the balances become doubtful. As of December 31, 2006, the allowance for doubtful debts was US$ nil (2004: US$681,934; 2005:US$631,934).

(k) Advances to suppliers

Advances to suppliers consist of balances paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the development and construction of residential units in the PRC. As of December 31, 2006, the allowance for doubtful debts was US$ nil (2004:US$223,254; 2005: US$223,254).

(l) Customer deposits

Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding to the Group upon the completion of the financing rather than the completion of the project. The Group receives these funds and recognizes them as a current liability until the revenue can be recognized.

(m) Other payables

Other payables consist of balances for non-construction costs with unrelated companies and individuals with which the Group has business relationships. These amounts are unsecured, non-interest bearing and generally are short term in nature.

(n) Real estate properties held for lease, net

Real estate properties held for lease are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of the real estate properties held for lease are 20 years.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Major additions and improvements to the real estate properties held for lease are capitalized.

(o) Property and equipment, net

Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of the assets are as follows:

 

Buildings		20 years
Vehicles		5 years
Furniture and fixture		5 years

Maintenance, repairs and minor renewals are charged directly to expense as incurred unless such expenditures extend the useful life or represent a betterment, in which case they are capitalized.

(p) Long-term investments

The Group accounts for long-term investments in equities as follows:

 

Ÿ

Where the Group has significant influence over the investee, the Group applies the equity method of accounting. The reporting dates and accounting policies of the equity investees are the same as the Group. The investments in the equity investees are stated at cost, including the Group’s share of the equity investee’s net gain or loss, less any impairment in value. The Group recognizes in its consolidated statement of operations its share of the net income of the equity investees.

 

Ÿ

Where the Group has no significant influence, the investment is classified as other long-term investment and is carried under the cost method. Investment income is recognized by the Group when the investee declares a dividend and the Group believes it is collectible. The Group periodically evaluates the carrying value of its investment under the cost method and any decline in value is included in impairment of cost investment.

As of December 31, 2004, 2005 and 2006, the Group has investments in two companies in the PRC that specialize in the real estate industry. The Group has 45% and 1.85% interests in them, respectively. For the 45% owned equity investee, the Group accounts for the investment under the equity method. Investment income or loss is recognized by the Group periodically according to 45% of the total net profit or loss generated by the equity investee. For the 1.85% owned company, the Group does not exercise significant influence over it and the Group accounts for the investment under the cost method. Investment income is recognized by the Group when the investee declares a dividend and the Group believes it is collectible.

(q) Impairment of long-lived assets

The Group reviews its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the fair value of the assets. There was no impairment loss recognized for the long-lived assets for the years ended December 31, 2004, 2005 and 2006.

(r) Capitalized interest

The Group capitalizes interest as a component of building construction costs in accordance with SFAS No. 34, “Capitalization of Interest Cost”. Total interest cost incurred for the year ended December 31, 2006 amounted to US$2,209,340 (2004: US$1,302,126; 2005: US$1,725,090). Total interest cost capitalized as part of the construction costs for the year ended December 31, 2006, amounted to US$1,482,299 (2004: US$481,977; 2005: US$890,621).

(s) Retirement benefits

Regulations in the PRC require the Group to contribute to a defined contribution retirement plan for all permanent employees. Pursuant to the mandatory requirement from the local authority in the PRC, the retirement pension insurance, unemployment insurance, health insurance and housing fund were established for the employees during the term they are employed. For the year ended December 31, 2006, the level of contribution to these funds was determined at 38% of the average employee salary determined by the Social Welfare Bureau. For the year ended December 31, 2004 and 2005, the level of contribution to these funds was determined at 15.5% of monthly base salaries of the current employees. For the year ended December 31, 2006, the Group made contributions in the amount of US$406,060 (2004: US$150,388; 2005: US$236,162).

(t) Distribution of earnings and reserve fund

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions from its subsidiaries. The earnings reflected in the financial statements prepared in accordance with US GAAP differ from those reflected in the statutory financial statements of the Company’s subsidiaries.

In accordance with the PRC Company Law, the PRC subsidiaries are required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory surplus reserve (the “SSR”) until such reserve reaches 50% of the registered capital of the subsidiaries. Subject to certain restrictions set out in the PRC Company Law, the SSR may be distributed to stockholders in the form of share bonus issues to increase share capital, provided that the remaining balance after the capitalization is not less than 25% of the registered capital.

Prior to January 1, 2006, according to the PRC Company Law, the PRC subsidiaries are required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory public welfare fund (the “PWF”), which is a non-distributable reserve except in the event of liquidation of the subsidiaries. The fund must be used for capital expenditure on staff welfare facilities. According to the PRC Company Law effective January 1, 2006, the PRC subsidiaries are not required to transfer their profit after tax to the PWF.

For the year ended December 31, 2006, the subsidiaries appropriated reserve fund in the amount of US$363,014 (2004: US$978,828; 2005: US$2,678,869).

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

(u) Income taxes

The Group accounts for income tax using the liability method. Deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as unutilized net operating losses. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future utilization is uncertain.

(v) Land Appreciation Tax (“LAT”)

In accordance with the relevant taxation laws for real estate companies of the provinces in which the subsidiaries operate in the PRC, the local tax authorities levy LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, being the proceeds of sales of properties less deductible expenditures, including borrowings costs and all property development expenditures. LAT is prepaid on customer deposits and is expensed when the related revenue is recognized, as explained at Note 2(l).

(w) Comprehensive income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Group’s only components of comprehensive income during the year ended December 31, 2004, 2005 and 2006 were net income and the foreign currency translation adjustment.

(x) Advertising expenses

Advertising costs are expensed as incurred, or the first time the advertising takes place, in accordance with Statement of Position No. 93-7 “Reporting on Advertising Costs”. For the year ended December 31, 2006, the Group recorded an advertising expense of US$1,422,083 (2004: US$859,910; 2005: US$1,262,139).

(y) Leases

In accordance with SFAS No. 13, “Accounting for Leases”, leases are classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital lease if any of the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the property’s estimated remaining economic life or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental payments are expensed as incurred.

The Group has no capital lease for any of the periods stated herein. For the year ended December 31, 2006, the Group recorded total rental expense of US$127,895 (2004: US$12,821; 2005: US$56,950).

(z) Goodwill and intangible assets

Goodwill represents the excess of cost over the fair value of identifiable net assets of acquired businesses. SFAS No. 142 “Goodwill and Other Intangible Assets” requires that goodwill be tested for

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily determined by computing the future discounted cash flows expected to be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value is then compared with the carrying amount of the reporting unit goodwill, and if it is less, the Company would then recognize an impairment loss.

Intangible assets represent property management rights acquired in a business combination and are recognized initially at fair value at the date of acquisition. Property management rights represent contractual rights to provide management services to the owners of residential developments. Intangible assets are carried at cost less accumulated amortization. Amortization for the property management rights is computed on a straight-line basis over the contract life of three years. For the year ended December 31, 2006, the Group recorded an amortization charge of US$113,833 (2004 and 2005: US$nil).

(aa) Property warranty

The Company and its subsidiaries provide customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold as stipulated in the relevant sales contracts. The warranty period varies from two months to three years, depending on different property components the warranty covers. The Group constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company constantly monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Group may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Group also withholds up to 5% of the contract cost from subcontractors for periods of two to five years. These amounts are included in current liabilities, and are only paid to the extent that has been no warranty claim against the Group relating to the work performed or materials supplied by the subcontractors. For the three years ended December 31, 2006, the Group had not recognized any warranty liability or incurred any warranty costs in excess of the amount retained from subcontractors.

(ab) Earnings per share

Earnings per share is calculated in accordance with SFAS No. 128, “Earnings Per Share”. Basic earnings per share is computed by dividing net income attributable to holders of common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares. Convertible, redeemable preference shares are included in the computation of diluted earnings per ordinary share on an “if-converted” basis, when the impact is dilutive. Contingent exercise price resets are accounted for in a manner similar to contingently issuable shares. Ordinary share equivalents are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive.

(ac) Burnham Warrants

The Company has entered into an agreement with Burnham Securities (“Burnham”) to engage Burnham to render certain financial advisory and investment banking services to the Company in order to raise capital through a private placement and subsequently in a public offering.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

As part of the payment for Burnham’s services rendered on the issuance of preference shares to Blue Ridge China and Equity International, the Company granted Burnham and its designee warrants to acquire 1,853,172 common shares in total (“Burnham Warrants”), at US$0.81155 per share, exercisable between August 25, 2006 and the earlier of August 25, 2011, or the date of an initial public offering or change in control of the Company. The warrants are non-transferable.

As the warrants over common shares, they have been recorded in additional paid in capital. In accordance with SFAS No. 123 (R), “Share based payment” and EITF No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, the Burnham Warrants are measured based on the fair value of services rendered.

The cost of the transaction with Burnham was incurred solely for the purpose of the fund raising, and offset against the proceeds from the preference shares issued.

(ad) Recent accounting pronouncements

In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by the Group as of January 1, 2007. The Group is currently assessing the impact, if any, of this new standard on its financial statements.

In September 2006, the EITF issued EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing Investment under SFAS No. 66 for the Sale of Condominiums” (“EITF 06-8”). EITF 06-8 states that in assessing the collectibility of the sales price pursuant to paragraph 37(d) of SFAS 66, an entity should evaluate the adequacy of the buyer’s initial and continuing investment to conclude that the sales price is collectible. If an entity is unable to meet the criteria of paragraph 37, including an assessment of collectibility using the initial and continuing investment tests described in paragraphs 8-12 of SFAS 66, then the entity should apply the deposit method as described in paragraphs 65-67 of SFAS 66. EITF 06-8 is effective for fiscal years beginning after March 15, 2007. In November 2006, the FASB ratified the EITF’s recommendation. The application of the continuing investment criteria on the collectibility of the sales price will limit the Group’s ability to recognize revenue and costs using the percentage of completion accounting method. Although the Group will continue to evaluate the application of EITF 06-8, management does not foresee that the adoption will have a material impact on the revenue or costs reported under percentage of completion accounting in fiscal 2004-2006. The effect of a change resulting from adoption of this consensus will be recognized as a cumulative-effect adjustment.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The provisions are to be applied prospectively as of the beginning of the fiscal year in which SFAS No. 157 is initially applied, except as it pertains to a change in accounting principles related to (i) large positions previously accounted for using a block

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

discount and (ii) financial instruments (including derivatives and hybrids) that were initially measured at fair value using the transaction price in accordance with guidance in footnote 3 of EITF No. 02-3 or similar guidance in SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140”. For these transactions, differences between the amounts recognized in the statement of financial position prior to the adoption of SFAS No. 157 and the amounts recognized after adoption should be accounted for as a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Group is currently assessing the impact, if any, of this new standard on its financial statements. However, management does not currently foresee that the adoption will have a material impact on the Group’s results of operations or financial position.

In February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No.115”. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Group is currently assessing the impact of this new standard on its financial statements. However, management does not currently foresee that the adoption will have a material impact on the Group’s results of operations or financial position.

In March 2007, the FASB EITF released Topic No. D-109, “Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement No. 133”. EITF Topic D-109 provides guidance on the determination of the nature of the host contract for a hybrid financial instrument (that is, whether the nature of the host contract is more akin to debt or to equity) issued in the form of a share should be based on a consideration of economic characteristics and risks. The SEC believes that the consideration of the economic characteristics and risks of the host contract should be based on all the stated and implied substantive terms and features of the hybrid financial instrument. EITF Topic D-109 is effective at the beginning of the first fiscal quarter beginning after June 15, 2007. Although the Group will continue to evaluate the application of EITF Topic No. D-109, management does not currently foresee that the adoption will have a material impact on the Group’s results of operations or financial position.

 

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

3. Real estate property development completed and under development

The following summarizes the components of real estate property completed and under development at December 31, 2004, 2005 and 2006:

 

		December 31
		2004		2005		2006
		US$		US$		US$
Development completed:
Zhengzhou Xinyuan Splendid 1A		1,000,341		631,543		847,804
Zhengzhou Xinyuan Splendid 3A3B3C		1,108,737		616,346		243,498
Zhengzhou Xinyuan Splendid Hao Jing Ge		1,863,672		486,826		—
Zhengzhou Xinyuan Splendid City Homestead		—		607,051		141,496
Zhengzhou City Family		—		—		3,204,531
Zhengzhou City Manor		—		—		16,716
Zhengzhou Xinyuan Splendid 2A		5,459		—		—
Zhengzhou Xinyuan Splendid 2B		149,828		—		—
Zhengzhou Xinyuan Splendid 2C		131,338		—		—
Zhengzhou Xinyuan Splendid 1B		189,269		—		—
Real estate property development completed		4,448,644		2,341,766		4,454,045
Under development:
Current:
Zhengzhou Xinyuan Splendid 3A3B3C		17,365,187		—		—
Zhengzhou Xinyuan Splendid City Homestead		6,901,253		—		—
Zhengzhou City Manor		14,250,149		25,361,964		—
Jinan City Family		—		—		14,520,670
Jinan Elegant Scenery		—		—		23,371,650
Suzhou Lake Splendid		—		—		35,977,718
Zhengzhou City Family		—		6,402,089		—
Zhengzhou Commercial Plaza		—		2,598,823		3,041,617
Hefei Wangjiang Garden		—		—		10,287,628
Zhengzhou Central Garden East				10,515,183		35,275,285
Zhengzhou Central Garden West		—		10,868,660		40,072,801
		38,516,589		55,746,719		162,547,369
Profit recognized		—		—		19,427,999
Less: progress billings (see Note 11)		—		—		(94,356,103	)
Real estate property under development—current		38,516,589		55,746,719		87,619,265
Non-current:
Zhengzhou Longhai Road project		8,886,374		9,110,393		19,184,534
Real estate property under development—non-current		8,886,374		9,110,393		19,184,534
Total real estate property under development		47,402,963		64,857,112		106,803,799
Total real estate property development completed and under development		51,851,607		67,198,878		111,257,844

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

As of December 31, 2006, land use rights included in the real estate properties under development totaled US$48,296,027 (2004: US$12,330,091; 2005: US$14,392,456).

As of December 31, 2006, partial payments for land use rights included in the real estate properties under development totaled US$47,879,929 (2004: US$8,037,214; 2005: US$6,248,916).

As of December 31, 2006, real estate properties under development with an aggregate net book value of US$33,427,697 (2004: US$27,322,212; 2005: US$27,608,254) were pledged as collateral for certain bank loans.

4. Real estate properties held for lease, net

 

		December 31,
		2004			2005			2006
		US$			US$			US$
Zhengzhou Longhai Star Garden		1,123,757			1,152,484			1,191,079
Elementary school		2,322,431			2,486,425			2,726,937
Clubhouse		2,044,542			2,096,807			—
Zhengzhou Xinyuan Splendid 1A		—			40,037			41,378
Kindergarten		744,847			763,888			853,090
Parking facility		1,835,038			1,711,492			1,992,740
Total cost		8,070,615			8,251,133			6,805,224
Accumulated depreciation		(415,644	)		(842,704	)		(1,264,682	)
Real estate properties held for lease, net		7,654,971			7,408,429			5,540,542

Depreciation expense for the year ended December 31, 2006 amounted to US$440,128 (2004: US$252,143; 2005: US$411,177).

As of December 31, 2006, minimum future rental income on non-cancellable leases, in aggregate and for each of the five succeeding fiscal years and thereafter are as follows:

 

Year		Amount
		US$
2007		223,299
2008		174,039
2009		166,209
2010		155,468
2011		155,468
Thereafter		1,334,885
Total		2,209,368

 

F-22

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

5. Property and equipment, net

Property and equipment consist of the following:

 

		December 31
		2004			2005			2006
		US$			US$			US$
Buildings and improvements		940,077			964,108			2,720,820
Vehicles		312,536			355,227			772,303
Furniture and fixtures		153,215			241,932			582,313
Total		1,405,828			1,561,267			4,075,436
Accumulated depreciation		(330,900	)		(425,954	)		(606,414	)
Property and equipment, net		1,074,928			1,135,313			3,469,022

Depreciation expense for the year ended December 31, 2006 amounted to US$180,460 (2004: US$123,278; 2005: US$135,176).

6. Other long-term investment

As of December 31, 2004, 2005 and 2006, other long-term investment consisted of the following:

 

							December 31
Investee		Initial cost		Ownership			2004		2005		2006
		US$					US$		US$		US$
Henan Lianhe Real Estate Co., Ltd.		241,648		1.85	%		241,648		241,648		241,648

For the years ended December 31, 2004, 2005 and 2006, the Group recognized no investment loss or profit.

7. Interest in an equity investee

As of December 31, 2004, 2005 and 2006, interest in an equity investee consisted of the following:

 

							Equity Accounted
Investee		Initial cost		Ownership			December 31,         2004		December 31,         2005		December 31,         2006
		US$					US$		US$		US$
Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd.		446,086		45	%		—		446,086		—

For the year ended December 31, 2006, the investee incurred a loss of US$1,214,888. The Group’s share of loss of the equity investee was the amount necessary to reduce the investment to nil, or US$446,086.

 

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

Variable Interest Entity

In accordance with FIN 46 (R), “Consolidation of Variable Interest Entities”, Jiantou Xinyuan is a variable interest entity, as it has insufficient equity at risk. The Group is not considered as the primary beneficiary, as it does not absorb the majority of Jiantou Xinyuan’s expected losses or residual returns.

Jiantou Xinyuan was established as a joint venture corporation between the Group and an unrelated company in 2005. Its purpose is to undertake residential property development projects in Zhengzhou city, Henan province. As at December 31, 2006 it had one project under construction and two projects under planning and had consolidated total assets of US$94.7 million.

The Group’s maximum exposure to loss is limited to its 45% equity investment and such loans as it may make from time to time to Jiantou Xinyuan (See Note 13(b)). As of December 31, 2006, its maximum exposure was US$7.7 million (2004: US$ nil; 2005: US$6.7 million).

Summarized consolidated balance sheet information of Jiantou Xinyuan is as follows:

 

		December 31,
		2004		2005		2006
		US$		US$		US$
Current assets		—		27,485,160		94,390,457
Non-current assets		—		1,983		263,524
Current liabilities		—		26,502,838		94,331,044
Non-current liabilities		—		—		—
Venturer’s capital (deficit)		—		984,305		(211,768	)

Summarized consolidated statement of operations information of Jiantou Xinyuan is as follows:

 

		December 31,
		2004		2005		2006
		US$		US$		US$
Revenue		—		—		—
Operating expenses		—		9,845		1,552,364
Loss from operations before minority interest		—		6,907		1,282,200
Net loss		—		6,907		1,214,888

 

F-24

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

8. Acquisitions

(a) The Ancillary Companies were acquired in August 2006. The purchase consideration was allocated as follows:

 

		Fair value on acquisition date
		US$
Cash and bank balances		512,792
Receivables		763,690
Inventories		401,586
Property and equipment, net		83,876
Other assets		43,033
Property management rights		1,024,498
Goodwill		1,105,408
Payables		(1,088,200	)
Customer deposits		(328,077	)
Payroll and welfare payable		(89,100	)
Deferred tax liabilities		(338,084	)
Total consideration		2,091,422

Had the acquisition taken place at the beginning of the year for 2005 and 2006, respectively, the Group’s net revenue, income before income taxes, net income and earnings per share for each year ended would have been as follows:

 

		December 31,
		2005		2006
		US$		US$
		Proforma (Unaudited)		Proforma (Unaudited)
Net revenue		62,460,178		143,071,057
Income before income taxes		14,728,230		26,673,637
Net income		9,494,252		15,958,694
Basic and diluted earnings per share		0.16		0.22

(a) The property management rights are amortized over the contract life of 3 years as follows:

 

Year		Amount
		US$
2006		113,833
2007		341,499
2008		341,499
2009		227,667
Total		1,024,498

 

F-25

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

(b) On March 16, 2006, the Group increased its existing ownership of Henan Wanzhong from 80% to 100% by acquiring the remaining 20% from Ms. Yuyan Yang for a cash consideration of US$0.22 million. As the Group and Henan Wanzhong were under common control at the time, the acquisition was accounted for in a manner similar to a pooling-of-interest the effect of which had been taken to February 6, 2005, the day Henan Wanzhong was incorporated. Accordingly, no adjustment was made to the recorded book values of assets and liabilities transferred. The cash consideration was recorded as a distribution to shareholders.

(c) The movement on goodwill and other intangible assets during the year was as follows:

 

		Goodwill		Property management rights
		US$		US$
Opening balance		—		—
Acquisitions		1,105,408		1,024,498
Amortization		—		(113,833	)
Closing balance		1,105,408		910,665

 

F-26

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

9. Short-term bank loans

Short term bank loans represent amounts due to various banks and are due on the dates indicated below. These loans generally can be renewed with the banks. Short term bank loans at December 31, 2004, 2005 and 2006 consisted of the following:

 

		December 31,
		2004		2005		2006
		US$		US$		US$
Loans from China Construction Bank,
Due September 29, 2007, at 6.51% per annum		—		—		1,920,934
Due December 21, 2007, at 6.42% per annum		—		—		3,201,557
Due April 8, 2006, at 6.3% per annum		—		991,301		—
Due Aug 26, 2005, at 6.23% per annum		3,624,720		—		—
		3,624,720		991,301		5,122,491
Loans from Industrial and Commercial Bank of China,
Due December 31, 2007, at 7.344% per annum		—		—		9,604,672
Due December 25, 2006, at 6.14% per annum		—		4,956,507		—
Due March 23, 2006, at 6.42% per annum		—		1,363,039		—
Due June 23, 2006, at 6.42% per annum		—		1,363,040		—
Due Dec 23, 2005, at 7.14% per annum		1,751,948		—		—
Due Oct 28, 2005, at 7.25% per annum		3,624,721		—		—
Due Oct 28, 2005, at 7.25% per annum		604,120		—		—
Due Apr 20, 2005, at 6.04% per annum		3,624,721		—		—
		9,605,510		7,682,586		9,604,672
Loans from China Communication Bank,
Due March 21, 2007, at 6.138% per annum		—		—		1,536,747
Due February 2, 2006, at 6.14% per annum		—		1,486,952		—
		—		1,486,952		1,536,747
Loans from Shanghai Pudong Development Bank,
Due May 28, 2007, at 7.254% per annum		—		—		6,403,115
Due November 29, 2006, at 7.25% per annum		—		9,913,013		—
Due February 1, 2006, at 7.25% per annum		—		1,858,690		—
Due Sept 29, 2005, at 5.31% per annum		2,416,480		—		—
Due Mar 3, 2005, at 5.84% per annum		3,624,721		—		—
Due various dates before Sept 30, 2005		10,874,162		—		—
		16,915,363		11,771,703		6,403,115
Loan from Bai Rui Trust Investment Co.,
Due May 22, 2006, at 12% per annum		—		2,478,253		—
		—		2,478,253		—
Total short-term bank loans		30,145,593		24,410,795		22,667,025

 

F-27

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

As of December 31, 2006, the Group’s short term bank loans are all denominated in RMB and are secured by the Group’s land use rights (included in real estate properties under development) with net book value of US$8,452,111 (2004: US$12,940,272; 2005: US$15,597,777), real estate properties under development with net book value of US$12,924,924 (2004: US$20,575,239; 2005: US$22,141,569), 29 property certificates with net book value of US$1,536,747 (2004 and 2005: US$ nil), and certain deposits in the banks amounting to US$8,759,733 (2004: US$ 9,715,052; 2005: US$3,179,799) as of December 31, 2006.

The weighted average interest rate on short-term bank loans as of December 31, 2006 was 7.05% (2004: 6.31%; 2005: 7.31%).

10. Long-term bank loans

Long-term bank loans as of December 31, 2004, 2005 and 2006 consisted of the following:

 

		December 31,
		2004		2005		2006
		US$		US$		US$
Loan from Industrial and Commercial Bank of China,
Due December 18, 2008, at 6.93% per annum		—		—		12,806,229
Loans from China Construction Bank,
Due December 21, 2007, at 6.62% per annum		—		7,434,760		—
Due Apr 8, 2006, at 6.30% per annum		3,141,425		—		—
Total long-term bank loans		3,141,425		7,434,760		12,806,229

As of December 31, 2006, the Group’s long term bank loans are all denominated in RMB and are secured by the Group’s real estate properties under development with net book value of US$20,489,966 (2004: US$889,666; 2005: US$7,104,365) and real estate properties under development with net book value of US$20,502,773 (2004: US$6,746,973; 2005: US$5,466,685) as of December 31, 2006.

The interest rates of these bank loans are adjustable based on the PBOC prime rate in the range of 95% to 110%. The weighted average interest rate on long-term bank loans as of December 31, 2006 was 6.93% (2004: 6.30%; 2005: 6.62%).

11. Customer deposits

Customer deposits consist of amounts received from customers for the pre-sale of residential units in the PRC.

 

		December 31,
		2004		2005		2006
		US$		US$		US$
Advances for real estate properties under development		31,023,639		43,834,021		119,888,088
Less: recognized as progress billings (see Note 3)		—		—		(94,356,103	)
Total net balance		31,023,639		43,834,021		25,531,985

 

F-28

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

Customer deposits are typically funded up to 80% by mortgage loans made by banks to the customers. Until the customer obtains legal title to the property, the banks have a right to seek reimbursement from the Group for any defaults by the customers. The Group holds certain cash balances in restricted deposit accounts at the relevant banks (see Note 2 (f)). The Group, in turn, has a right to withhold transfer of title to the customer until outstanding amounts are fully settled.

12. Income taxes

(a) Corporate income tax (“CIT”)

As a Cayman Island resident company, the Company is not subject to income tax.

The PRC subsidiaries are governed by the Income Tax Law of the PRC concerning Chinese limited liability companies. Under the Income Tax Laws of the PRC, the PRC subsidiaries are subject to an income tax at a statutory rate of 33% (30% state income taxes plus 3% local income taxes) on income reported in the statutory financial statements after appropriate tax adjustments.

For the years ended December 31, 2004, 2005 and 2006, in accordance with the provisions of the PRC tax law, the local tax authority of Zhengzhou City concluded a deemed profit method is a better measure of income tax liability for companies in the real estate industry located in that province, including the PRC subsidiaries. Under the deemed profit method, the local tax authority levies income tax based on 33% of an arbitrary deemed profit of 12% or 14% of total cash receipts of real estate property companies, rather than based on 33% of statutory taxable income. The PRC subsidiaries in that province have filed their tax returns based on the deemed profit method. The local tax authority has confirmed verbally that it will apply the same deemed profit method for the year ending December 31, 2007. The local tax authority is entitled to re-evaluate prior years’ income taxes assessed under the deemed profit method, upon receipt of audited accounts or upon completion of specific development projects, however, the tax authority has not indicated if it will do so.

For subsidiaries located in Shandong, Jiangsu and Anhui provinces, Tax Regulation of the State No. 31 applies. The tax authorities levy income tax on these subsidiaries at the rate of 33%. These subsidiaries, however, have not recognized any sales during the year.

Therefore, for the years ended December 31, 2004, 2005 and 2006, the PRC subsidiaries have provided for deferred taxation based on the 33% income tax rate. Although the local tax authority of Zhengzhou City has not indicated that it will re-evaluate prior assessed years, the Group believes that the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority to apply the deemed profit method. Because of the uncertainty surrounding whether or not these tax years will be re-evaluated and the taxes adjusted, the difference between the taxes due based on taxable income calculated according to PRC tax statutes and the taxes due based on the deemed profit method has been recorded as an additional receivable or payable and has been included with the temporary differences. Management believes that if the local tax authority of Zhengzhou City or a higher tax authority were to re-evaluate any of these tax years, the PRC subsidiaries would be required to pay any additional taxes due, or would be entitled to a refund for any taxes overpaid based on the difference between the amounts paid under the deemed profit method and the actual taxes due calculated based on the PRC tax statutes.

 

F-29

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

Income tax expense for the year ended December 31, 2004, 2005 and 2006 is summarized as follows:

 

		Year ended December 31,
		2004			2005		2006
		US$			US$		US$
Current:
CIT expense		2,011,679			2,949,813		6,193,562
LAT expense		10,070			418,491		2,003,020
Deferred tax expense		(69,604	)		1,879,505		2,520,756
Income tax expense		1,952,145			5,247,809		10,717,338

The Group’s income tax expense differs from the tax expense computed by applying the statutory CIT rate of 33% for the years ended December 31, 2004, 2005 and 2006 as follows:

 

		Year ended December 31,
		2004			2005			2006
		US$			US$			US$
CIT at rate of 33%		1,945,398			4,882,584			8,856,433
Tax effect of permanent differences		—			84,836			518,882
LAT expense		10,070			418,491			2,003,020
Tax effect of LAT		(3,323	)		(138,102	)		(660,997	)
Actual income tax expense		1,952,145			5,247,809			10,717,338

(b) Land Appreciation Tax (“LAT”)

Since January 1, 1994, LAT has been applicable at progressive tax rates ranging from 30% to 60% on the appreciation of land values, with an exemption provided for the sales of ordinary residential properties if the appreciation values do not exceed certain thresholds specified in the relevant tax laws. However, prior to September 2004, the Group’s local tax authority in Zhengzhou city did not impose the regulation on real estate companies in its area of administration. Since September, 2004, the local tax authority has levied the LAT at the rate of 0.8% or 1.0% against total cash receipts from sales of real estate properties, rather than according to the progressive rates. In early 2007, the national PRC tax authorities clarified the regulations to require the full payment of LAT in accordance with the progressive rates.

For the year ended December 31, 2006, based on the latest understanding of LAT regulations from tax authorities, the Group made additional LAT provision of US$1,131,551 with respect to properties sold up to December 31, 2006 in accordance with the requirements set forth in the relevant PRC tax laws and regulations.

As of December 31, 2006 prepaid LAT balances of US$ nil were included in other deposits and prepayments (2004: US$134,411; 2005: US$284,028).

 

F-30

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

(c) Deferred tax

The tax effects of temporary differences that give rise to the Group’s net deferred tax assets and liabilities as of December 31, 2004, 2005 and 2006 are as follows:

 

		December 31,
		2004			2005			2006
		US$			US$			US$
Deferred tax liabilities:
Tax due under tax statutes versus tax due under deemed profit method		—			819,272			3,311,108
Real estate properties—accelerated deductions		1,829,034			1,674,219			1,460,020
Percentage of completion revenue		—			—			1,211,337
Property and equipment		280,273			284,874			297,297
Property management rights		—			—			300,520
Others		234,932			117,196			167,100
Total deferred tax liabilities		2,344,239			2,895,561			6,747,382
Deferred tax assets:
Tax due under deemed profit method versus tax due under tax statutes		(1,517,880	)		—			(643,514	)
Doubtful debt allowances		(298,727	)		(321,062	)		(33,363	)
Accruals and provisions		(308,451	)		(289,431	)		(674,084	)
Others		(107,509	)		(267,002	)		(398,403	)
Total deferred tax assets		(2,232,567	)		(877,495	)		(1,749,364	)
Net deferred tax liabilities		111,672			2,018,066			4,998,018
Classified as current		—			—			(1,211,337	)
Long term deferred tax liabilities		111,672			2,018,066			3,786,681

For each PRC subsidiary, deferred tax assets have been netted against deferred tax liabilities as the reversal of the underlying temporary differences is expected to occur in the same future periods.

Due to the nature of the deemed profit method, all of the deferred tax assets and liabilities will reverse either if the tax years are re-evaluated and reassessed under tax statutes or the tax years are no longer open for tax review. In addition, certain deferred tax assets and liabilities may reverse if actual margins fall below the deemed margin. Management currently does not expect actual margins will fall below the deemed margin. Therefore, all the deferred tax assets and liabilities have been classified as non-current.

13. Related-party and employee transactions

(a) Due from shareholders

The balances represent cash advances to two shareholders from the Company for traveling expenses and other expenses. The balances bear no interest and have no fixed payment terms.

In 2005, loans made to shareholders amounted to US$428,218. The loans bear no interest and were due on December 31, 2005. All of the loans were settled prior to maturity.

 

F-31

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

(b) Due from related parties

 

		December 31,
		2004		2005		2006
		US$		US$		US$
Mingyuan Landscape		476,664		380,468		—
Jiantou Xinyuan		—		6,650,393		7,728,227
Xinyuan Property Management		687,283		523,484		—
Xinyuan Network		18		16		—
Total		1,163,965		7,554,361		7,728,227

Jiantou Xinyuan is co-invested by a third party and the Group, and the Group holds 45% of total shares of Jiantou Xinyuan (see Note 7). The balance represents the development cost of real estate paid on behalf of Jiantou Xinyuan, which carries interest of 6.138% per annum (2004: nil; 2005: 5.58%) and was repayable within one year.

As explained in Note 1, the Group acquired 100% interest in Mingyuan Landscape, Xinyuan Property Management and Xinyuan Network during 2006. The balances due to these companies have been eliminated upon consolidation.

In 2004, loans made to Mingyuan Landscape and Xinyuan Property Management amounted to US$362,468 and US$483,290, respectively. The loans bear no interest and were due on December 31, 2005.

All other amounts bear no interest and have no fixed payment terms.

(c) Due from employees

 

		December 31,
		2004		2005		2006
		US$		US$		US$
Loans		799,491		158,732		—
Advances		175,021		275,230		313,807
Total		974,512		433,962		313,807

The loans were made in 2004 to the Group’s top managerial staff and were due on December 31, 2005. The loans bear no interest.

For the year ended December 31, 2006, sales to employees amounted to US$ nil (2004: US$250,796; 2005: US$265,582). All of the sales were settled in cash and are not included in the balances above.

(d) Due to related parties

 

		December 31,
		2004		2005		2006
		US$		US$		US$
Xinyuan Network		48,330		130,300		—
Xinyuan Property Management		518,841		890,010		—
Mingyuan Landscape		46,110		299,153		—
Jiantou Xinyuan		—		—		3,763,843
Total		613,281		1,319,463		3,763,843

 

F-32

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Table of Contents

XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

As explained in Note 1, the Group acquired 100% interest in Mingyuan Landscape, Xinyuan Property Management and Xinyuan Network on August 30, 2006. The balances due to these companies have been eliminated upon consolidation.

For the period ended August 31, 2006, landscaping costs payable to Mingyuan Landscape and intercom service fee payable to Xinyuan Network amounted to US$707,908 and US$108,619 respectively.

For the year ended December 31, 2005, landscaping costs payable to Mingyuan Landscape and intercom service fee payable to Xinyuan Network amounted to US$1,354,902 and US$223,071, respectively (2004: US$412,408 and US$ nil, respectively).

Jiantou Xinyuan is co-invested by a third party and the Group, and the Group holds 45% of total shares of Jiantou Xinyuan (see Note 7). The balance represents the loan and interest payable to Jiantou Xinyuan. The loan in the amount of US$3,713,806 bears an interest at 6.44% per annum (2004 and 2005: nil) and is repayable in full on August 14, 2007.

All other amounts bear no interest and have no fixed payment terms.

(e) Due to employees:

 

		December 31
		2004		2005		2006
		US$		US$		US$
Total		1,910,329		213,093		25,612

Balance as of December 31, 2006 represents deposits from the sales offices management of Xinyuan Agency.

Balances as of December 31, 2004 and 2005, represent various loans from the Group’s staff for real estate property development purposes. The loans bear various interest rates that are similar to short-term bank loan rates and have fixed payment terms.

(f) Due to shareholders

 

		December 31
		2004		2005		2006
		US$		US$		US$
Blue Ridge China Partners, L.P.		—		—		21,000,000
EI Fund II China, LLC		—		—		14,000,000
Total		—		—		35,000,000

The loans bear interest at 12.5% and are repayable in full on December 6, 2007. There is a mandatory prepayment of the outstanding principal loan balance plus accrued and unpaid interest in the event the Company receives proceeds from debt financing in advance of the due date. If the principal amount and the interest are not paid on or prior to December 6, 2007, the lenders have the right to covert all or any portion of the outstanding

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

principal amount and accrued interest into common shares based on a conversion ratio as determined by a multiple of 2007 consolidated net income over the total number of common shares (on a fully diluted basis) and issuable common shares pursuant to this conversion.

(g) Others

For the year ended December 31, 2006, total directors’ remuneration paid amounted to US$46,979.

On April 16, 2005, Henan Xinyuan entered into a consulting agreement with a consulting company which is beneficially owned by Yong Cui, one of its directors, to provide finance consulting services to the Group for a duration of 24 months. Total consulting fees paid in 2005 and 2006 under the agreement amounted to US$59,473. On December 27, 2006, Henan Xinyuan entered into a consulting agreement with another consulting company which is beneficially owned by Yong Cui to provide similar finance consulting services to the Group, with an annual fee of US$30,735 starting from April 16, 2007. The agreement will expire on April 15, 2012, and it can be terminated by written consent from both parties. The agreement contains provisions on confidentiality and non-competition.

14. Equity

(a) Convertible Redeemable Preference Shares

As disclosed in Note 1, the Company entered into a securities purchase agreement with Blue Ridge China and Equity International (collectively, the “Investors”) on August 25, 2006, whereby the Company issued a total of 30,805,400 Series A convertible redeemable preference shares (“Series A preference shares”) with warrants for total cash proceeds of US$21,918,420, net of issuance costs of US$3,081,580. The Series A preference shares are issued with warrants to purchase additional Series A preference shares. Other significant terms of the preference shares and warrants are outlined below:

Redemption

The Company’s Series A convertible preference shares are redeemable, if not previously converted, upon the earlier occurrence of the date on which Mr. Zhang ceases to serve in the capacity of Chairman or the fifth anniversary of the issuance date. Anytime thereafter, the holder may, by written notice given to the Company require the Company to redeem any or all Series A convertible redeemable preference shares held.

The redemption price is determined at a per share price in cash equal to the sum of the original issue price of US$0.81155 per share and an accreted annual amount of ten percent (10%) of the original issue price, compounded annually to the date of redemption.

Conversion

Each Series A preference shares shall be convertible, upon issuance, into fully paid common shares at the option of the holder at an initial conversion ratio of 1 to 1. Each Series A preference shares shall be converted into fully paid common shares automatically upon an initial public offering of the Group (“IPO”) or written approval by 75% of the Investors at a conversion ratio that is adjustable under certain circumstances as follows:

a) If the value of the common shares issuable upon conversion of the Series A preference shares in connection with the IPO of the Group is less than an amount equal to two times the original Series A issue price plus an accreted annual amount of 10% compounded annually to the date of completion of the IPO, the Company shall issue to the preference shareholders a number of common shares equal to the amount of such shortfall divided by the price of common shares at IPO.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

b) If the Company sub-divides the outstanding common shares or issues a share dividend on its outstanding common shares, the number of common shares issuable upon conversion of the Series A preference shares immediately prior to such subdivision or the issuance of such share dividend shall be proportionately increased by the same ratio as the subdivision or dividend (with appropriate adjustments in the Series A conversion price). In case the Company shall at any time combine its outstanding common shares, the number of common shares issuable upon conversion of the Series A preference shares immediately prior to such combination shall be proportionately decreased by the same ratio as the combination.

Voting Rights

The Investors have voting rights that are equal to common shares on an as-converted basis. In addition, as mentioned in Note 1, the Investors have substantive participating rights, the most significant of which relate to approval of annual plans and budgets and changes in existing management.

Dividends

The Series A preference shares shall rank senior to the common shares in all respects as to rights of payment and distribution (whether in cash, in kind or in other property or securities), whether by way of dividend or upon a liquidation or otherwise. All such payments and distributions shall be made to the Series A convertible redeemable preference shares in full prior to dividend distributions to ordinary shareholders.

Liquidation Preference

On a winding-up, the holders of Series A preference shares shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to holders of the Junior Shares by reason of their ownership of such shares, for each Series A preference shares, the amount per share (the “Series A Preference Amount”) equal to two (2) times the sum of (x) US$0.81155, and (y) an accreted annual amount of ten percent (10%) on the original Series A issue price, compounded annually from the date of issuance of such Series A preference shares to the date of payment hereunder.

After the payment in full has been made to the holders of Series A preference shares, the holders of the Series A preference shares shall be entitled to share ratably in all remaining assets and funds to be distributed.

Measurement and Recording

The Series A preference shares were classified as mezzanine equity at gross proceeds net of issuance costs and are increased by period accretions using the interest method at an annual rate of 10%, so that the carrying amount will equal to the redemption amount at the redemption date. At the issuance date of the Series A preference shares, the Group determined that there was no beneficial conversion feature as a result of the effective conversion price being higher than the fair value per common share.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

The carrying values of the preference shares are as follows:

 

		Series A
		US$
Issuance of preference shares		25,000,000
Issuance costs		(3,081,580	)
Warrant liability		(496,000	)
Burnham Warrants		(55,595	)
Accretion		942,301
Balance—December 31, 2006		22,309,126

Warrant terms, Measurement and Recording

The warrants issued together with the Series A preference shares entitle the holders to purchase more Series A preference shares at an exercise price of US$0.01 per share if the Group fails to meet specified profit performance targets in 2007 and 2008. If cumulative net income for the two year period ending December 31, 2008, is less than US$80 million, the holders of the warrants are entitled to purchase up to a maximum additional number of 3,987,009 fully paid Series A preference shares at an exercise price of US$0.01 per share. If cumulative net income for the two year period ending December 31, 2008, equals or exceeds US$80 million, or if the Company consummates a qualified initial public offering prior to March 31, 2008, then the warrants will expire without being exercised, as amended on August 28, 2007. See Subsequent Events Note 19(h). The warrants and Series A Preference Shares are transferable in whole or in part, without charge to the holder. The holders of the warrants are not entitled to vote or receive dividend.

The warrants were allocated their full fair value from the basket issuance with the Series A preference shares and classified as a liability in accordance with FSP FAS 150-5 “Issuers Accounting under FAS 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable” on the basis that the issue faces a cash outflow to settle them on redemption. Changes in value from period to period are recognized through earnings. Management assessed that the probability of the exercisability for the Series A preference share warrants was 10% and 5% on August 26, 2006 and December 31, 2006, respectively.

In the event that the warrants are exercised and additional Series A preference shares are issued, the total redemption amount in respect thereof is limited to the exercise price of US$0.01 per share plus an accreted annual amount of ten percent (10%) of the exercise price, compounded annually, from the date of exercise to the date of redemption. The total impact on the redemption price of the issued Series A convertible redeemable preference shares from the exercise of the warrants would be nominal since the Company is obligated to pay the holders upon redemption the exact amount received from the exercise of the warrants plus some nominal interest accretion. With the exercise of the warrants being contingent upon certain events, the measurement date of a beneficial conversion feature will be on the date of exercise of the warrants.

(b) Common Shares

(i) As at December 31, 2006, the Company’s authorized share capital was 450 million common shares, par value US$0.0001 per share.

(ii) In March 2006, the Company issued 60,000,000 outstanding common shares to the Zhang Family for a consideration of US$6,000.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

(iii) In August 2006, the Company issued the Burnham Warrants as payment for services rendered and recorded its fair value of US$55,595 as paid in capital.

(iv) Under the terms of the agreement, if any of the Burnham Warrants remains unexercised upon termination, Mr. Zhang is entitled to purchase, within 60 days, the common shares underlying such remaining unexercised amount, at a purchase price of US$0.0001 per share. This benefit was valued at the time of the issuance of the Burnham Warrants, and determined to be insignificant. The total cost is being amortized over the life of the Burnham Warrants. In November 2006, the Company issued 15,704,379 common shares for US$0.9551 per share, for total cash proceeds of US$14,552,985, net of issuance cost. These shares were issued to Blue Ridge China (9,422,627 shares) and Equity International (6,281,752 shares), which, subsequent to the purchase, owned 12.4% and 8.3% of the Company’s outstanding common shares, respectively, as of December 31, 2006.

(v) Common shares at January 1 and December 31, 2005 represent issued and paid up share capital of the Company’s subsidiaries which were then held directly by the Zhang Family and to which pooling-of-interest accounting has been applied, as explained in Note 1.

The Company has certain restrictions on its ability to declare and pay dividends on its common shares and preference shares. No dividends are paid on convertible notes and floating rate notes; however, restrictions inherent in these notes also restrict the ability to declare and pay dividends on common shares and preference shares. In addition, as disclosed in note 20, under the PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The amounts restricted include paid-in capital and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling US$78,730,297 as of December 31, 2006 (2005: US$6,367,285).

15. Earnings per share

Basic and diluted net earnings per share for each period presented are calculated as follows:

 

		Year ended December 31,
		2004		2005		2006
		US$		US$		US$
Numerator:
Net income		3,943,002		9,562,791		16,122,910
Accretion of Series A convertible redeemable preference shares		—		—		(942,301	)
Net income attributable to ordinary shareholders		3,943,002		9,562,791		15,180,609
Denominator:
Number of shares outstanding, opening		60,000,000		60,000,000		60,000,000
Weighted average number of shares issued (15,704,379 shares)		—		—		1,807,079
Weighted average number of convertible redeemable preference shares		—		—		10,887,388
Weighted average number of shares outstanding—basic and diluted		60,000,000		60,000,000		72,694,467
Basic and diluted earnings per share		0.07		0.16		0.21

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

On August 25, 2006, the Company issued Series A convertible redeemable preference shares that will convert automatically into common shares upon the completion of an IPO. Assuming the conversion had occurred “on a hypothetical basis” on January 1, 2006, the proforma basic and diluted earnings per share for the year ended December 31, 2006 is calculated as follows:

 

		Year ended December 31,
		2006
		US$ Proforma (Unaudited, Note 2)
Numerator:
Net income attributable to ordinary shareholders		15,180,609
Accretion of convertible redeemable preference shares		942,301
Net income for proforma basic and diluted earnings per share		16,122,910
Denominator:
Number of shares outstanding, opening		60,000,000
Weighted average number of shares issued (15,704,379 shares)		1,807,079
Conversion of preference shares to common shares (30,805,400 shares)		30,805,400
Weighted average number of shares outstanding—proforma basic and diluted earnings per shares		92,612,479
Proforma basic and diluted earnings per share		0.17

The terms of the Series A preference shares allow the holders to receive additional common shares if the value of the common shares upon conversion of the Series A preference shares in connection with an IPO is less than two times the original Series A preference shares issuance price of US$0.81155, plus an accreted amount of 10% compounded annually to the date of completion of the IPO. The holders of the Series A preference shares shall receive common shares equal to the amount of the shortfall divided by the price of the common shares.

16. Segment reporting

The Group considers that each of its individual property development is a discrete operating segment. The Group has aggregated its segments based on a provincial basis as property development projects undertaken within a segment have similar expected economic characteristics, type of properties offering, customers and market, regulatory environment. The Group’s reportable operating segments are comprised of the Henan Province, Shandong Province, Jiangsu Province and Anhui Province. Each geographic operating segment is principally engaged in the construction and development of residential real estate units. All “other” category relates to investment holdings, property management services, installation of intercom systems, landscaping, engineering and management, real estate sale, purchase and lease activities. The accounting policies of the various segments are the same as those described in Note 2, “Summary of Significant Accounting Policies”.

The Group’s chief operating decision maker relies upon net sales, gross profit and net income when making decisions about allocating resources and assessing performance of the Group. Net sales for geographic segments are generally based on the location of the project development. Net income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

No single customer accounted for more than 10% of net sales in 2004, 2005 and 2006.

Summary information by operating segment is as follows:

 

December 31, 2004		Henan			Shandong		Jiangsu		Anhui		Others		Consolidated
		US$			US$		US$		US$		US$		US$
Net real estate sales		35,320,585			—		—		—		—		35,320,585
Real estate lease income		143,908			—		—		—		—		143,908
Other revenue		168,017			—		—		—		—		168,017
Revenue from external customers		35,632,510			—		—		—		—		35,632,510
Cost of real estate sales		(26,123,957	)		—		—		—		—		(26,123,957	)
Cost of real estate lease income		(252,143	)		—		—		—		—		(252,143	)
Total cost of revenue		(26,376,100	)		—		—		—		—		(26,376,100	)
Gross profit		9,256,410			—		—		—		—		9,256,410
Operating expenses		(2,608,069	)		—		—		—		—		(2,608,069	)
Operating income		6,648,341			—		—		—		—		6,648,341
Interest income		66,955			—		—		—		—		66,955
Interest expense		(820,149	)		—		—		—		—		(820,149	)
Share of loss in an equity investee		—			—		—		—		—		—
Income before income taxes		5,895,147			—		—		—		—		5,895,147
Income tax expense		(1,952,145	)		—		—		—		—		(1,952,145	)
Net income before minority interest		3,943,002			—		—		—		—		3,943,002
Depreciation and amortization		375,971			—		—		—		—		375,971
Capital expenditure		103,145			—		—		—		—		103,145
Investment in an equity investee		—			—		—		—		—		—
Total long-lived assets		17,883,148			—		—		—		—		17,883,148
Total assets		83,004,341			—		—		—		—		83,004,341

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

December 31, 2005		Henan			Shandong		Jiangsu		Anhui		Others			Consolidated
		US$			US$		US$		US$		US$			US$
Net real estate sales		61,769,436			—		—		—		—			61,769,436
Real estate lease income		132,127			—		—		—		—			132,127
Other revenue		39,498			—		—		—		989			40,487
Revenue from external customers		61,941,061			—		—		—		989			61,942,050
Cost of real estate sales		(42,199,481	)		—		—		—		—			(42,199,481	)
Cost of real estate lease income		(432,848	)		—		—		—		—			(432,848	)
Total cost of revenue		(42,632,329	)		—		—		—		—			(42,632,329	)
Gross profit		19,308,732			—		—		—		989			19,309,721
Operating expenses		(3,717,947	)		—		—		—		(152,596	)		(3,870,543	)
Operating income/(loss)		15,590,785			—		—		—		(151,607	)		15,439,178
Interest income		191,000			—		—		—		—			191,000
Interest expense		(834,469	)		—		—		—		—			(834,469	)
Share of loss in an equity investee		—			—		—		—		—			—
Income/(loss) before income taxes		14,947,316			—		—		—		(151,607	)		14,795,709
Income tax expense		(5,247,809	)		—		—		—		—			(5,247,809	)
Net income/(loss) before minority interest		9,699,507			—		—		—		(151,607	)		9,547,900
Depreciation and amortization		543,092			—		—		—		3,740			546,832
Capital expenditure		115,602			—		—		—		58,643			174,245
Investment in an equity investee		446,086			—		—		—		—			446,086
Total long-lived assets		18,289,471			—		—		—		55,605			18,345,076
Total assets		108,582,596			—		—		—		119,787			108,702,383

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

December 31, 2006		Henan			Shandong			Jiangsu			Anhui			Others			Consolidated
		US$			US$			US$			US$			US$			US$
Net real estate sales		141,577,738			—			—			—			—			141,577,738
Real estate lease income		204,411			—			—			—			—			204,411
Other revenue		44,440			8,332			515			685			531,100			585,072
Revenue from external customers		141,826,589			8,332			515			685			531,100			142,367,221
Cost of real estate sales		(107,267,400	)		—			—			—			—			(107,267,400	)
Cost of real estate lease income		(442,020	)		—			—			—			—			(442,020	)
Other cost		—			—			—			—			(486,307	)		(486,307	)
Total cost of revenue		(107,709,420	)		—			—			—			(486,307	)		(108,195,727	)
Gross profit/(loss)		34,117,169			8,332			515			685			44,793			34,171,494
Operating expenses		(5,355,273	)		(589,632	)		(38,318	)		(35,420	)		(603,383	)		(6,622,026	)
Operating income/(loss)		28,761,896			(581,300	)		(37,803	)		(34,735	)		(558,590	)		27,549,468
Interest income		461,335			—			—			—			—			461,335
Interest expense		(727,041	)		—			—			—			—			(727,041	)
Share of loss in an equity investee		(446,086	)		—			—			—			—			(446,086	)
Income/(loss) before income taxes		28,050,104			(581,300	)		(37,803	)		(34,735	)		(558,590	)		26,837,676
Income tax expense		(10,783,088	)		—			—			—			65,750			(10,717,338	)
Net income/(loss) before minority interest		17,267,016			(581,300	)		(37,803	)		(34,735	)		(492,840	)		16,120,338
Depreciation and amortization		603,279			10,741			—			—			120,401			734,421
Goodwill		—			—			—			—			1,105,408			1,105,408
Capital expenditure		1,178,931			155,928			83,176			103,266			19,573			1,540,874
Total long-lived assets		28,074,589			150,665			105,427			84,916			2,114,639			30,530,236
Total assets		88,023,519			60,066,158			36,228,682			10,575,543			10,061,870			204,955,772

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

17. Commitments and contingencies

The Group leases certain of its office properties under operating lease arrangements. Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases, and the terms of the leases do not contain rent escalation, or contingent rent, renewal, or purchase options. There are no restrictions placed upon the Group by entering into these leases.

Commitments

As of December 31, 2006, the Group has lease payments under non-cancellable leases falling due as follows:

 

		Amount
		US$
Due within 1 year		118,465
Due after 1 year, within 2 years		71,943
Total		190,408

As of December 31, 2006, the Group has outstanding commitments with respect to non-cancelable construction contracts for real estate development and land use rights purchases as follows:

 

		Amount
		US$
Due within 1 year		54,354,422

Contingencies

On June 28, 2003, Henan Xinyuan was sued by Henan Jiantong Industrials Co., Ltd. (“Jiantong”), its former contractor. The lawsuit charged Henan Xinyuan with a total fine of US$102,287 for breach of contract. However, on August 9, 2003, Henan Xinyuan countercharged Jiantong with false allegation that impaired Henan Xinyuan’s reputation and appealed for the withdrawal of investment capital from Jiantong. Total amount of the investment capital to be withdrawn and reputation compensation sought is US$28,604. As of December 31, 2006, the final judgment from the court was still pending.

On September 16, 2004, Henan Xinyuan acquired an interest in a land site located at Longhai Middle Road, Zhengzhou City, Henan Province, the PRC, from Henan Park Property Co. Ltd. (“Park Property”) for a total purchase price of US$21,636,124. As of December 31, 2006, total amount paid by way of deposit to the vendor was US$8,518,703. However, the vendor failed to transfer the land use right to Henan Xinyuan before the due date, December 5, 2004. Therefore on April 5, 2005, Henan Xinyuan sued Henan Park Property Co., Ltd. for its failure to transfer the land use right to Henan Xinyuan. The court found the subject land had been mortgaged to Guangdong Development Bank as security for a bank loan. To avoid the subject land being auctioned by the bank, Henan Xinyuan has paid US$7,389,194 to Guangdong Development Bank to discharge the mortgage. Pursuant to the final judgment of the court filed on December 12, 2005, Park Property was ordered to transfer the land use right to Henan Xinyuan. Park Property appealed the court decision. As of November 10, 2006, the court

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

has turned down the appeal of Park Property and rendered its final verdict that Henan Xinyuan prevail. The court then enforced the legal transfer of the subject land to Henan Xinyuan, which received the official land certificate in February 2007.

The remaining balance of the purchase price of US$5,728,227 was included in commitments due within one year.

Henan Xinyuan has incurred additional costs of US$3,986,579 in the process of registration of the land transfer. Further, Henan Xinyuan may be required to settle the relocation and settlement costs of US$5,122,492 due to Park Property’s financial insolvency. Therefore, Henan Xinyuan may incur total estimated costs in addition to the purchase price up to US$10,244,983. As Park Property is currently under liquidation procedures, any additional costs incurred by Henan Xinyuan may not be fully recoverable from Park Property.

On March 14, 2006, Henan Xinyuan was sued by Henan Oriental Construction Company Limited, its former contractor, claiming payment of construction fees of US$225,940 and an amount of US$32,016 for breach of contract. As of December 31, 2006, the final judgment from the court was still pending.

The PRC subsidiaries have complied with the requirements of their local authority to accrue for retirement benefit contributions in respect of their employees (See Note 2 (s)). However payment of such accrued amount has not been sought by the regulatory bureau.

As at December 31, 2006, the Group provided guarantees of US$62,372,820 (2004: US$17,767,312; 2005: US$37,879,778), in favor of their customers in respect of mortgage loans granted by banks to such customers for their purchases of the Group’s properties where the underlying real estate ownership certificates can only be provided to the banks on a time delay manner due to administrative procedures in the PRC. Pursuant to the terms of the guarantees, upon default in mortgage payments by these purchasers, the Group is responsible to repay the outstanding mortgage principals together with the accrued interest and penalty owed by the defaulted purchasers to the banks and the Group is entitled to take over the legal titles and possession of the related properties. The Group’s guarantee period starts from the dates of grant of the relevant mortgage loans and ends upon issuance of real estate ownership certificates which will generally be available within six to twelve months after the purchasers take possession of the relevant properties.

The fair value of the guarantees is not significant and the directors consider that in case of default in payments, the net realizable value of the related properties can cover the repayment of the outstanding mortgage principal together with the accrued interest and penalty and therefore no provision has been made for the guarantees.

18. Concentration of risk

The Group’s operations are conducted in the PRC. Accordingly, the Group’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC economy.

The Group’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Group’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

The Group transacts part of its business in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China (“PBOC”). However, the unification of the exchange rates does not imply the RMB may be readily convertible into U.S. dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the US$. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in a 5.7% appreciation of the RMB against the US$ by December 31, 2006.

Additionally, the value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.

The Group’s real estate projects are concentrated in Henan province. Any negative events such as a slow down in the economy in Henan province might cause material loss to the Group and have a material adverse effect on the Group’s financial condition and results of operations. The risk in this respect is mitigated by the Group by expanding its operations outside of Henan province.

The Group sells to a wide range of customers. No single customer accounted for a significant percentage of the revenue for the years ended December 31, 2004, 2005 and 2006.

19. Subsequent events

(a) The impact of the New Corporate Income Tax Law

During the 5th Session of the 10th National People's Congress, which was concluded on March 16, 2007, the PRC Corporate Income Tax Law (“the New Corporate Income Tax Law”) was approved and will become effective on January 1, 2008. The New Corporate Income Tax Law introduces a wide range of changes which include, but are not limited to, the unification of the income tax rate for domestic-invested and foreign-invested enterprises at 25%. Since the detailed implementation and administrative rules and regulations have not yet been announced, the financial impact of the New Corporate Income Tax Law to the Group cannot be reasonably estimated at this stage.

(b) Second Reorganization Plan

On March 26, 2007, the Company was incorporated under the law of the Cayman Island. Pursuant to a one-for-one share exchange under the second reorganization plan, on April 9, 2007, the Company entered into a Share Exchange and Assumption Agreement with the Zhang Family, Blue Ridge China and Equity International (collectively, the “then-existing shareholders”) and the Company, whereby:

(i) Mr. Yong Zhang and Ms. Yuyan Yang agreed to exchange their 48,000,000 and 12,000,000 common shares in Xinyuan, respectively, for an equivalent number of equal class of the Company’s newly issued shares.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

(ii) Blue Ridge China agreed to exchange its 18,483,240 Series A convertible redeemable preference shares and 9,422,627 common shares of the Company for an equivalent number of equal class of the Company’s newly issued shares.

(iii) Equity International agreed to exchange its 12,322,160 Series A convertible redeemable preference shares and 6,281,752 common shares of the Xinyuan for an equivalent number of equal class of the Company’s newly issued shares.

(iv) The Company’s Series A convertible redeemable preference shares are convertible, upon issuance, into fully paid common shares of the Company at the option of the holder at an initial conversion ratio of 1 to 1. Each Series A convertible redeemable preference share shall be converted automatically upon completion of an IPO, subject to certain adjustments set forth in the Company’s memorandum and articles of association.

(v) Xinyuan cancelled the Burnham Warrants issued to Burnham and its designee to purchase an aggregate of 1,853,172 common shares at US$0.81155 per share. The Company issued substantially similar warrants (the “New Burnham Warrants”) to Burnham and its designee. The New Burnham Warrants will expire on the earlier of August 25, 2011 or the date of an IPO.

As a result of the share exchange, the Company became the wholly-owned subsidiary of the Company on April 9, 2007 and as of that date, all the then-existing shareholders of Xinyuan became the shareholders of the Company.

On April 9, 2007, a Shareholders Agreement was entered into among the then-existing shareholders, the Parent, the Company, Burnham Securities and its designee, Mr. Joel B. Gardner, to provide for certain arrangements with respect to restrictions on transfer of shares, election of directors, approval rights and registration rights.

(c) Convertible Subordinated Notes

On April 13, 2007, the Company issued 2% Convertible Subordinated Notes due 2012 (the “Convertible Notes”) with an aggregate principal amount of US$25 million.

The Convertible Notes are repayable on April 15, 2012. The Notes bear interest at 2% per annum, adjustable to 8% from October 15, 2009 to maturity, if a qualifying IPO does not occur prior to October 15, 2009. The interest is repayable on a semi-annually basis on April 15 and October 15 each year. The Company shall pay interest on overdue principal, premium, if any, and interest at the rate of 4.0% per annum.

The holder shall have the right, at such holder’s option (i) at any time from and after a qualifying IPO and prior to April 9, 2012 and (ii) if there has been no qualifying IPO prior to April 1, 2012 then from April 2, 2012 through April 6, 2012 (each, the “Conversion Period”), to convert the principal amount of the Convertible Notes, or any portion of such principal amount which is a multiple of US$100,000, into fully paid and non-assessable common shares (as such shares shall then be constituted) at the conversion price in effect at such time.

In addition, if there are certain events, such as the Company granting its shareholders right to purchase common shares at a relatively low price, or distributing large amount of dividend (exceeds 5% of the fair value of the common shares), the Convertible Notes may be surrendered for conversion at any time on and after the date that the Company gives notice to the holders of such transactions.

The conversion price is set at US$2.6049 per share at inception and is adjustable from time to time for anti-dilutive purpose.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

The Convertible Notes are subject to various restrictive covenants, including restrictions on the Group’s ability to incur additional debt or guarantees, make restricted payments, payment of dividends or distributions on capital stock, repurchase of capital stock, payment of subordinated indebtedness, make or repayment of intercompany loans or advances, sales or transfers of properties or assets, sales of capital stock, enter into non-ordinary course business transactions, sales of assets, make investments, merge or consolidate with another company and engage in any business other than related businesses.

(d) Senior Floating Rate Notes and Warrants

On April 13, 2007, the Company issued Senior Floating Notes due 2010 (the “HY Notes”) with an aggregate principal amount of US$75 million and detachable Warrants to subscribe for common shares, at an issue price of 99.25%. The HY Notes bear interest at 6-month LIBOR (with the LIBOR rate reset semi-annually) plus 6.80%, payable semi-annually in arrears. The warrants issued together with the HY Notes entitle the holders to purchase common shares equal to the quotient obtained by dividing two-fifths of the face value of the HY Notes by the warrant exercise price, which is equal to 80% of the price per common shares sold to public under a qualifying IPO.

The HY Notes shall be repurchased or redeemed by the Company in cash on the third anniversary of the issuance date at the price equal to 100% of the principal amount, and if no qualifying IPO has occurred on or prior to the expiration of 30 months after their issuance, the repurchase price shall be equal to 112% of the principal amount plus accrued but unpaid interest. The maturity date of the Warrants shall be the later of the expiration of three years from the issuance date and the expiration of six months following the qualifying IPO.

The HY Notes are subject to various restrictive covenants, including restrictions on the Group’s ability to incur additional debt or guarantees, make restricted payments, payment of dividends or distributions on capital stock, repurchase of capital stock, payment of subordinated indebtedness, make or repayment of intercompany loans or advances, sales or transfers of properties or assets, sales of capital stock, enter into non-ordinary course business transactions, sales of assets, make investments, merge or consolidate with another company and engage in any business other than related businesses.

(e) Repayment of the Shareholders’ Loans

The Company has fully settled the principal amount of the Shareholders’ Loans of US$35,000,000 provided by Blue Ridge China and Equity International, together with all accrued and unpaid interest of US$1,552,329 (see Note 13 (f)) on April 19, 2007.

(f) Incorporation of new subsidiary

On June 12, 2007, the WFOE incorporated Xinyuan Real Estate (Chengdu) Co., Ltd. as a foreign owned enterprise with limited liability, with issued and fully subscribed share capital of RMB100,000,000, for an operating term of 10 years.

(g) Share Option Plan

On August 11, 2007, the Parent issued, under the 2007 Equity Incentive Plan (the “Plan”) grants of share options and restricted share awards to purchase up to 6,802,495 common shares to its employees, directors

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

and consultants, at an exercise price ranging from US$0.0001 to US$2.50. The objective of the Plan is to promote the interests of the Parent by enabling it to attract, retain and motivate key employees, directors and consultants responsible for the success and growth of the Group by providing them with appropriate incentives and rewards and enabling them to participate in the growth of the Parent. These options have various vesting periods ranging from 4 to 60 months and will expire no later than August 10, 2017.

The total amount of compensation expense, net of expected forfeitures, for the share options and restricted share awards granted on August 11, 2007 was US$9,917,345, which will be amortized in the amount of US$2,320,927, US$3,678,698, US$1,819,642, US$1,709,143, US$241,200 and US$147,735 in 2007, 2008, 2009, 2010, 2011 and 2012, respectively.

(h) Amended and Restated Warrants to Purchase Series A Convertible Preference Shares

On August 28, 2007, the Company amended its warrants issued to Blue Ridge China and Equity International in connection with the receipt by the holder of Series A Convertible Preference Shares, par value of US$0.0001 per share. Under the amended agreement, if the Company consummates a qualified initial public offering prior to March 31, 2008, then the warrants will expire without being exercised.

(i) Waiver of Certain Conversion Rights of Series A Convertible Preference Shares (Unaudited)

On November 13, 2007, the holders of the Series A convertible preference shares agreed to waive the contingent conversion option. As such, the Series A convertible preference shares will automatically convert at the time of a qualifying IPO on a 1 to 1 basis, subject to usual anti-dilution adjustments.

The modification is deemed to be substantive and will be treated as an extinguishment of the Series A convertible preference shares. Under EITF Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” the Company will recognize a dividend to the Series A convertible preferred shareholders, representing the difference between the fair value of the convertible preference shares immediately after modification and the carrying value of the Series A convertible preference shares immediately prior to modification. This deemed dividend to the Series A shareholders will not affect the Company’s net income or cash flows, however, it will reduce the Company’s net income attributable to ordinary shareholders and earnings per share (ADS) for the year ending December 31, 2007.

The Company has determined that on November 13, 2007, a 4% marketability discount be applied to an assumed initial offering price of US$            , the mid-point of the indicative price range for the offering, to arrive at a fair value of US$             for each Series A convertible preference share. In calculating the discount, the Company has taken into account the premium in the value of the Series A convertible preference shares relative to the common shares, and the residual price risk of the Series A preference shareholders before the offering, and has assumed that the offering will be consummated prior to year end. The Company will also review the actual IPO issue price and account for the Series A convertible preference shares accordingly in its financial statements for the year ending December 31, 2007. At this estimated fair value, the Company will record the modified Series A convertible preference shares at an amount of approximately US$             million and the deemed dividend to the Series A preference shareholders at approximately US$             million, which will reduce the net income attributable to common shareholders and retained earnings by the same amount of US$             million.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

20. Condensed financial information of the Company

Under the PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The amounts restricted include paid-in capital and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling US$78,730,297 as of December 31, 2006.

Balance sheet

 

		December 31, 2006
		US$
ASSETS
Current assets
Cash and cash equivalents		$	481,777
Due from shareholders			6,000
Total current assets			487,777
Investments in subsidiaries			104,989,082
TOTAL ASSETS			105,476,859
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Due to a subsidiary			953,812
Due to shareholders			35,000,000
Total current liabilities			35,953,812
Warrant liability of Series A convertible redeemable preference shares			631,000
Total liabilities			36,584,812
Preference shares
Preference shares, $0.0001 par value:
Authorized—50,000,000 shares
Issued and outstanding—30,805,400 shares			22,309,126
Shareholders’ equity
Common shares, $0.0001 par value:
Authorized—450,000,000 shares
Issued and outstanding—75,704,379 shares			7,570
Additional paid-in capital			17,264,455
Retained earnings			29,310,896
Total shareholders’ equity			46,582,921
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			105,476,859

 

F-48

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

Statement of operations

 

		Year ended December 31, 2006
		US$
General and administrative expenses		(71,671	)
Operating loss		(71,671	)
Interest expense		(781	)
Other income		12
Equity in profit of subsidiaries, net (Note 20(a))		16,195,350
Income from operations before income taxes		16,122,910
Income taxes		—
Net income		16,122,910
Accretion of Series A convertible redeemable preference shares		(942,301	)
Net income attributable to ordinary shareholders		15,180,609

Statement of cash flows

 

		Year ended December 31, 2006
		US$
Cash flows from operating activities:
Net income		16,122,910
Adjustment to reconcile net income to net cash provided by operating activities:
Equity in profit of subsidiaries, net		(16,195,350	)
Changes in operating assets and liabilities:
Due from shareholders		(6,000	)
Due to a subsidiary		953,812
Net cash provided by operating activities		875,372
Cash flows from investing activities:
Investment in a subsidiary		(72,000,000	)
Net cash used in investing activities		(72,000,000	)
Cash flows from financing activities:
Proceeds from issuance of common shares		14,552,985
Proceeds from issuance of preference shares		22,053,420
Proceeds from shareholders’ loans		35,000,000
Net cash provided by financing activities		71,606,405
Net increase in cash and cash equivalents		481,777
Cash and cash equivalents, at the beginning of year		—
Cash and cash equivalents, at end of year		481,777

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the years ended December 31, 2004, 2005 and 2006

(All amounts stated in US$, except for number of shares and per share data)

 

(a) Basis of presentation

In the Company-only financial statements, the Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since inception. The Company-only financial statements should be read in conjunction with the Company’s consolidated financial statements.

The Company records its investment in its subsidiaries under the equity method of accounting as prescribed in APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”. Such investment is presented on the balance sheet as “Investment in subsidiaries” and share of the subsidiaries’ profit or loss as “Equity in profit (loss) of subsidiary company” on the statements of operations.

The subsidiaries did not pay any dividend to the Company for the periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.

(b) Related party balances

For the year ended December 31, 2006, a subsidiary of the Company paid issuance costs of preference and common shares and other operating expenses amounting to US$953,812 on behalf of the Company.

At December 31, 2006, the amount due to shareholders represented the shareholders’ loans which bear an interest rate of 12.5% and are repayable in full on December 6, 2007 (see Note 13 (f)).

(c) Commitments

The Company does not have significant commitments or long-term obligations as of the year presented.

 

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Xinyuan Real Estate Co., Ltd. and Subsidiaries

As of December 31, 2006 and September 30, 2007 (unaudited) and for the nine months ended September 30, 2006 (unaudited) and 2007 (unaudited)

CONTENTS

 

		Pages
Consolidated Balance Sheets as of December 31, 2006 and September 30, 2007 (unaudited)		F-52 – F-53
Consolidated Statements of Operations for the nine months ended September 30, 2006 (unaudited) and 2007 (unaudited)		F-54
Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 (unaudited) and 2007 (unaudited)		F-55
Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2006 (unaudited) and 2007 (unaudited)		F-56
Notes to Consolidated Financial Statements		F-57 – F-103

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2006 and September 30, 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

		Notes		As of December 31, 2006		As of September 30, 2007		Proforma shareholders’ equity as of September 30, 2007
				US$ (Audited)		US$ (Unaudited)		US$ (Unaudited, Note 2)
ASSETS
Current assets
Cash and cash equivalents				34,914,210		106,410,499
Restricted cash				32,010,858		41,916,247
Accounts receivable				202,875		2,678,128
Other receivables				1,289,601		1,404,605
Other deposits and prepayments				2,932,534		7,652,375
Advances to suppliers				2,628,914		2,155,867
Inventories				252,253		335,780
Real estate property development completed		3		4,454,045		2,434,660
Real estate property under development		3		87,619,265		255,094,233
Due from shareholders		15		40,934		6,807
Due from related parties		15		7,728,227		6,055,173
Due from employees		15		313,807		660,142
Other current assets				38,013		1,771,159
Total current assets				174,425,536		428,575,675
Real estate property under development		3		19,184,534		53,614,884
Real estate properties held for lease, net		4		5,540,542		5,779,934
Property and equipment, net		5		3,469,022		4,639,455
Other long-term investment		6		241,648		241,648
Interests in an equity investee		7		—		5,970,558
Goodwill				1,105,408		1,105,408
Property management rights				910,665		654,540
Other assets				78,417		4,434,428
TOTAL ASSETS				204,955,772		505,016,530

The accompanying notes are an integral part of these financial statements.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

		Notes		As of December 31, 2006		As of September 30, 2007		Proforma shareholders’ equity as of September 30, 2007
				US$ (Audited)		US$ (Unaudited)		US$ (Unaudited, Note 2)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable				13,280,910		32,046,071
Short-term bank loans		9		22,667,025		29,690,579
Customer deposits		12		25,531,985		44,202,436
Income tax payable				7,104,573		4,632,064
Deferred tax liabilities		13		1,211,337		3,825,631
Other payables and accrued liabilities				10,056,978		14,485,572
Payroll and welfare payable				197,552		2,272,560
Due to related parties		15		3,763,843		324,077
Due to employees		15		25,612		38,586
Due to shareholders		15		35,000,000		—
Total current liabilities				118,839,815		131,517,576
Long-term bank loans		10		12,806,229		139,998,402
Warrant Liabilities		11		631,000		14,176,000
Deferred tax liabilities		13		3,786,681		2,996,952
Unrecognized tax benefits		13		—		11,765,394
Other long-term debt		11		—		93,363,919
Total liabilities				136,063,725		393,818,243
Commitments and contingencies		19
Preference shares
Preference shares, US $0.0001 par value:
Authorized—50,000,000 shares
Issued and outstanding—30,805,400 shares for 2007 (2006: 30,805,400) with aggregate amount of liquidation preference of US$ 55,417,066		16		22,309,126		24,441,243		—
Shareholders’ equity
Common shares, US $ 0.0001 par value:
Authorized—500,000,000 shares
Issued and outstanding—75,704,379 shares for 2007 (2006: 75,704,379 shares); 106,509,779 shares for proforma (unaudited)		16		7,570		7,570		10,651
Additional paid-in capital				17,264,455		17,180,691		41,618,853
Statutory reserves				4,066,854		4,066,854		4,066,854
Retained earnings				23,679,944		57,477,278		57,477,278
Accumulated other comprehensive earnings				1,564,098		8,024,651		8,024,651
Total shareholders’ equity				46,582,921		86,757,044		111,198,287
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY				204,955,772		505,016,530

The accompanying notes are an integral part of these financial statements.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the nine months ended September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

				Nine months ended September 30
		Notes		2006			2007
				US$			US$
				(Unaudited)			(Unaudited)
Revenue:
Real estate sales, net of sales taxes of US$5,772,055 in 2006 and US$ 12,692,177 in 2007, respectively				99,341,045			215,908,277
Real estate lease income				171,150			165,514
Other revenue				142,871			2,226,950
Total revenue				99,655,066			218,300,741
Cost of revenue:
Cost of real estate sales				(75,100,616	)		(145,031,411	)
Cost of real estate lease income				(347,341	)		(319,750	)
Other costs				(164,543	)		(1,638,620	)
Total cost of revenue				(75,612,500	)		(146,989,781	)
Gross profit				24,042,566			71,310,960
Selling and distribution expenses				(1,876,122	)		(5,956,676	)
General and administrative expenses				(2,095,888	)		(7,735,949	)
Operating income				20,070,556			57,618,335
Interest income				124,451			735,376
Interest expense				(307,239	)		(1,438,602	)
Share of income (loss) in an equity investee		7		(446,086	)		5,819,734
Change in fair value of warrant liabilities				—			(6,186,000	)
Income from operations before income taxes				19,441,682			56,548,843
Income taxes		13		(6,948,592	)		(20,584,150	)
Net income before minority interest				12,493,090			35,964,693
Minority interest				2,223			—
Net Income				12,495,313			35,964,693
Accretion of Series A convertible redeemable preference shares				(235,575	)		(2,167,359	)
Net income attributable to ordinary shareholders				12,259,738			33,797,334
Earnings per share:
Basic		17		0.19			0.32
Diluted		17		0.19			0.30
Shares used in computation:
Basic		17		63,038,341			106,509,779
Diluted		17		63,038,341			114,268,871
Proforma earnings per share
Basic		17					0.34
Diluted		17					0.30
Proforma shares used in computation
Basic		17					106,531,892
Diluted		17					114,333,967

The accompanying notes are an integral part of these financial statements.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

		Nine months ended September 30
		2006			2007
		US$			US$
		(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		12,495,313			35,964,693
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		699,735			1,326,320
Accretion of long-term debt		—			1,265,808
Changes in unrecognized tax benefit		—			8,810,065
Deferred tax expense		2,425,299			4,320,681
Share of (earnings) loss in an equity interest		446,086			(5,819,734	)
Minority interests’ share of earnings of a subsidiary		(2,223	)		—
Changes in fair value of warrant liabilities		—			6,186,000
Changes in fair value of embedded derivatives, net of amount capitalized		—			(4,500,340	)
Changes in operating assets and liabilities:
Accounts receivable		844,410			(2,417,298	)
Real estate property development completed		752,406			2,151,614
Real estate property under development		5,857,367			(189,269,644	)
Inventories		55,056			(72,034	)
Advances to suppliers		(1,855,933	)		565,637
Other receivables		(435,431	)		(62,563	)
Other deposits and prepayments		(2,567,750	)		(4,588,331	)
Other current assets		313,453			(1,651,957	)
Other assets		(914,788	)		(99,751	)
Accounts payable		(3,916,298	)		17,869,393
Customer deposits		(19,980,402	)		17,300,519
Income tax payable		1,633,485			(2,692,176	)
Other payables and accrued liabilities		6,257,680			3,972,757
Payroll and welfare payable		105,524			2,025,348
Net cash (used in) provided by operating activities		2,212,989			(109,414,993	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired		(1,578,630	)		—
Proceeds from disposal of investment		111,521			—
Improvement of properties held for lease		(25,972	)		(279,625	)
Purchase of property and equipment		(418,449	)		(1,335,272	)
Net cash used in investing activities		(1,911,530	)		(1,614,897	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preference shares		22,580,100			—
Distribution paid to shareholders		(1,476,461	)		—
Increase of restricted cash		(10,852,505	)		(8,461,024	)
Repayments of short-term bank loans		(14,414,506	)		(11,348,961	)
Proceeds from short-term bank loans		5,050,432			17,349,561
Repayment of long-term bank loans		(3,540,405	)		(16,958,218	)
Proceeds from long-term bank loans		2,174,910			141,079,327
Repayment of shareholders’ loans		—			(35,000,000	)
Advances from shareholders		—			34,794
Proceeds from other long-term debts		—			100,000,000
Debt issuance cost		—			(5,063,176	)
Repayment from/(loan to) related parties		5,269,013			(1,576,905	)
Loan to employees		(387,241	)		(315,417	)
Net cash provided by financing activities		4,403,337			179,739,981
NET INCREASE IN CASH AND CASH EQUIVALENTS		4,704,796			68,710,091
Effect of exchange rate changes on cash and cash equivalents		1,017,156			2,786,198
Cash and cash equivalents, at beginning of period		14,928,747			34,914,210
CASH AND CASH EQUIVALENTS, AT END OF PERIOD		20,650,699			106,410,499
SUPPLEMENTARY INFORMATION ON CASH FLOWS
Income taxes paid		3,938,154			10,731,622
Total interest paid		1,388,640			6,614,320

The accompanying notes are an integral part of these financial statements.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the nine months ended September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

		Number of shares		Issued ordinary shares at par		Additional paid-in capital			Statutory reserves		Comprehensive income		Accumulated earnings			Accumulated other comprehensive earnings		Total
				US$		US$			US$		US$		US$			US$		US$
BALANCE AT JANUARY 1, 2006		60,000,000		6,000		2,657,445			3,703,840		—		10,338,810			293,654		16,999,749
Foreign currency translation gain, net of tax		—		—		—			—		1,000,212		—			1,000,212		1,000,212
Net income		—		—		—			—		12,495,313		12,495,313			—		12,495,313
Distribution paid to shareholders		—		—		—			—		—		(1,476,461	)		—		(1,476,461	)
Accretion of Series A convertible redeemable preference shares		—		—		—			—		—		(235,575	)		—		(235,575	)
BALANCE AT SEPTEMBER 30, 2006		60,000,000		6,000		2,657,445			3,703,840		13,495,525		21,122,087			1,293,866		28,783,238
BALANCE AT JANUARY 1, 2007		75,704,379		7,570		17,264,455			4,066,854		—		23,679,944			1,564,098		46,582,921
Foreign currency translation gain, net of tax		—		—		—			—		6,460,553		—			6,460,553		6,460,553
Net income		—		—		—			—		35,964,693		35,964,693			—		35,964,693
Accretion of Series A convertible redeemable preference shares		—		—		—			—		—		(2,167,359	)		—		(2,167,359	)
Additional issuance costs		—		—		(83,764	)		—		—		—			—		(83,764	)
BALANCE AT SEPTEMBER 30, 2007		75,704,379		7,570		17,180,691			4,066,854		42,425,246		57,477,278			8,024,651		86,757,044

The accompanying notes are an integral part of these financial statements.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

1. Background information of business and organization

Xinyuan Real Estate Ltd. (“Xinyuan”) was incorporated on January 27, 2006 as a privately held company under the law of the Cayman Islands by Mr. Yong Zhang and his wife, Ms. Yuyan Yang (collectively, the “Zhang Family”).

Xinyuan Real Estate Co., Ltd. (the “Company”) was incorporated on March 26, 2007 under the law of the Cayman Islands. Pursuant to a one-for-one share exchange under a reorganization plan, on April 9, 2007, the Company entered into a Share Exchange and Assumption Agreement with the Zhang Family, Blue Ridge China Partners, L.P. (“Blue Ridge China”) and EI Fund II China, LLC (“Equity International”) (collectively, the “then-existing shareholders”), whereby:

(i) Mr. Yong Zhang and Ms. Yuyan Yang agreed to exchange their 48,000,000 and 12,000,000 common shares in Xinyuan, respectively, for an equivalent number of equal class of the Company’s newly issued shares.

(ii) Blue Ridge China agreed to exchange its 18,483,240 Series A convertible redeemable preference shares and 9,422,627 common shares of Xinyuan for an equivalent number of equal class of the Company’s newly issued shares.

(iii) Equity International agreed to exchange its 12,322,160 Series A convertible redeemable preference shares and 6,281,752 common shares of Xinyuan for an equivalent number of equal class of the Company’s newly issued shares.

(iv) The Company’s Series A convertible redeemable preference shares are convertible, upon issuance, into fully paid common shares of the Company at the option of the holder at an initial conversion ratio of 1 to 1. Each Series A convertible redeemable preference share shall be converted automatically upon completion of an IPO, subject to certain adjustments set forth in the Company’s memorandum and articles of association.

(v) Xinyuan cancelled the Burnham Warrants issued to Burnham and its designee to purchase an aggregate of 1,853,172 common shares at US$0.81155 per share. The Company issued similar warrants (the “New Burnham Warrants”) to Burnham and its designee. The New Burnham Warrants will expire on the earlier of August 25, 2011 or the date of an IPO.

As a result of the share exchange, Xinyuan became the wholly-owned subsidiary of the Company on April 9, 2007 and as of that date all the then-existing shareholders of Xinyuan became the shareholders of the Company. The above exchange was accounted for as an exchange that lacks substance, in a manner similar to a pooling-of-interest. Accordingly, the accompanying consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented. The assets and liabilities of the parties to the reorganization have been stated at their historical amounts in the consolidated financial statements.

On April 9, 2007, a Shareholder Agreement was entered into among the then-existing shareholders, the Company, Xinyuan, Burnham Securities and its designee, Mr. Joel B. Gardner, to provide for certain arrangements with respect to restrictions on transfers of shares, election of directors, approval rights and registration rights.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

Henan Xinyuan Real Estate Co., Ltd (“Henan Xinyuan”) was incorporated on May 19, 1997 by the Zhang Family as a privately held company under the law of the People’s Republic of China (the “PRC” or “China”). Henan Xinyuan is principally engaged in the construction, development and sale of residential real estate units in Henan province of the PRC.

On March 16, 2006, Henan Xinyuan acquired an additional 20% interest in Henan Wanzhong Real Estate Co., Ltd. (“Henan Wanzhong”), which was incorporated on February 6, 2005, from Ms. Yuyan Yang to bring its total interest therein to 100%.

Pursuant to a reorganization plan (the “Reorganization”), Xinyuan incorporated Xinyuan Real Estate (China) Development Co., Ltd (the “WFOE”) with issued and fully subscribed share capital of US$5 million on April 10, 2006. On August 7, 2006, the WFOE and the Zhang Family entered into an equity transfer agreement in which the Zhang Family transferred all of its equity interests in Henan Xinyuan to the WFOE, a wholly owned subsidiary of Xinyuan in exchange for US$1.25 million. Henan Xinyuan registered the change of shareholders along with its amended articles of association with the local Administration of Industry and Commerce (“AIC”) on August 7, 2006. A new business license for Henan Xinyuan was issued on August 10, 2006.

According to relevant PRC laws and regulations, an equity transfer is completed upon registration with the local AIC and the issuance of a new business license. Therefore, the equity transfer of Henan Xinyuan from the Zhang Family to the WFOE was considered to be legally completed on August 10, 2006. The Reorganization, as well as the acquisition of the 20% minority interest in Henan Wanzhong, were accounted for as a legal reorganization of entities under common control, in a manner similar to a pooling-of-interest. Cash consideration paid by WFOE to the Zhang Family for the acquisition of equity interests in Henan Xinyuan and Henan Wanzhong is recorded as a distribution to shareholders.

On August 25, 2006, Xinyuan issued 18,483,240 Series A convertible redeemable preference shares and one warrant to Blue Ridge China Partners, L.P. (“Blue Ridge China”) and 12,322,160 Series A convertible redeemable preference shares and one warrant to EI Fund II China, LLC (“Equity International”) for US$15 million and US$10 million, respectively. After the preference shares subscription, Blue Ridge China and Equity International collectively owned 34% voting rights in Xinyuan and obtained certain substantive participating rights as defined in Emerging Issues Task Force (“EITF”) No. 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights”. Because of these substantive participating rights, the Zhang Family was no longer considered the controlling shareholder of Xinyuan starting August 25, 2006 for accounting purposes. These substantive participating rights have been carried over to the Company.

On August 30, 2006, Henan Xinyuan acquired a 100% equity interest in each of Henan Xinyuan Property Management Co., Ltd. (“Xinyuan Property Management”), Henan Xinyuan Real Estate Agency Co., Ltd. (“Xinyuan Agency”), Zhengzhou Mingyuan Landscape Engineering Co., Ltd. (“Mingyuan Landscape”) and Zhengzhou Xinyuan Computer Network Engineering Co., Ltd. (“Xinyuan Network”) (collectively, the “Ancillary Companies”) from the Zhang Family for a cash consideration of US$2.1 million. The terms of the acquisitions of the Ancillary Companies were not finalized as part of the Reorganization. The acquisition was accounted for using the purchase method of accounting as the Zhang Family, subsequent to August 25, 2006, is deemed, for accounting purposes, to no longer have control over the Group due to the substantive participating rights of Blue Ridge China and Equity International. The acquired assets and liabilities of the Ancillary Companies were recorded at fair value on the acquisition date.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

The Company’s subsidiaries and an equity investee are set out below:

 

Company name		Place and date of incorporation		Registered/ paid-up capital RMB ’000				Percentage of equity directly attributable to the Group			Principal activities
Subsidiary companies:
Xinyuan Real Estate Limited		The Cayman Islands January 27, 2006		$	50,000	*		100	%		Investment holding company
WFOE		The PRC April 10, 2006			565,940			100	%		Investment holding company
Henan Xinyuan		The PRC May 19, 1997			50,000			100	%		Real estate development
Henan Wanzhong Real Estate Co., Ltd. **		The PRC February 6, 2005			10,000			100	%		Real estate development
Qingdao Xinyuan Xingrui Real Estate Co., Ltd.		The PRC February 9, 2006			10,000			100	%		Real estate development
Shandong Xinyuan Real Estate Co., Ltd.		The PRC June 2, 2006			80,000			100	%		Real estate development
Henan Xinyuan Property Management Co., Ltd. #		The PRC December 28 1998			5,000			100	%		Providing property management services
Henan Xinyuan Real Estate Agency Co., Ltd. #		The PRC November 6, 2005			2,000			100	%		Real estate sales, purchase and lease services
Zhengzhou Xinyuan Landscape Engineering Co., Ltd. #		The PRC February 17, 2004			2,000			100	%		Landscaping engineering and management
Zhengzhou Xinyuan Computer Network Engineering Co., Ltd. #		The PRC May 26, 2004			2,000			100	%		Installation of intercom systems
Suzhou Xinyuan Real Estate Co., Ltd.		The PRC November 24, 2006			200,000			100	%		Real estate development
Anhui Xinyuan Real Estate Co., Ltd.		The PRC December 7, 2006			50,000			100	%		Real estate development

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

Company name		Place and date of incorporation		Registered/ paid-up capital RMB ’000		Percentage of equity directly attributable to the Group			Principal activities
Subsidiary companies:
Xinyuan Real Estate (Chengdu) Co., Ltd.		The PRC June 12, 2007		100,000		100	%		Real estate development
Equity investee:
Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd. (“Jiantou Xinyuan”)		The PRC June 13, 2005		8,000		45	%		Real estate development

---

*

Expressed in US$

**

The percentage of equity directly attributable to the Group was increased from 80% to 100% on March 16, 2006.

#

These companies were acquired on August 30, 2006, for total consideration of US$2.1 million.

Except where otherwise indicated, equity holdings remained unchanged throughout the nine months ended September 30, 2006 and 2007. Beijing Xinyuan Jinhe Investment & Development Co., Ltd., an investment company 99% owned by Xinyuan, was liquidated in November 2006.

2. Summary of significant accounting policies

(a) Basis of presentation and consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In the opinion of the Group’s management, the accompanying unaudited interim consolidated financial statements contain all normal recurring adjustments necessary for a fair presentation of the Group’s consolidated financial statements for the nine months ended September 30, 2007 and 2006. The results of operations for the nine months ended September 30, 2007 are not necessarily indicative of results expected for the full year. The consolidated financial statements include the financial statements of the Company, its subsidiaries, and Variable Interest Entities for which the Company is the Primary Beneficiary (collectively, the “Group”). All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.

Subsidiaries and other controlled entities are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where there is a loss of control of a subsidiary or other controlled entity, the consolidated financial statements include the results for the part of the reporting year during which the Group has control.

(b) Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

accompanying notes, and disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, fair values, revenue recognition, taxes, budgeted costs and other similar charges. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.

(c) Fair value of financial instruments

Fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The Group considers the carrying amount of cash, restricted cash, accounts receivable, advances to suppliers, other receivables, accounts payable, other payables and amounts due from/to shareholders, related parties and employees and bank loans to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. The Group considers the carrying amount of bank loans to approximate their fair values based on the interest rates of the instruments and the current market rate of interest.

For investments that are actively traded in organized financial markets, fair value is determined by reference to market bid price at the close of business on the balance sheet date. For investments where there is no quoted market price, fair value is determined either:

(i) by reference to the current market value of another financial instrument which is substantially the same; or

(ii) is calculated based on the expected cash flows of the underlying net asset of the investment.

(d) Foreign currency translation

The Group’s financial information is presented in US dollars. The functional currency of the Company is US dollars. The functional currency of the Company’s subsidiaries is Renminbi (“RMB”), the currency of the PRC. The financial statements of the Company’s subsidiaries have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation”. The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in shareholders’ equity.

 

		December 31, 2006		September 30,
				2006		2007
Year/Period end RMB: US $ exchange rate		7.8087		7.9087		7.5108
Period average RMB: US$ exchange rate		7.9721		8.0079		7.6659

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollars at the rates used in translation.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

(e) Cash and cash equivalents

The Group considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Group maintains bank accounts in the PRC and Hong Kong. The Group does not maintain any bank accounts in the United States. All PRC bank balances are denominated in RMB. Hong Kong bank balances are denominated in U.S. dollar.

Cash includes cash on hand and demand deposits in accounts maintained with state-owned and private banks within the PRC and Hong Kong. Total cash in banks at September 30, 2007 amounted to US$106,410,499 (2006: US$34,914,210), of which no deposits are covered by insurance. The Group has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

(f) Restricted cash

The Group is required to maintain certain deposits with banks that provide mortgage loans to the Group (see Note 9) and the Group’s customers in order to purchase residential units from the Group (see Note 12). These balances are subject to withdrawal restrictions and totaled US$9,236,376 as of September 30, 2007 (2006: US$15,859,805). As of September 30, 2007, the Group also held US$32,679,871 (2006:US$16,151,053) in its restricted cash accounts, representing funds received from loans, which were designated to finance permitted project development expenditures that are subject to approval by the lender. These deposits are not covered by insurance. The Group has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

(g) Real estate property development completed and under development

Real estate properties consist of finished residential unit sites, commercial offices and residential unit sites under development. The Group leases the land for the residential unit sites under land use right leases with various terms from the PRC. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.

Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales value of units to the estimated total sales value times the total project costs.

Costs of amenities transferred to buyers are allocated as common costs of the project that are allocated to specific units as a component of total construction costs. For amenities retained by the Group, costs in excess of the related fair value of the amenity are also treated as common costs. Results of operations of amenities retained by the Group are included in current operating results.

Management evaluates the recoverability of its real estate developments taking into account several factors including, but not limited to, management’s plans for future operations, prevailing market prices for similar properties and projected cash flows. There were no impairment losses for the nine months ended September 30, 2006 and 2007.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

(h) Revenue recognition

Real estate sales are reported in accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate”.

Revenue from the sales of development properties where the construction period is 12 months or less is recognized by the full accrual method at the time of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer. A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration has been exchanged, (c) any permanent financing of which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property, and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property, and the buyer’s receivable, if any, is not subject to future subordination. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method in which all costs are capitalized as incurred, and payments received from the buyer are recorded as a deposit liability.

Revenue and profit from the sale of development properties where the construction period is more than 12 months is recognized by the percentage-of-completion method on the sale of individual units when the following conditions are met:

a. Construction is beyond a preliminary stage.

b. The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit.

c. Sufficient units have already been sold to assure that the entire property will not revert to rental property.

d. Sales prices are collectible.

e. Aggregate sales proceeds and costs can be reasonably estimated.

If any of the above criteria is not met, proceeds are accounted for as deposits until the criteria are met and/or the sale consummated.

The effect of changes to total estimated contract cost or revenues, if any, are recognized in the period in which they are determined. Revenue recognized to date in excess of amounts received from customers is classified as current assets under real estate property under development. Amounts received from customers in excess of revenue recognized to date are classified as current liabilities under customer deposits. As of December 31, 2006 and September 30, 2007, the amounts received from customers in excess of revenues recognized were US$18.5 million and US$38.7 million, respectively.

Any losses incurred or forecast to occur on real estate transaction are recognized in the period in which the loss is first anticipated.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

Real estate lease income is recognized on a straight-line basis over the terms of the tenancy agreements. Business tax of 5% and depreciation cost of the property are recorded as the cost of rental income.

Other revenue mainly includes property management service fees of US$1,430,377 for the nine months ended September 30, 2007 (2006: US$93,505).

(i) Accounts receivable

Accounts receivable consists of balances due from customers for the sale of residential units in the PRC. In cases where the customers deposit more than 50% of the total purchase price, the Group may defer the remaining purchase price. These deferred balances are unsecured, bear no interest and are due within six months from the date of the sale.

Accounts receivable are reviewed periodically as to whether their carrying value has become impaired. The Group considers the assets to be impaired if the collectability of the balances become doubtful. As of December 31, 2006 and September 30, 2007, the allowance for doubtful debts was US$ nil.

(j) Other receivables

Other receivables consist of various cash advances to unrelated companies and individuals with which the Group has business relationships.

Other receivables are reviewed periodically as to whether their carrying value has become impaired. The Group considers the assets to be impaired if the collectability of the balances becomes doubtful. As of December 31, 2006 and September 30, 2007, the allowance for doubtful debts was US$ nil.

(k) Advances to suppliers

Advances to suppliers consist of balances paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the development and construction of residential units in the PRC. Advances to suppliers are reviewed periodically to determine whether their carrying value has become impaired. The Group considers the assets to be impaired if the collectability of the services and materials become doubtful. As of December 31, 2006 and September 30, 2007, the allowance for doubtful debts was US$nil.

(l) Customer deposits

Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding to the Group upon the completion of the financing rather than the completion of the project. The Group receives these funds and recognizes them as a current liability until the revenue can be recognized.

(m) Other payables

Other payables consist of balances for non-construction costs with unrelated companies and individuals with which the Group has business relationships. These amounts are unsecured, non-interest bearing and generally are short term in nature.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

(n) Real estate properties held for lease, net

Real estate properties held for lease are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of the real estate properties held for lease are 20 years.

Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Major additions and improvements to the real estate properties held for lease are capitalized.

(o) Property and equipment, net

Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of the assets are as follows:

 

Buildings		20 years
Vehicles		5 years
Furniture and fixture		5 years

Maintenance, repairs and minor renewals are charged directly to expense as incurred unless such expenditures extend the useful life or represent a betterment, in which case they are capitalized.

(p) Long-term investments

The Group accounts for long-term investments in equities as follows:

 

Ÿ

Where the Group has significant influence over the investee, the Group applies the equity method of accounting. The reporting dates and accounting policies of the equity investees are the same as the Group. The investments in the equity investees are stated at cost, including the Group’s share of the equity investee’s net gain or loss, less any impairment in value. The Group recognizes in its consolidated statement of operations its share of the net income of the equity investees.

 

Ÿ

Where the Group has no significant influence, the investment is classified as other long-term investment and is carried under the cost method. Investment income is recognized by the Group when the investee declares a dividend and the Group believes it is collectible. The Group periodically evaluates the carrying value of its investment under the cost method and any decline in value is included in impairment of cost investment.

As of December 31, 2006 and September 30, 2007, the Group has investments in two companies in the PRC that specialize in the real estate industry. The Group has 45% and 1.85% interests in them, respectively. For the 45% owned equity investee, the Group accounts for the investment under the equity method. Investment income or loss is recognized by the Group periodically according to 45% of the total net profit or loss generated by the equity investee. For the 1.85% owned company, the Group does not exercise significant influence over it and the Group accounts for the investment under the cost method. Investment income is recognized by the Group when the investee declares a dividend and the Group believes it is collectible.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

(q) Impairment of long-lived assets

The Group reviews its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the fair value of the assets. There was no impairment loss recognized for the long-lived assets for the nine months ended September 30, 2006 and 2007.

(r) Capitalized interest

The Group capitalizes interest as a component of building construction costs in accordance with SFAS No. 34, “Capitalization of Interest Cost”.

As a result of the total interest costs capitalized during the period, the interest expense for the nine months ended September 30 was as follows:

 

		2006			2007
		US$			US$
Change in fair value of embedded derivative on Convertible Subordinated Notes		—			(2,482,000	)
Accretion of discount from embedded derivative on Convertible Subordinated Notes		—			235,934
Change in fair value of embedded derivative on Senior Floating Rate Notes		—			(3,422,000	)
Accretion of discount arising from embedded derivative on Senior Floating Rate Notes		—			555,584
Amortization of issuance cost related to other long term debt		—			741,535
Accretion of discount arising from warrants on Senior Floating Rate Notes		—			1,137,919
Interest on bank loans		1,362,574			12,748,183
Total interest costs		1,362,574			9,515,155
Less: total interest costs capitalized		(1,055,335	)		(8,076,553	)
Interest expense, net		307,239			1,438,602

(s) Retirement benefits

Regulations in the PRC require the Group to contribute to a defined contribution retirement plan for all permanent employees. Pursuant to the mandatory requirement from the local authority in the PRC, the retirement pension insurance, unemployment insurance, health insurance and housing fund were established for the employees during the term they are employed. For the nine months ended September 30, 2006 and 2007 the level of contribution to these funds for each employee was determined at 38% of their average salary determined by the Social Welfare Bureau. For the nine months ended September 30, 2007, the Group recorded expenses in the amount of US$1,084,181 (2006: US$309,255)

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

(t) Distribution of earnings and reserve fund

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions from its subsidiaries. The earnings reflected in the financial statements prepared in accordance with US GAAP differ from those reflected in the statutory financial statements of the Company’s subsidiaries.

In accordance with the PRC Company Law, the PRC subsidiaries are required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory surplus reserve (the “SSR”) until such reserve reaches 50% of the registered capital of the subsidiaries.

Subject to certain restrictions set out in the PRC Company Law, the SSR may be distributed to stockholders in the form of share bonus issues to increase share capital, provided that the remaining balance after the capitalization is not less than 25% of the registered capital.

Prior to January 1, 2006, according to the PRC Company Law, the PRC subsidiaries are required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory public welfare fund (the “PWF”), which is a non-distributable reserve except in the event of liquidation of the subsidiaries. The fund must be used for capital expenditure on staff welfare facilities. According to the PRC Company Law effective January 1, 2006, the PRC subsidiaries are not required to transfer their profit after tax to the PWF.

(u) Income taxes

The Group accounts for income tax using the liability method. Deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as unutilized net operating losses. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future utilization is uncertain.

On January 1, 2007, the Group adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). There was no cumulative effect of the adoption of FIN 48 to beginning retained earnings. Interest and penalties arising from underpayment of income taxes shall be recognized according to the relevant tax law. The amount of interest expense to be recognized shall be computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken in a tax return. Interest recognized in accordance with this Interpretation is classified in the financial statements as interest expense, while penalties recognized in accordance with this Interpretation are classified in the financial statements as other expenses. Please refer to Note (13), “Income Taxes” for additional information relating to the adoption of FIN 48 and its impact on the current period financial results.

In accordance with the provisions of FIN 48, the Group recognizes in its financial statements the impact of a tax position if a tax return’s position or future tax position is “more likely than not” to prevail (defined as a likelihood of more than fifty percent of being sustained upon audit, based on the technical merits of the tax position). Tax positions that meet the “more likely than not” threshold are measured (using a probability weighted approach) at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. The Group’s estimated liability for unrecognized tax benefits is periodically assessed

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, certain changes and/or developments with respect to audits, and expiration of the statute of limitations. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from the Group’s estimates. As each audit is concluded, adjustments, if any, are appropriately recorded in the Group’s financial statements. Additionally, in future periods, changes in facts, circumstances, and new information may require the Group to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur.

Prior to the adoption of FIN 48, the Group applied Statement of Financial Accounting Standards (“SFAS”) No.5, “Accounting for Contingencies,” to assess and provide for potential income tax exposures. In accordance with SFAS No.5, the Group maintained reserves for tax contingencies based on reasonable estimates of the tax liabilities, interest, and penalties (if any) that may result from such audits. FIN 48 substantially changes the applicable accounting model and is likely to cause greater volatility in the income statements and effective tax rates as more items are recognized and/or derecognized discretely within income tax expense.

(v) Land Appreciation Tax (“LAT”)

In accordance with the relevant taxation laws for real estate companies of the provinces in which the subsidiaries operate in the PRC, the local tax authorities levy LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, being the proceeds of sales of properties less deductible expenditures, including borrowing costs and all property development expenditures. LAT is prepaid on customer deposits and is expensed when the related revenue is recognized, as explained at Note 2 (l).

(w) Comprehensive income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Group’s only components of comprehensive income during the nine months ended September 30, 2006 and 2007 were net income and the foreign currency translation adjustment.

(x) Advertising expenses

Advertising costs are expensed as incurred, or the first time the advertising takes place, in accordance with Statement of Position No. 93-7 “Reporting on Advertising Costs”. For the nine months ended September 30, 2007, the Group recorded an advertising expense of US$2,262,443 (2006: US$910,342).

(y) Leases

In accordance with SFAS No. 13, “Accounting for Leases”, leases are classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital lease if any of the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the property’s estimated remaining economic life or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental payments are expensed as incurred.

The Group has no capital leases for any of the periods stated herein. For the nine months ended September 30, 2007 the Group recorded total rental expense of US$236,479 (2006: US$45,879).

(z) Goodwill and intangible assets

Goodwill represents the excess of cost over the fair value of identifiable net assets of acquired businesses. SFAS No. 142 “Goodwill and Other Intangible Assets” requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily determined by computing the future discounted cash flows expected to be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value is then compared with the carrying amount of the reporting unit goodwill, and if it is less, the Company would then recognize an impairment loss.

Intangible assets represent property management rights acquired in a business combination and are recognized initially at fair value at the date of acquisition.

Property management rights represent contractual rights to provide management services to the owners of residential developments. Intangible assets are carried at cost less accumulated amortization. Amortization for the property management rights is computed on a straight-line basis over the contract life of three years. For the nine months ended September 30, 2007, the Group recorded an amortization charge of US$256,125 (2006: US$28,458).

The property management rights are amortized over the contract life of 3 years. Remaining amortization are as follows:

 

Year		Amount
		US$
2007		85,374
2008		341,499
2009		227,667
Total		654,540

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

The balances of goodwill and tangible assets as of September 30, 2007 and December 31, 2006 are as follows:

 

		December 31, 2006					September 30, 2007
		Goodwill		Property management rights			Goodwill		Property management rights
		US$		US$			US$		US$
Cost		1,105,408		1,024,498			1,105,408		1,024,498
Accumulated amortization		—		(113,833	)		—		(369,958	)
Closing balance		1,105,408		910,665			1,105,408		654,540

(aa) Property warranty

The Company and its subsidiaries provide customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold as stipulated in the relevant sales contracts. The warranty period varies from two months to three years, depending on different property components the warranty covers. The Group constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company constantly monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Group may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Group also withholds up to 5% of the contract cost from sub-contractors for periods of 2 to 5 years. These amounts are included in current liabilities, and are only paid to the extent that has been no warranty claim against the Group relating to the work performed or materials supplied by the subcontractors. For the three years ended December 31, 2006 and the nine months ended September 30, 2007, the Group had not recognized any warranty liability or incurred any warranty costs in excess of the amount retained from subcontractors.

(ab) Earnings per share

Earnings per share is calculated in accordance with SFAS No. 128, “Earnings Per Share”. Basic earnings per share is computed by dividing net income attributable to holders of common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares. Convertible, redeemable preference shares are included in both basic and diluted earnings per ordinary share computations as they are considered participating securities. Contingent exercise price resets are accounted for in a manner similar to contingently issuable shares.

Ordinary share equivalents are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive.

(ac) Burnham Warrants

The Company has entered into an agreement with Burnham Securities (“Burnham”) to engage Burnham to render certain financial advisory and investment banking services to the Company in order to raise capital through a private placement and subsequently in a public offering.

As part of the payment for Burnham’s services rendered on the issuance of preference shares to Blue Ridge China and Equity International, the Company granted Burnham and its designee warrants to acquire

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

1,853,172 common shares in total (“Burnham Warrants”), at US$0.81155 per share, exercisable between August 25, 2006 and the earlier of August 25, 2011, or the date of an initial public offering or change in control of the Company. The warrants are non-transferable.

As the warrants are over common shares, they have been recorded in additional paid in capital. In accordance with SFAS No. 123 (R), “Share based payment” and EITF No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, the Burnham Warrants are measured based on the fair value of services rendered.

The cost of the transaction with Burnham was incurred solely for the purpose of the fund raising, and offset against the proceeds from the preference shares issued.

(ad) Unaudited proforma shareholders’ equity

If an initial public offering (“IPO”) is completed, all of the Series A convertible redeemable preference shares (see Note 16) outstanding will automatically convert into 30,805,400 common shares, based on the number of Series A convertible redeemable preference shares outstanding at September 30, 2007. The terms of the Series A preference shares allow the holders to receive additional common shares if the value of the common shares upon conversion of the Series A preference shares in connection with an IPO is less than two times the original Series A preference shares issuance price of US$0.81155, plus an accreted amount of 10% compounded annually to the date of completion of the IPO. The holders of the Series A preference shares shall receive common shares equal to the amount of the shortfall divided by the price of the common shares. Unaudited proforma shareholders’ equity, as adjusted for the assumed conversion of the Series A convertible redeemable preference shares, is set forth in the consolidated balance sheets.

(ae) Convertible Subordinated Notes

On April 13, 2007, the Company issued 2% Convertible Subordinated Notes due 2012 (the “Convertible Note”) with an aggregate principal amount of US$25 million. The holder shall have the right, at such holder’s option (i) at any time from and after a qualifying initial public offering (“IPO”) and prior to April 9, 2012 and (ii) if there has been no qualifying IPO prior to April 1, 2012 then from April 2, 2012 through April 6, 2012 (each, the “Conversion Period”), to convert the principal amount of the Convertible Notes, or any portion of such principal amount which is a multiple of US$100,000, into fully paid and non-assessable common shares (as such shares shall then be constituted) at the conversion price in effect at such time.

Given that the Convertible Note is debt in its legal form and is not a derivative in its entirety, it is not considered a financial instrument within the scope of SFAS No. 150 “Accounting for Financial Instrument with Characteristics of Both Liabilities and Equity.” In addition, since the Convertible Note provides that holder with an option to convert into a fixed number of shares for which the ability to exercise the option is based on the passage of time or a contingent event (in this case, an IPO), it meets the definition of a conventional convertible instrument and has been classified as a liability.

According to the terms of the Convertible Note, the Note bears interest at 2% per annum, but is subject to increase to 8% if a Qualifying IPO does not occur prior to October 15, 2009, from and including October 15, 2009 to maturity. Hence, the contingent interest is indexed to the Qualifying IPO, which is not considered clearly

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

and closely related to the economic characteristics of the debt host. Accordingly, the contingent interest feature is considered an embedded derivative that has been bifurcated from the Convertible Note and valued separately. The contingent interest is initially recorded as a derivative liability associated with long-term debt at fair value of US$2,543,000. The fair value at September 30, 2007 was US$61,000, with the resulting change in fair value recognized in current earnings, net of amount capitalized.

The Convertible Note, net of the contingent interest feature, is accreted to its face amount at maturity using the effective interest method. If there is a Qualifying IPO prior to April 2, 2012, the debt amount, including any unamortized debt discount on the Convertible Note will be immediately credited to equity upon conversion.

(af) Senior Floating Rate Notes and Warrants

On April 13, 2007, the Company issued Senior Floating Rate Notes due 2010 (the “FRN”) with a par value of US$100,000 with an aggregate principal amount of US$75 million and detachable warrants to subscribe for common shares (the “FRN Warrants”).

Given that the FRN are debt in its legal form, it has been classified as other long-term debt. According to EITF No. 00-19, “Accounting for Derivative financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock” (“EIFF 00-19”), the portion of the proceeds of debt securities issued with detachable stock purchase warrants that is allocable to the warrants are accounted for as a derivative liability associated with other long-term debt. The allocation is based on the relative fair value of the two securities at time of issuance. Any resulting discount or premium on the debt securities is accounted for as such.

FRNs

According to the terms of the FRN, it shall be repurchased or redeemed by the Company in cash on the third anniversary of the issuance date at the price equal to 100% of the principal amount, and if no qualifying IPO has occurred on or prior to the expiration of 30 months after their issuance, the repurchase price shall be equal to 112% of the principal amount plus accrued but unpaid interest. Hence, the additional premium is indexed to the Qualifying IPO, which is not considered clearly and closely related to the economic characteristics of the debt host. Accordingly, the premium is considered an embedded derivative that has been bifurcated from the FRN and valued separately. The premium is initially recorded as a derivative liability associated with long-term debt at fair value of US$3,593,000. The fair value at September 30, 2007 was US$171,000, with the resulting change in fair value recognized in current earnings, net of amounts capitalized.

FRN Warrants

One FRN with par value of US$100,000 attached with one warrant is called one unit, and one unit is issued at the price of USD100,000. Therefore, a total of 750 units were issued. Upon issuance, the FRN Warrants were immediately separable and detachable. Each FRN Warrant entitles the holder to subscribe at the warrant exercise price for the number of common shares equal to the quotient obtained by dividing (i) US$40,000 by (ii) the warrant exercise price, which will be equal to 80% of the price per common share derived from the qualifying IPO.

The FRN Warrant was initially recorded as a derivative liability associated with long-term debt at a fair value of US$7,359,000 and the fair value at September 30, 2007 was US$13,965,000. The proceeds, net of the portion allocated to the warrant, are allocated to the FRN, which will be accreted to its face amount at maturity using the effective interest method. The accretion amount is recognized as interest expense.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

(ag) Debt Issuance Costs

Debt issuance costs are capitalized and amortized over the life of the loan to which they relate on an effective interest method.

(ah) Effect of change in estimate

Revisions in estimated gross profit margins related to percentage of completion revenues are made in the period in which circumstances requiring the revisions become known. During 2007, two real estate development projects had changes in their estimated gross profit margins. As a result of these changes, gross profit, net income and basic earnings per share in the nine months ended September 30, 2007 increased by US$22.2 million, US$14.9 million and US$0.14 per share, respectively.

(ai) Share-based compensation

The company has adopted SFAS No.123 (R) “Share-Based Payment”, which requires that share-based payment transactions with employees, such as restricted shares or stock options, be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, which is generally the vesting period.

(aj) Recent accounting pronouncements

In September 2006, the EITF issued EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing Investment under SFAS No. 66 for the Sale of Condominiums” (“EITF 06-8”). EITF 06-8 states that in assessing the collectibility of the sales price pursuant to paragraph 37(d) of SFAS 66, an entity should evaluate the adequacy of the buyer’s initial and continuing investment to conclude that the sales price is collectible. If an entity is unable to meet the criteria of paragraph 37, including an assessment of collectibility using the initial and continuing investment tests described in paragraphs 8-12 of SFAS 66, then the entity should apply the deposit method as described in paragraphs 65-67 of SFAS 66. EITF 06-8 is effective for fiscal years beginning after March 15, 2007. In November 2006, the FASB ratified the EITF’s recommendation. The application of the continuing investment criteria on the collectibility of the sales price will limit the Group’s ability to recognize revenue and costs using the percentage of completion accounting method. Although the Group will continue to evaluate the application of EITF 06-8, management does not foresee that the adoption will have a material impact on the revenue or costs reported under percentage of completion accounting in fiscal 2004-2006. The effect of a change resulting from adoption of this consensus will be recognized as a cumulative-effect adjustment.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The provisions are to be applied prospectively as of the beginning of the fiscal year in which SFAS No. 157 is initially applied, except as it pertains to a change in accounting principles related to (i) large positions previously accounted for using a block discount and (ii) financial instruments (including derivatives and hybrids) that were initially measured at fair value using the transaction price in accordance with guidance in footnote 3 of EITF No. 02-3 or similar guidance

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

in SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140”. For these transactions, differences between the amounts recognized in the statement of financial position prior to the adoption of SFAS No. 157 and the amounts recognized after adoption should be accounted for as a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Group is currently assessing the impact, if any, of this new standard on its financial statements. However, management does not currently foresee that the adoption will have a material impact on the Group’s results of operations or financial position.

In February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No.115”. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Group is currently assessing the impact of this new standard on its financial statements. However, management does not currently foresee that the adoption will have a material impact on the Group’s results of operations or financial position.

In March 2007, the FASB EITF released Topic No. D-109, “Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement No. 133”. EITF Topic D-109 provides guidance on the determination of the nature of the host contract for a hybrid financial instrument (that is, whether the nature of the host contract is more akin to debt or to equity) issued in the form of a share should be based on a consideration of economic characteristics and risks. The SEC believes that the consideration of the economic characteristics and risks of the host contract should be based on all the stated and implied substantive terms and features of the hybrid financial instrument. EITF Topic D-109 is effective at the beginning of the first fiscal quarter beginning after September 15, 2007. Although the Group will continue to evaluate the application of EITF Topic No. D-109, management does not currently foresee that the adoption will have a material impact on the Group’s results of operations or financial position.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

3. Real estate property development completed and under development

The following summarizes the components of real estate property completed and under development at December 31, 2006 and September 30, 2007:

 

		December 31, 2006			September 30, 2007
		US$			US$
Development completed:
Zhengzhou Xinyuan Splendid 1A		847,804			284,348
Zhengzhou Xinyuan Splendid 3A3B3C		243,498			—
Zhengzhou Xinyuan Splendid City Homestead		141,496			—
Zhengzhou City Family		3,204,531			1,209,990
Zhengzhou City Manor		16,716			—
Zhengzhou Central Garden East		—			940,322
Real estate property development completed		4,454,045			2,434,660
Under development:
Current:
Suzhou Colorful Garden		—			40,377,110
Suzhou Lake Splendid		35,977,718			74,201,096
Suzhou Xinyuan Splendid		—			59,663,297
Hefei Wangjiang Garden		10,287,628			29,525,954
Zhengzhou Commercial Plaza		3,041,617			11,035,614
Zhengzhou Xinyuan Huating		—			15,444,395
Zhengzhou Central Garden East		35,275,285			—
Zhengzhou Central Garden West		40,072,801			—
Jinan City Family		14,520,670			22,562,741
Jinan Elegant Scenery		23,371,650			41,554,858
Jinan International City Garden I		—			23,743,389
Jinan International City Garden II		—			17,152,633
Chengdu Xinyuan Splendid I		—			48,248,988
Chengdu Xinyuan Splendid II		—			10,887,896
		162,547,369			394,397,971
Profit recognized		19,427,999			40,432,124
Less: progress billings (see Note 12)		(94,356,103	)		(179,735,862	)
Real estate property under development—current		87,619,265			255,094,233
Non-current:
Zhengzhou Longhai Road Project		19,184,534			32,397,360
Zhengzhou Xinyuan Colorful Garden		—			21,217,524
Real estate property under development—non-current		19,184,534			53,614,884
Total real estate property under development		106,803,799			308,709,117
Total real estate property development completed and under development		111,257,844			311,143,777

As of September 30, 2007, land use rights included in the real estate properties under development totaled US$262,710,143 (2006: US$48,296,027).

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

As of September 30, 2007, partial payments for land use rights included in the real estate properties under development totaled US$35,334,452 (2006: US$ 47,879,929).

As of September 30, 2007, real estate properties under development with an aggregate net book value of US$199,061,780 (2006: US$33,427,697) were pledged as collaterals for certain bank loans.

4. Real estate properties held for lease, net

 

		December 31, 2006			September 30, 2007
		US$			US$
Zhengzhou Longhai Garden		1,191,079			1,245,255
Elementary school		2,726,937			2,839,755
Zhengzhou Xinyuan Splendid 1A		41,378			—
Kindergarten		853,090			1,203,750
Parking facility		1,992,740			2,071,778
Total cost		6,805,224			7,360,538
Accumulated depreciation		(1,264,682	)		(1,580,604	)
Real estate properties held for lease, net		5,540,542			5,779,934

Depreciation expense for the nine months ended September 30, 2007 amounted to US$315,922 (2006: US$395,668).

Real estate properties held for lease with an aggregate net book value of US$1,015,031 (2006: US$1,536,747) were pledged as collateral for certain bank loans.

As of September 30, 2007, minimum future rental income on non-cancellable leases, in aggregate and for each of the five succeeding fiscal years and thereafter, is as follows:

 

Year		Amount
		US$
Last quarter of 2007		77,907
2008		174,039
2009		166,209
2010		155,468
2011		155,468
2012		184,203
Thereafter		1,150,682
Total		2,063,976

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

5. Property and equipment, net

Property and equipment consisted of the following:

 

		December 31, 2006			September 30, 2007
		US$			US$
Buildings and improvements		2,720,820			3,229,784
Vehicles		772,303			1,478,072
Furniture and fixtures		582,313			892,070
Total		4,075,436			5,599,926
Accumulated depreciation		(606,414	)		(960,471	)
Property and equipment, net		3,469,022			4,639,455

Depreciation expense for the nine months ended September 30, 2007 amounted to US$354,057 (2006: US$65,400).

6. Other long-term investment

As of December 31, 2006 and September 30, 2007 other long-term investment consisted of the following:

 

Investee		Initial cost		Ownership			December 31, 2006		September 30, 2007
		US$					US$		US$
Henan Lianhe Real Estate Co., Ltd.		241,648		1.85	%		241,648		241,648

For the nine months ended September 30, 2006 and 2007 the Group recognized no investment loss or profit.

7. Interest in an equity investee

As of December 31, 2006 and September 30, 2007, interest in an equity investee consisted of the following:

 

							Equity Accounted
Investee		Initial cost		Ownership			December 31, 2006		September 30, 2007
		US$					US $		US$
Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd.		446,086		45	%		—		5,970,558

For the nine months ended September 30, 2007, the investee recognized earnings of US$13,035,766 (2006: net loss of US$1,100,252). The Group’s share of the income of the equity investee was US$5,819,734 (2006 share of loss :US$446,086).

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

Variable Interest Entity

In accordance with FIN 46 (R), “Consolidation of Variable Interest Entities”, Jiantou Xinyuan is a variable interest entity, as if it was established with insufficient equity at risk. The Group is not considered as the primary beneficiary, as it does not absorb the majority of Jiantou Xinyuan’s expected losses or residual returns.

Jiantou Xinyuan was established as a joint venture corporation between the Group and an unrelated company in 2005. Its purpose is to undertake residential property development projects in Zhengzhou city, Henan province. As at September 30, 2007, it had one project completed, two projects under construction, and one project under planning and had consolidated total assets of US$120.6 million.

The Group’s maximum exposure to loss is limited to its 45% equity investment and such loans as it may make from time to time to Jiantou Xinyuan (See Note 15(b)). As of September 30, 2007, its maximum exposure was approrimately US$12 million (2006: US$7.7 million).

Summarized consolidated balance sheet information of Jiantou Xinyuan is as follows:

 

		December 31, 2006			September 30, 2007
		US$			US$
Current assets		94,390,457			120,305,376
Non-current assets		263,524			344,157
Current liabilities		94,331,044			66,476,625
Non-current liabilities		—			39,984,775
Venturer’s capital (deficit)		(211,768	)		13,267,907

Summarized consolidated statement of operations information of Jiantou Xinyuan is as follows:

 

		September 30, 2006			September 30, 2007
		US$			US$
Revenue, net		—			79,994,917
Cost of revenue		—			57,453,711
Gross profit		—			22,541,206
Operating expenses		1,176,682			2,994,540
Income (loss) from operations before minority interest		(1,100,252	)		13,311,224
Net income (loss)		(1,100,252	)		13,035,766

8. Acquisitions

On March 16, 2006, the Group increased its existing ownership of Henan Wanzhong from 80% to 100% by acquiring the remaining 20% from Ms. Yuyan Yang for a cash consideration of US$0.22 million. As the Group and Henan Wanzhong were under common control at the time, the acquisition was accounted for in a manner similar to a pooling-of-interest the effect of which had been taken to February 6, 2005, the day Henan Wanzhong was incorporated. Accordingly, no adjustment was made to the recorded book values of assets and liabilities transferred. The cash consideration was recorded as a distribution to shareholders.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

9. Short-term bank loans

Short term bank loans represent amounts due to various banks and are due on the dates indicated below. These loans generally can be renewed with the banks. Short term bank loans at December 31, 2006 and September 30, 2007 consisted of the following:

 

		December 31, 2006		September 30, 2007
		US$		US$
Loans from China Construction Bank,
Due September 29, 2007, at 6.51% per annum		1,920,934		—
Due December 21, 2007, at 6.42% per annum		3,201,557		—
		5,122,491		—
Loan from China Communication Bank,
Due March 21, 2007, at 6.138% per annum		1,536,747		—
Due September 15, 2008, at 6.90% per annum		—		1,730,841
		1,536,747		1,730,841
Loans from Industrial and Commercial Bank of China (“ICBC”),
Due December 31, 2007, at 7.344% per annum		9,604,672		—
Due October 31, 2007, at 7.344% per annum		—		6,657,080
Due March 31, 2008, at 6.75% per annum		—		3,195,399
Due December 31, 2007, at 6.41% per annum		—		1,331,416
Due June 30, 2008, at 6.75% per annum		—		798,850
Due September 30, 2008, at 6.75% per annum		—		2,662,832
		9,604,672		14,645,577
Loan from China Merchants Bank,
Due May 25, 2008, at 6.57% per annum		—		13,314,161
		—		13,314,161
Loan from Shanghai Pudong Development Bank,
Due May 28, 2007, at 7.254% per annum		6,403,115		—
		6,403,115		—
Total short-term bank loans		22,667,025		29,690,579

As of September 30, 2007, the Group’s short term bank loans are all denominated in RMB and are secured by the Group’s real estate properties under development with net book value of US$25,317,438 (2006: US$12,924,924), property and equipment with net book value of US$1,015,031 (2006:US$ nil) and certain deposits in the banks amounting to US$8,293,356 (2006:US$8,759,733). In 2006, the short term bank loans were also secured by real estate properties held for lease property certificates with net book value of US$ 1,536,747.

The weighted average interest rate on short-term bank loans as of September 30, 2007 was 6.99% (2006: 6.73%).

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

10. Long-term bank loans

Long-term bank loans as of December 31, 2006 and September 30, 2007 consisted of the following:

 

		December 31, 2006		September 30, 2007
		US$		US$
Loan from China Construction Bank,
Due January 3, 2009, at 6.93% per annum		—		3,861,107
Due January 3, 2009, at 6.93% per annum		—		4,127,390
Due May 13, 2009, at 6.57% per annum		—		6,657,080
Due June 12, 2009, at 6.41% per annum		—		14,645,577
Due June 12, 2009, at 6.41% per annum		—		11,916,174
		—		41,207,328
Loan from ICBC,
Due December 18, 2008, at 6.93% per annum		12,806,229		10,917,612
Due December 18, 2008, at 6.93% per annum		—		6,657,080
Due March 27, 2009, at 6.57% per annum		—		3,994,248
Due December 31, 2008, at 5.99% per annum		—		6,923,364
Due December 31, 2008, at 6.24% per annum		—		1,065,133
Due December 31, 2008, at 6.75% per annum		—		2,662,832
Due June 28, 2010, at 7.72% per annum		—		13,314,161
Due June 28, 2010, at 7.72% per annum		—		1,331,416
Due October 23, 2008, at 8.22% per annum		—		1,331,416
		12,806,229		48,197,262
Loan from China Merchants Bank,
Due September 29, 2009, at 7.47% per annum		—		19,971,244
Due September 29, 2009, at 7.47% per annum		—		3,994,248
		—		23,965,492
Loan from China Agriculture Bank,
Due October 30, 2008, at 6.37% per annum		—		6,657,080
Due April 30, 2009, at 6.11% per annum		—		6,657,080
Due July 30, 2009, at 6.11% per annum		—		6,657,080
Due March 27, 2010, at 6.37% per annum		—		6,657,080
		—		26,628,320
Total long-term bank loans		12,806,229		139,998,402

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

As of September 30, 2007, the contractual maturities of these loans are as follows:

 

		Amount
Year		US$
4th quarter 2007		7,988,496
2008		57,916,600
2009		82,481,228
2010		21,302,657
		169,688,981
Less: short term loan (Note 9)		(29,690,579	)
Total long-term bank loans		139,998,402

As of September 30, 2007, the Group’s long term bank loans are all denominated in RMB and are secured by the Group’s real estate properties under development with net book value of US$173,744,342 (2006: US$20,489,966).

The interest rates of these bank loans are adjustable based on the range of 95% to 110% of the PBOC benchmark rate. The weighted average interest rate on long-term bank loans as of September 30, 2007 was 7.77% (2006: 6.89 %).

11. Other long-term debt

As of December 31, 2006 and September 30, 2007, other long-term debt consisted of the following:

 

		December 31, 2006		September 30, 2007
		US$		US$
Convertible subordinated notes due in April 2012 at 2% (adjustable to 8% from October 15, 2009 to maturity)		—		22,923,490
Senior floating rate notes due 2010 at 6 month LIBOR plus 6.8%		—		70,208,429
Fair value of embedded derivatives		—		232,000
Total other long-term debt		—		93,363,919
Warrant on Series A Preference Shares		631,000		211,000
Warrant on senior floating rate notes		—		13,965,000
Total warrant liabilities		631,000		14,176,000

Convertible Subordinated Notes

On April 13, 2007, the Company issued 2% Convertible Subordinated Notes due 2012 (the “Convertible Notes”) with an aggregate principal amount of US$25 million.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

The Convertible Notes are repayable on April 15, 2012. The Notes bear interest at 2% per annum, adjustable to 8% from October 15, 2009 to maturity, if a qualifying IPO does not occur prior to October 15, 2009. The interest is payable on a semi-annual basis on April 15 and October 15 each year. The Company shall pay interest on overdue principal, premium, if any, and interest at the rate of 4.0% per annum.

The holder shall have the right, at such holder’s option (i) at any time from and after a qualifying IPO and prior to April 9, 2012 and (ii) if there has been no qualifying IPO prior to April 1, 2012 then from April 2, 2012 through April 6, 2012 (each, the “Conversion Period”), to convert the principal amount of the Convertible Notes, or any portion of such principal amount which is a multiple of US$100,000, into fully paid and non-assessable common shares (as such shares shall then be constituted) at the conversion price in effect at such time.

In addition, if there are certain events, such as the Company granting its shareholders right to purchase common shares at a relatively low price, or distributing a dividend (in excess of 5% of the fair value of the common shares), the Convertible Notes may be surrendered for conversion at any time on and after the date that the Company gives notice to the holders of such transactions.

The conversion price is set such that each $100,000 principal amount of the notes is convertible to 38,388 shares of the Company’s common stock (US$2.6049 per share at inception) and is adjustable from time to time for anti-dilutive purposes.

The embedded derivative associated with these notes is initially recorded as a derivative liability associated with long-term debt at fair value of US$2,543,000 and the fair value at September 30, 2007 was US$61,000.

The Convertible Notes are subject to various restrictive covenants, including restrictions on the Group’s ability to incur additional debt or guarantees, make restricted payments, payment of dividends or distributions on capital stock, repurchase of capital stock, payment of subordinated indebtedness, settlement of intercompany loans or advances, sales or transfers of properties or assets, sales of capital stock, enter into non-ordinary course business transactions, make investments, merge or consolidate with another company and engage in any business other than related businesses.

Senior Floating Rate Notes and Warrants

On April 13, 2007, the Company issued Senior Floating Notes due 2010 (the “FRN”) with an aggregate principal amount of US$75 million and detachable warrants to subscribe for common shares The FRN bear interest at 6-month LIBOR (with the LIBOR rate reset semi-annually) plus 6.80%, payable semi-annually in arrears. The FRN shall be repurchased or redeemed by the Company in cash on the third anniversary of the issuance date at the price equal to 100% of the principal amount, and if no qualifying IPO has occurred on or prior to the expiration of 30 months after their issuance, the repurchase price shall be equal to 112% of the principal amount plus accrued but unpaid interest.

In connection with the FRN, a total of 750 units of warrants (“the Warrants”) were issued at the price of US$100,000 each. The Warrants entitle the holders to purchase common shares equal to the quotient obtained by

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

dividing two-fifths of the face value of the FRN by the warrant exercise price, which is equal to 80% of the price per common shares sold to public under a qualifying IPO. The maturity date of the Warrants shall be the later of the expiration of three years from the issuance date and the expiration of six months following the qualifying IPO. The fair value of the Warrants was US$13,965,000 as of September 30, 2007.

The embedded derivative associated with the FRN is initially recorded as a derivative liability associated with long-term debt at fair value of US$3,593,000 and the fair value at September 30, 2007 was US$171,000.

The FRN are subject to various restrictive covenants, including restrictions on the Group’s ability to incur additional debt or guarantees, make restricted payments, payment of dividends or distributions on capital stock, repurchase of capital stock, payment of subordinated indebtedness, settlement of intercompany loans or advances, sales or transfers of properties or assets, sales of capital stock, enter into non-ordinary course business transactions, make investments, merge or consolidate with another company and engage in any business other than related businesses.

12. Customer deposits

Customer deposits consisted of amounts received from customers for the pre-sale of residential units in the PRC.

 

		December 31, 2006			September 30, 2007
		US$			US$
Advances for real estate properties under development		119,888,088			223,938,298
Less: recognized as progress billings (see Note 3)		(94,356,103	)		(179,735,862	)
Total net balance		25,531,985			44,202,436

Customer deposits are typically funded up to 80% by mortgage loans made by banks to the customers. Until the customer obtains legal title to the property, the banks have a right to seek reimbursement from the Group for any defaults by the customers. The Group holds certain cash balances in restricted deposit accounts at the relevant banks (see Note 2 (f)). The Group, in turn, has a right to withhold transfer of title to the customer until outstanding amounts are fully settled.

13. Income taxes

(a) Corporate income tax (“CIT”)

As a Cayman Island resident company, the Company is not subject to income tax.

The PRC subsidiaries are governed by the Income Tax Law of the PRC concerning Chinese limited liability companies. Under the Income Tax Laws of the PRC, the PRC subsidiaries are subject to an income tax at a statutory rate of 33% (30% state income taxes plus 3% local income taxes) on income reported in the statutory financial statements after appropriate tax adjustments.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

Income tax expense for the nine months periods ended September 30, 2006 and 2007 is summarized as follows:

 

		September 30,
		2006		2007
		US$		US$
Current:
CIT expense		4,127,193		3,604,761
Land Appreciation Tax (“LAT”) expense		396,100		3,848,643
Unrecognized tax uncertainty benefit		—		8,810,065
Deferred tax expense		2,425,299		4,320,681
Income tax expense		6,948,592		20,584,150

The Group’s income tax expense differs from the tax expense computed by applying the statutory CIT rate of 33% for the nine months ended September 30, 2006 and 2007 as follows:

 

		September 30,
		2006			2007
		US$			US$
CIT at rate of 33%		6,415,755			18,661,118
Tax effect of change in income tax rate		—			(2,165,740	)
Tax effect of non-deductible expenses		267,450			3,430,693
Tax effect of non-taxable income		—			(1,920,512	)
LAT expense		396,100			3,848,643
Tax effect of LAT		(130,713	)		(1,270,052	)
Actual income tax expense		6,948,592			20,584,150

(b) Liability for Unrecognized Tax Benefit

On January 1, 2007, the Group adopted FIN 48. There was no cumulative effect adjustment to beginning retained earnings resulting from the adoption of FIN 48. The total liability for cumulative unrecognized tax benefits as of January 1, 2007 was $2,667,599, as discussed below. As of the date of adoption, no interest and penalties have been recognized under FIN 48.

The liability for unrecognized tax benefit relates to the application of the deemed profit method by the local tax authority of Zhengzhou city. During the years ended December 31, 2004-2006, in accordance with the provisions of the PRC tax law, the local tax authority of Zhengzhou City concluded a deemed profit method is a better measure of income tax liability for companies in the real estate industry located in that province, including the PRC subsidiaries, than the statutory taxable income method. Under the deemed profit method, the local tax authority levies income tax based on 33% of an arbitrary deemed profit of 12% or 14% of total cash receipts of real estate property companies, rather than based on 33% of statutory taxable income. The PRC subsidiaries in that province have filed their tax returns based on the deemed profit method. The local tax authority has

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

confirmed verbally that it will apply the same deemed profit method for the year ending December 31, 2007. The local tax authority is entitled to re-evaluate prior years’ income taxes assessed under the deemed profit method, upon receipt of audited accounts or upon completion of specific development projects, however, the tax authority has not indicated if it will do so.

Although the local tax authority of Zhengzhou City has not indicated that it will re-evaluate prior years, the Group believes that the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority to apply the deemed profit method. Because of the uncertainty surrounding whether or not these tax years will be re-evaluated and the taxes adjusted, the difference between the taxes due based on taxable income calculated according to statutory taxable income method and the taxes due based on the deemed profit method has been recorded as an additional receivable or payable and has been included in unrecognized tax benefits. Management believes if the local tax authority of Zhengzhou City or a higher tax authority were to re-evaluate any of these tax years, the PRC subsidiaries would be required to pay additional taxes due, or would be entitled to receive additional taxes paid, based on the accumulated difference between the amounts paid under the deemed profit method and the amounts due under the PRC statutory taxable income method.

Under PRC tax law, the statute of limitations for the PRC subsidiaries is generally five years (2001-2006). However, local tax authorities may exercise broad discretion in applying the tax law, thus potentially exposing the PRC subsidiaries to audits of tax years outside the general statute of limitations.

Since the adoption of FIN 48 on January 1, 2007, the change in the Group’s total unrecognized tax benefit was an increase of US$8,810,065 and the balance at September 30, 2007 is US$11,765,394.

(c) LAT

Since January 1, 1994, LAT has been applicable at progressive tax rates ranging from 30% to 60% on the appreciation of land values, with an exemption provided for the sales of ordinary residential properties if the appreciation values do not exceed certain thresholds specified in the relevant tax laws. However, prior to September 2004, the Group’s local tax authority in Zhengzhou city did not impose the regulation on real estate companies in its area of administration. Since September, 2004, the local tax authority has levied the LAT at the rate of 0.8% or 1.0% against total cash receipts from sales of real estate properties, rather than according to the progressive rates. In early 2007, the national PRC tax authorities clarified the regulations to require the full payment of LAT in accordance with the progressive rates.

For the nine months ended September 30, 2007, the Group has made full provision for LAT with respect to properties sold up to September 30, 2007 in accordance with the requirements set forth in the relevant PRC tax laws and regulations.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

(d) Deferred tax

The tax effects of temporary differences that give rise to the Group’s net deferred tax assets and liabilities as of December 31, 2006 and September 30, 2007 are as follows:

 

		December 31, 2006			September 30, 2007
		US$			US$
Deferred tax liabilities:
Tax due under tax statutes versus tax due under deemed profit method		3,311,108			—
Real estate properties—accelerated deductions		1,460,020			1,072,359
Percentage of completion revenue		1,211,337			9,012,053
Property and equipment		297,297			205,973
Property management rights		300,520			215,998
Others		167,100			—
Total deferred tax liabilities		6,747,382			10,506,383
Deferred tax assets:
Tax due under deemed profit method versus tax due under tax statutes		(643,514	)		—
Doubtful debt allowances		(33,363	)		(12,963	)
Accruals and provisions		(674,084	)		(2,259,520	)
Others		(398,403	)		(1,411,317	)
Total deferred tax assets		(1,749,364	)		(3,683,800	)
Net deferred tax liabilities		4,998,018			6,822,583
Classified as current		(1,211,337	)		(3,825,631	)
Long term deferred tax liabilities		3,786,681			2,996,952

For each PRC subsidiary, deferred tax assets have been netted against deferred tax liabilities by current or non-current classification, as the reversal of the underlying temporary differences is expected to occur in the same future periods.

The deferred tax assets and liabilities will reverse when the originating temporary differences reverse. In addition, as a result of applying the deemed profit method to calculate PRC income taxes payable, deferred tax assets and liabilities will reverse either if the tax years are re-evaluated and reassessed under the statutory taxable income method or the tax years are no longer open for tax review.

(e) The impact of the New Corporate Income Tax Law

During the 5^th Session of the 10th National People’s Congress, which was concluded on March 16, 2007, the PRC Corporate Income Tax Law (“the New Corporate Income Tax Law”) was approved and will become effective on January 1, 2008. The New Corporate Income Tax Law introduces a wide range of changes which include, but are not limited to, the unification of the income tax rate for domestic-invested and foreign-invested enterprises at 25% and a withholding tax on dividend distributions up to a rate of 20%. As a result of the new law, the Group remeasured its deferred tax items anticipated to reverse in 2008 and later years at the new

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

25% tax rate. The impact of this remeasurement is reflected as a reduction of income tax expense of US$2,165,740. However, as of the date of release for these financial statements, detailed implementation and administrative rules and regulations have not yet been announced.

14. Share-based compensation

(a) Options

On August 11, 2007, the Company granted under the 2007 Equity Incentive Plan (the “Plan”) share options to purchase up to 3,198,417 common shares to its directors and employees at exercise prices ranging from US$0.81 to US$2.50 per share. These options have a weighted average grant date fair value of US$2.07 per option, and a total expected compensation cost, net of forfeitures, of US$6,094,030. The vesting of these options is contingent upon the completion of a qualifying IPO, and the compensation expense related to these options would then begin to be recognized over the future vesting periods. These options have various vesting periods based on length of service ranging from 10 to 40 months and will expire no later than August 10, 2017. The Company’s Board of Directors may, at its discretion, accelerate the vesting of these options at the time of the effectiveness of the IPO, to immediately vest options that would have vested between the grant date and the effectiveness of the IPO.

Due to the vesting being contingent upon completion of a qualifying IPO, no compensation expense has been recognized during the nine months ended September 30, 2007. The Company assumed a forfeiture ratio of 10% for non-executive employees in arriving at the total compensation expense.

The derived fair value of the ordinary shares underlying the options was determined by the Company, with reference to a retrospective third-party valuation as of August 11, 2007 by American Appraisal, using generally accepted valuation methodologies.

The fair value of each option is estimated on the date of grant using the Dividend Adjusted Black-Scholes option-pricing model that uses the assumptions noted below.

 

Average risk-free rate of return		5.22%
Expected term		5.61 Years
Volatility rate		50.13%
Dividend yield		0%

The risk-free rate for periods within the expected life of the option is based on the implied yield rates of China International Bond denominated in USD as of the valuation date. The expected life of options represents the period of time the granted options are expected to be outstanding. As the Company did not grant options before, no historical exercising pattern could be followed in estimating the expected life. Therefore, the expected life is estimated as the average of the contractual term and the vesting period. The Company has not paid dividends in the past nor does it expect to pay dividends in the foreseeable future. Because the Company’s shares are not publicly tradable at the moment, the expected volatility was based on the historical volatilities of comparable publicly traded companies engaged in similar business.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

(b) Restricted Shares

On August 11, 2007, the Company issued under the Plan, grants of 3,270,745 restricted shares to its directors and employees with an exercise price of US$0.0001 per share. These restricted shares have a weighted average grant date fair value of US$3.25 per restricted share, and a total expected compensation cost, net of forfeitures, of US$10,215,809. The vesting of these restricted shares are contingent upon the completion of a qualifying IPO whereupon they will have vesting periods based on length of service ranging from 10 to 60 months and will expire no later than August 10, 2017. Upon effectiveness of the IPO, these awards will have an immediate vesting of all shares that would have vested between the grant date and the effectiveness of the IPO and compensation expense will be recognized at that time based on the numbers of shares vested. Due to the vesting being contingent upon completion of a qualifying IPO, no compensation expense has been recognized during the nine months ended September 30, 2007.

In addition, on August 11, 2007, the Company issued, under the Plan, a grant of 333,333 restricted shares to a non-employee consultant, with an exercise price of US$0.0001 per share. These restricted shares have a vesting period based on length of service of 60 months and will expire no later than August 10, 2017. All other terms of this award are the same as the employee awards. These awards are accounted for under EITF 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services” and the cost will be measured at the dates that the services are completed during the vesting period.

Due to performance condition in the awards, no compensation expense had been recognized during the nine months ended September 30, 2007.

The Company assumed a forfeiture ratio of 10% for non-executive employees in arriving at the total compensation expense.

The derived fair value of the ordinary shares underlying the restricted share awards was determined by the Company, with reference to a retrospective third-party valuation as of August 11, 2007 by American Appraisal, using generally accepted valuation methodologies.

15. Related-party and employee transactions

(a) Due from shareholders

The balances represent cash advances to two shareholders from the Company for traveling expenses and other expenses. The balances bear no interest and have no fixed payment terms.

(b) Due from related parties

 

		December 31, 2006		September 30, 2007
		US$		US$
Jiantou Xinyuan		7,728,227		6,055,173
Total		7,728,227		6,055,173

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

Jiantou Xinyuan is co-invested by a third party and the Group, and the Group holds 45% of total shares of Jiantou Xinyuan (see Note 7). The balance represents an entrusted loan to Jiantou Xinyuan for the development of real estate properties, which carries interest of 6.57% per annum (2006: 6.138%) and is repayable within one year.

(c) Due from employees

 

		December 31, 2006		September 30, 2007
		US$		US$
Advances to employees		313,807		660,142

The balance represents cash advances to employees for traveling expenses and other expenses. The balances bear no interest and have no fixed payment terms.

(d) Due to related parties

 

		December 31, 2006		September 30, 2007
		US$		US $
Jiantou Xinyuan		3,763,843		324,077
Total		3,763,843		324,077

All the amounts bear no interest and have no fixed payment terms.

(e) Due to employees:

 

		December 31, 2006		September 30, 2007
		US$		US$
Total		25,612		38,586

Balance as of September 30, 2007 represented reimbursable expenses paid by the staff which was reimbursable by the Group.

(f) Due to shareholders

 

		December 31, 2006		September 30, 2007
		US$		US$
Blue Ridge China		21,000,000		—
Equity International		14,000,000		—
Total		35,000,000		—

The loans from shareholders were fully paid off in April 2007.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

(g) Others

For the nine months ended September 30, 2007, total directors’ remuneration paid amounted to US$128,556 (2006: US$ nil).

On April 16, 2005, Henan Xinyuan entered into a consulting agreement with a consulting company which is beneficially owned by Yong Cui, one of its directors, to provide finance consulting services to the Group for a duration of 24 months. Total consulting fees paid in the nine months ended September 30, 2006 under the agreement amounted to US$30,202. No consulting fees were paid to the consulting company in the nine months ended September 30, 2007. On December 27, 2006, Henan Xinyuan entered into a consulting agreement with another consulting company which is beneficially owned by Yong Cui to provide similar finance consulting services to the Group, with an annual fee of US$30,735 starting from April 16, 2007. The agreement will expire on April 15, 2012, and it can be terminated by written consent from both parties. The agreement contains provisions on confidentiality and non-competition.

16. Equity

(a) Convertible Redeemable Preference Shares

As disclosed in Note 1, the Company entered into a securities purchase agreement with Blue Ridge China and Equity International (collectively, the “Investors”) on August 25, 2006, whereby the Company issued a total of 30,805,400 Series A convertible redeemable preference shares (“Series A preference shares”) with warrants for total cash proceeds of US$21,883,178, net of issuance costs of US$3,081,580 (including US$35,242 incurred in 2007). The Series A preference shares are issued with warrants to purchase additional Series A preference shares. Other significant terms of the preference shares and warrants are outlined below:

Redemption

The Company’s Series A convertible preference shares are redeemable, if not previously converted, upon the earlier occurrence of the date on which Mr. Zhang ceases to serve in the capacity of Chairman or the fifth anniversary of the issuance date. Anytime thereafter, the holder may, by written notice given to the Company require the Company to redeem any or all Series A convertible redeemable preference shares held.

The redemption price is determined at a per share price in cash equal to the sum of the original issue price of US$0.81155 per share and an accreted annual amount of ten percent (10%) of the original issue price, compounded annually to the date of redemption.

Conversion

Each Series A preference shares shall be convertible, upon issuance, into fully paid common shares at the option of the holder at an initial conversion ratio of 1 to 1. Each Series A preference shares shall be converted into fully paid common shares automatically upon an initial public offering of the Group (“IPO”) or written approval by 75% of the Investors at a conversion ratio that is adjustable under certain circumstances as follows:

(a) If the value of the common shares issuable upon conversion of the Series A preference shares in connection with the IPO of the Group is less than an amount equal to two times the original Series A issue price plus an accreted annual amount of 10% compounded annually to the date of

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

completion of the IPO, the Company shall issue to the preference shareholders a number of common shares equal to the amount of such shortfall divided by the price of common shares at IPO.

(b) If the Company sub-divides the outstanding common shares or issues a share dividend on its outstanding common shares, the number of common shares issuable upon conversion of the Series A preference shares immediately prior to such subdivision or the issuance of such share dividend shall be proportionately increased by the same ratio as the subdivision or dividend (with appropriate adjustments in the Series A conversion price). In case the Company shall at any time combine its outstanding common shares, the number of common shares issuable upon conversion of the Series A preference shares immediately prior to such combination shall be proportionately decreased by the same ratio as the combination.

Voting Rights

The Investors have voting rights that are equal to common shares on an as-converted basis. In addition, as mentioned in Note 1, the Investors have substantive participating rights, the most significant of which relate to approval of annual plans and budgets and changes in existing management.

Dividends

The Series A preference shares shall rank senior to the common shares in all respects as to rights of payment and distribution (whether in cash, in kind or in other property or securities), whether by way of dividend or upon a liquidation or otherwise. All such payments and distributions shall be made to the Series A convertible redeemable preference shares in full prior to dividend distributions to ordinary shareholders. The Series A preference shares are participating securities for EPS purposes.

Liquidation Preference

On a winding-up, the holders of Series A preference shares shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to holders of the Junior Shares by reason of their ownership of such shares, for each Series A preference shares, the amount per share (the “Series A Preference Amount”) equal to two (2) times the sum of (x) US$0.81155, and (y) an accreted annual amount of ten percent (10%) on the original Series A issue price, compounded annually from the date of issuance of such Series A preference shares to the date of payment hereunder.

After the payment in full has been made to the holders of Series A preference shares, the holders of the Series A preference shares shall be entitled to share ratably in all remaining assets and funds to be distributed.

Measurement and Recording

The Series A preference shares were classified as mezzanine equity at gross proceeds net of issuance costs and are increased by period accretions using the interest method at an annual rate of 10%, so that the carrying amount will equal to the redemption amount at the redemption date. At the issuance date of the Series A preference shares, the Group determined that there was no beneficial conversion feature as a result of the effective conversion price being higher than the fair value per common share.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

The carrying values of the preference shares are as follows:

 

		Series A
		US$
Issuance of preference shares		25,000,000
Issuance costs incurred in 2006		(3,081,580	)
Issuance costs incurred in 2007		(35,242	)
Warrant liability		(496,000	)
Burnham Warrants		(55,595	)
Accretion		3,109,660
Balance as of September 30, 2007		24,441,243

Warrant terms, Measurement and Recording

The warrants issued together with the Series A preference shares entitle the holders to purchase more Series A preference shares at an exercise price of US$0.01 per share if the Group fails to meet specified profit performance targets in 2007 and 2008. If cumulative net income for the two-year period ending December 31, 2008 is less than US$80 million, the holders of the warrants are entitled to purchase up to a maximum additional number of 3,987,009 fully paid Series A preference shares at an exercise price of US$0.01 per share so that their percentage interest in the Group on a fully diluted basis will be brought to a maximum of 36%. If cumulative net income for the two-year period ending December 31, 2008 equals or exceeds US$80 million, then the warrants will expire without being exercised. On August 28, 2007, the Company amended the terms of the warrants issued to Equity International and Blue Ridge China. Under the amended agreement, if the Company consummates a qualified initial public offering prior to March 31, 2008 the warrants will expire without being exercised.

The warrants were allocated their full fair value from the basket issuance with the Series A preference shares and classified as a liability in accordance with FSP FAS 150-5 “Issuers Accounting under FAS 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable” on the basis that the issuer faces a cash outflow to settle them on redemption. Changes in value from period to period are recognized through earnings. Management assessed that the probability of the exercisability for the Series A preference share warrants was 15% on September 30, 2007.

In the event that the warrants are exercised and additional Series A preference shares are issued, the total redemption amount in respect thereof is limited to the exercise price of US$0.01 per share plus an accreted annual amount of ten percent (10%) of the exercise price, compounded annually, from the date of exercise to the date of redemption. The total impact on the redemption price of the issued Series A convertible redeemable preference shares from the exercise of the warrants would be nominal since the Company is obligated to pay the holders upon redemption the exact amount received from the exercise of the warrants plus some nominal interest accretion. With the exercise of the warrants being contingent upon certain events, the measurement date of a beneficial conversion feature will be on the date of exercise of the warrants.

(b) Common Shares

(i) As at September 30, 2007 the Company’s authorized share capital was 500 million common shares, par value US$0.0001 per share (2006: 450 million common shares).

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

(ii) In March 2006, the Company issued 60,000,000 outstanding common shares to the Zhang Family for a consideration of US$6,000.

(iii) In August 2006, the Company issued the Burnham Warrants as payment for services rendered and recorded its fair value of US$55,595 as paid in capital.

(iv) Under the terms of the agreement, if any of the Burnham Warrants remains unexercised upon termination, Mr. Yong Zhang is entitled to purchase, within 60 days, the common shares underlying such remaining unexercised amount, at a purchase price of US$0.0001 per share. This benefit was valued at the time of the issuance of the Burnham Warrants, and determined to be insignificant. The total cost is being amortized over the life of the Burnham Warrants. In November 2006, the Company issued 15,704,379 common shares for US$0.9551 per share, for total cash proceeds of US$14,552,985, net of issuance cost. These shares were issued to Blue Ridge China (9,422,627 shares) and Equity International (6,281,752 shares). Blue Ridge China and Equity International, subsequent to this purchase, owned 12.4% and 8.3% of the Company’s outstanding common shares, respectively, as of September 30, 2007.

The Company has certain restrictions on its ability to declare and pay dividends on its common shares and preference shares. No dividends are paid on convertible notes and floating rate notes; however, restrictions inherent in these notes also restrict the ability to declare and pay dividends on common shares and preference shares. In addition, as disclosed in note 22, under the PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The amounts restricted include paid-in capital and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling US$78,730,297 as of September 30, 2007 (2006: US$78,730,297).

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

17. Earnings per share

Basic and diluted net earnings per share for each period presented are calculated as follows:

 

		Nine months ended September 30,
		2006			2007
		US$			US$
Numerator:
Net income		12,495,313			35,964,693
Accretion of Series A convertible redeemable preference shares		(235,575	)		(2,167,359	)
Net income attributable to ordinary Shareholders-basic		12,259,738			33,797,334
Interest related to convertible notes		—			232,877
Net income attributable to ordinary shareholders—diluted		12,259,738			34,030,211
Denominator:
Number of shares outstanding, opening		60,000,000			75,704,379
Convertible redeemable preference shares		3,038,341			30,805,400
Number of shares outstanding—basic		63,038,341			106,509,779
Burnham warrants		—			1,853,172
Convertible bonds		—			5,905,920
Number of shares outstanding—diluted		63,038,341			114,268,871
Earnings per share—basic		0.19			0.32
Earnings per share—diluted		0.19			0.30

The Burnham warrants have been excluded from the computation of dilutive earnings per share for the nine months ended September 30, 2006, as they are anti-dilutive.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

On August 25, 2006, the Company issued Series A convertible redeemable preference shares that will convert automatically into common shares upon the completion of an IPO. Assuming the conversion had occurred “on a hypothetical basis” on January 1, 2007, the proforma basic and diluted earnings per share for the nine months ended September 30, 2007 is calculated as follows:

 

		Nine months ended September 30, 2007
		US$ Proforma (Note 2) Unaudited
Numerator:
Net income attributable to ordinary shareholders		33,797,334
Accretion of convertible redeemable preference shares		2,167,359
Net income for proforma basic earnings per share		35,964,693
Interest related to convertible notes		232,877
Stock compensation cost		(1,688,154	)
Net income for proforma diluted earnings per share		34,509,416
Denominator:
Number of shares outstanding, opening		75,704,379
Vested restricted shares		22,113
Conversion of preference shares to common shares (30,805,400 shares)		30,805,400
Number of shares outstanding—proforma basic		106,531,892
Burnham warrants		1,853,172
Convertible bonds		5,905,920
Unvested restricted shares		42,983
Number of shares outstanding—proforma diluted		114,333,967
Proforma basic earnings per share		0.34
Proforma diluted earnings per share		0.30

The terms of the Series A preference shares allow the holders to receive additional common shares if the value of the common shares upon conversion of the Series A preference shares in connection with an IPO is less than two times the original Series A preference shares issuance price of US$0.81155, plus an accreted mount of 10% compounded annually to the date of completion of the IPO. The holders of the Series A preference shares shall receive common shares equal to the amount of the shortfall divided by the price of the common shares. The effect of the Senior Floating Rate note warrants on proforma earnings per share cannot be determined as their exercise price is based on a percentage of the IPO price.

The effects of 3,198,417 options have been excluded from the computation of pro-forma diluted earnings per share for the period ended September 30, 2007 as they are anti-dilutive.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

18. Segment reporting

The Group considers that each of its individual property developments is a discrete operating segment. The Group has aggregated its segments on a provincial basis as property development projects undertaken within a province have similar expected economic characteristics, type of properties offering, customers and market and regulatory environment. The Group’s reportable operating segments are comprised of the Henan Province, Shandong Province, Jiangsu Province, Sichuan Province and Anhui Province. Each geographic operating segment is principally engaged in the construction and development of residential real estate units. The “other” category relates to investment holdings, property management services, installation of intercom systems, landscaping, engineering and management, real estate sale, purchase and lease activities. The accounting policies of the various segments are the same as those described in Note 2, “Summary of Significant Accounting Policies”.

The Group’s chief operating decision maker relies upon net sales, gross profit and net income when making decisions about allocating resources and assessing performance of the Group. Net sales for geographic segments are generally based on the location of the project development. Net income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment.

No single customer accounted for more than 10% of net sales for the nine months ended September 30, 2006 and 2007.

Summary information by operating segment is as follows:

 

September 30, 2006		Henan			Shandong			Others			Consolidated
		US$			US$			US$			US$
Net real estate sales		99,341,045			—			—			99,341,045
Real estate lease income		171,150			—			—			171,150
Other revenue		—			651			142,220			142,871
Total revenue		99,512,195			651			142,220			99,655,066
Cost of real estate sales		(75,100,616	)		—			—			(75,100,616	)
Cost of real estate lease income		(347,341	)		—			—			(347,341	)
Other cost		—			—			(164,543	)		(164,543	)
Total cost of revenue		(75,447,957	)		—			(164,543	)		(75,612,500	)
Gross profit		24,064,238			651			(22,323	)		24,042,566
Operating expenses		(3,693,527	)		(224,373	)		(54,110	)		(3,972,010	)
Operating income/(loss)		20,370,711			(223,722	)		(76,433	)		20,070,556
Interest income		120,393			2,054			2,004			124,451
Interest expense		(307,239	)		—			—			(307,239	)
Share of loss in an equity investee		(446,086	)		—			—			(446,086	)
Income/(loss) before income taxes		19,737,779			(221,668	)		(74,429	)		19,441,682
Income tax expense		(6,948,592	)		—			—			(6,948,592	)
Net income/(loss) before minority interest		12,789,187			(221,668	)		(74,429	)		12,493,090
Depreciation and Amortization		695,997			3,738			—			699,735
Goodwill		—			—			1,105,408			1,105,408
Capital expenditure		297,551			146,870			—			444,421
Total long-lived assets		27,489,533			—			—			27,489,533
Total assets		89,618,875			30,843,651			3,218,919			123,681,445

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

September 30, 2007		Henan			Shandong			Jiangsu			Anhui			Sichuan			Others			Consolidated
		US$			US$			US$			US$			US$			US$			US$
Net real estate sales		91,193,644			32,415,011			74,393,335			17,906,287			—			—			215,908,277
Real estate lease income		165,514			—			—			—			—			—			165,514
Other revenue		—			6,943			3,915			3,357			2			2,212,733			2,226,950
Total revenue		91,359,158			32,421,954			74,397,250			17,909,644			2			2,212,733			218,300,741
Cost of real estate sales		(45,765,302	)		(26,524,696	)		(58,342,695	)		(14,398,718	)		—			—			(145,031,411	)
Cost of real estate lease income		(319,750	)		—			—			—			—			—			(319,750	)
Other cost		—			—			—			—			—			(1,638,620	)		(1,638,620	)
Total cost of revenue		(46,085,052	)		(26,524,696	)		(58,342,695	)		(14,398,718	)		—			(1,638,620	)		(146,989,781	)
Gross profit		45,274,106			5,897,258			16,054,555			3,510,926			2			574,113			71,310,960
Operating expenses		(4,670,464	)		(2,388,880	)		(2,866,887	)		(1,291,271	)		(383,863	)		(2,091,260	)		(13,692,625	)
Operating income/(loss)		40,603,642			3,508,378			13,187,668			2,219,655			(383,861	)		(1,517,147	)		57,618,335
Interest income		291,897			125,492			205,299			17,830			4,068			90,790			735,376
Interest expense		(509,610	)		(88,006	)		(1,214,504	)		(146,901	)		—			520,419			(1,438,602	)
Income from change in fair value of warrant liability		—			—			—			—			—			(6,186,000	)		(6,186,000	)
Share of income in an equity investee		5,819,734			—			—			—			—			—			5,819,734
Income/(loss) before income taxes		46,205,663			3,545,864			12,178,463			2,090,584			(379,793	)		(7,091,938	)		56,548,843
Income tax expense		(15,959,572	)		(910,758	)		(3,078,299	)		(579,820	)		100,780			(156,481	)		(20,584,150	)
Net income/(loss) before minority interest		30,246,091			2,635,106			9,100,164			1,510,764			(279,013	)		(7,248,419	)		35,964,693
Depreciation and amortization		235,744			39,000			30,479			19,215			4,222			997,660			1,326,320
Goodwill		—			—			—			—			—			1,105,408			1,105,408
Capital expenditure		938,964			161,330			220,892			84,834			208,877			—			1,614,897
Total long-lived assets		84,662,759			396,962			59,961,748			153,407			208,058			6,165,603			151,548,537
Total assets		72,959,560			117,826,968			150,778,882			24,589,622			64,034,312			74,827,186			505,016,530

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

19. Commitments and contingencies

The Group leases certain of its office properties under operating lease arrangements. Payments under operating leases are expensed on a straight-line basis over the periods of their respective leases, and the terms of the leases do not contain rent escalation, or contingent rent, renewal, or purchase options. There are no restrictions placed upon the Group by entering into these leases.

Commitments

As of September 30, 2007, the Group has lease payments under non-cancellable leases falling due as follows:

 

		Amount
		US$
Due within 1 year		168,170
Due after 1 year, within 2 years		17,525
Total		185,695

As of September 30, 2007, the Group has outstanding commitments with respect to non-cancelable construction contracts for real estate development and land use rights purchases as follows:

 

		Amount
		US$
Due within 1 year		117,483,543

Contingencies

On June 28, 2003, Henan Xinyuan was sued by Henan Jiantong Industrials Co., Ltd. (“Jiantong”), its former contractor. The lawsuit charged Henan Xinyuan with a total fine of US$102,287 for breach of contract. However, on August 9, 2003, Henan Xinyuan countercharged Jiantong with false allegation that impaired Henan Xinyuan’s reputation and appealed for the withdrawal of investment capital from Jiantong. Total amount of the investment capital to be withdrawn and reputation compensation sought is US$28,604. As of September 30, 2007, the final judgment from the court was still pending.

On March 14, 2006, Henan Xinyuan was sued by Henan Oriental Construction Company Co., Ltd., its former contractor, claiming payment of construction fees of US$225,940 and an amount of US$32,016 for breach of contract. As of September 30, 2007, the final judgment from the court was still pending.

The PRC subsidiaries have complied with the requirements of their local authority to accrue for retirement benefit contributions in respect of their employees (See Note 2 (s)). However payment of such accrued amount has not been sought by the regulatory bureau.

As at September 30, 2007, the Group provided guarantees of US$172,470,416 (September 30, 2006: US$51,476,855), in favor of their customers in respect of mortgage loans granted by banks to such customers for their purchases of the Group’s properties where the underlying real estate ownership certificates can only be provided to the banks on a time delay manner due to administrative procedures in the PRC. Pursuant to the terms of the guarantees, upon default in mortgage payments by these purchasers, the Group is responsible

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

to repay the outstanding mortgage principals together with the accrued interest and penalty owed by the defaulted purchasers to the banks and the Group is entitled to take over the legal titles and possession of the related properties. The Group’s guarantee period starts from the dates of grant of the relevant mortgage loans and ends upon issuance of real estate ownership certificates which will generally be available within six to twelve months after the purchasers take possession of the relevant properties.

The fair value of the guarantees is not significant and the directors consider that in case of default in payments, the net realizable value of the related properties can cover the repayment of the outstanding mortgage principal together with the accrued interest and penalty and therefore no provision has been made for the guarantees.

On September 16, 2004, Henan Xinyuan acquired an interest in a land site located in Zhengzhou City of Henan Province from Henan Park Property Co. Ltd. (“Park Property”) for a total purchase price of US$21,636,124. However, Park Property failed to transfer the land use right to Henan Xinyuan before the due date, December 5, 2004. On April 5, 2005, Henan Xinyuan sued Park Property for breach of the land transfer agreement. Pursuant to the final judgment of the court filed on December 12, 2005, Park Property was ordered to transfer the land use right to Henan Xinyuan. Park Property appealed the court decision. As of November 10, 2006, the court has turned down the appeal of Park Property and rendered its final verdict that Henan Xinyuan prevail. The court then enforced the legal transfer of the subject land to Henan Xinyuan, which received the official land certificate in February 2007. However, Henan Xinyuan may be required to settle the relocation and settlement costs of US$5,122,492 due to Park Property’s financial insolvency. As Park Property is currently under liquidation procedures, any additional costs incurred by Henan Xinyuan may not be fully recoverable from Park Property. The Company has assessed the recoverability of its investment in this land site, including the additional costs that may be incurred and has concluded that no impairment provision is required.

20. Concentration of risk

The Group’s operations are conducted in the PRC. Accordingly, the Group’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC economy.

The Group’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Group’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The Group transacts part of its business in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China (‘PBOC”) or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the US$. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in a 7.98% appreciation of the RMB against the US$ from July 21, 2005 to 30, September, 2007.

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

Additionally, the value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.

The Group’s real estate projects are concentrated in Henan province. Any negative events such as a slow down in the economy in Henan province might cause material loss to the Group and have a material adverse effect on the Group’s financial condition and results of operations. The risk in this respect is mitigated by the Group by expanding its operations outside of Henan province.

The Group sells to a wide range of customers. No single customer accounted for a significant percentage of the revenue for the nine months ended September 30, 2006 and 2007.

21. Subsequent event

(a) 2007 Long Term Incentive Plan

In November 2007, the Company adopted the 2007 Long Term Incentive Plan (the “2007 Plan”) which provides for the grant of options, restricted shares, restricted stock units, stock appreciation rights and other stock-based awards to purchase its common shares. The maximum aggregate number of common shares which may be issued pursuant to all awards, including options, is 10 million common shares, subject to adjustment to accounting for changes in the capitalization of the Company. The board of directors may grant awards under the 2007 Plan prior to the offering, provided that no awards granted may vest prior to completion of the IPO.

On November 5, 2007, the Company granted options under the 2007 Plan to directors, management and key employees for an aggregate of 2,441,844 common shares at the exercise price equal to the price of the offering. These options have vesting periods of up to 36 months, and will expire no later than the 10th anniversary of the date of grant.

(b) Waiver of Certain Conversion Rights of Series A Convertible Preference Shares

On November 13, 2007, the holders of the Series A convertible preference shares agreed to waive the contingent conversion option. As such, the Series A convertible preference shares will automatically convert at the time of a qualifying IPO on a 1 to 1 basis, subject to usual anti-dilution adjustments.

The modification is deemed to be substantive and will be treated as an extinguishment of the Series A convertible preference shares. Under EITF Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” the Company will recognize a dividend to the Series A convertible preferred shareholders, representing the difference between the fair value of the convertible preference shares immediately after modification and the carrying value of the Series A convertible preference shares immediately prior to modification. This deemed dividend to the Series A shareholders will not affect the Company’s net income or cash flows, however, it will reduce the Company’s net income attributable to ordinary shareholders and earnings per share (ADS) for the year ending December 31, 2007.

The Company has determined that on November 13, 2007, a 4% marketability discount be applied to an assumed initial offering price of US$            , the mid-point of the indicative price range for the offering, to arrive at a fair value of US$             for each Series A convertible preference share. In calculating the discount, the Company has taken into account the premium in the value of the Series A convertible preference shares relative

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

to the common shares, and the residual price risk of the Series A preference shareholders before the offering, and has assumed that the offering will be consummated prior to year end. The Company will also review the actual IPO issue price and account for the Series A convertible preference shares accordingly in its financial statements for the year ending December 31, 2007. At this estimated fair value, the Company will record the modified Series A convertible preference shares at an amount of approximately US$             million and the deemed dividend to the Series A preference shareholders at approximately US$             million, which will reduce the net income attributable to common shareholders and retained earnings by the same amount of US$             million.

22. Condensed financial information of the Company

Under the PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The amounts restricted include paid-in capital and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling US$78,730,297 as of September 30, 2007 (2006: US$78,730,297).

Balance sheet

 

		September 30, 2007
		US$ (Unaudited)
ASSETS
Investments in subsidiaries		111,205,735
Current assets
Other current assets		1,530,020
TOTAL ASSETS		112,735,755
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Due to a subsidiary		322,448
Other payable and accrued liabilities		1,215,020
Total liabilities		1,537,468
Preference shares
Preference shares, $0.0001 par value:
Authorized—50,000,000 shares
Issued and outstanding—30,805,400 shares		24,441,243
Shareholders’ equity
Common shares, $0.0001 par value:
Authorized—500,000,000 shares
Issued and outstanding—75,704,379 shares		7,570
Additional paid-in capital		17,180,691
Other comprehensive income		8,024,651
Retained earnings		61,544,132
Total shareholders’ equity		86,757,044
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		112,735,755

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

Statement of operations

 

		September 30, 2007
		US$ (Unaudited)
General and administrative expenses		(5,133	)
Operating loss		(5,133	)
Equity in profit of subsidiaries, net		35,969,826
Income from operations before income taxes		35,964,693
Income taxes		—
Net income		35,964,693
Accretion of Series A convertible redeemable preference shares		(2,167,359	)
Net income attributable to ordinary shareholders		33,797,334

Statement of cash flows

 

		September 30, 2007
		US$ (Unaudited)
Cash flows from operating activities:
Net income		35,964,693
Adjustment to reconcile net income to net cash provided by operating activities:
Equity in profit of subsidiaries, net		(35,969,826	)
Changes in operating assets and liabilities:
Due to a subsidiary		5,133
Net cash provided by operating activities		—
Cash flows from investing activities:
Investment in a subsidiary		—
Net cash used in investing activities		—
Cash flows from financing activities:
Net cash provided by financing activities		—
Net decrease in cash and cash equivalents		—
Cash and cash equivalents, at the beginning of the period		—
Cash and cash equivalents, at end of the period		—

 

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XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended

September 30, 2006 (unaudited) and 2007 (unaudited)

(All amounts stated in US$, except for number of shares data)

 

(a) Basis of presentation

In the Company-only financial statements, the Company’s investment in subsidiaries is stated at cost plus its equity interest in undistributed earnings of subsidiaries since inception. The Company-only financial statements should be read in conjunction with the Company’s consolidated financial statements.

The Company records its investment in its subsidiaries under the equity method of accounting as prescribed in APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”. Such investment is presented on the balance sheet as “Investment in subsidiaries” and share of the subsidiaries’ profit or loss as “Equity in profit (loss) of subsidiary company” on the statements of operations.

The subsidiaries did not pay any dividends to the Company for the periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.

(b) Related party balances

For the nine months ended September 30, 2007, a subsidiary of the Company paid start-up costs and audit fees amounting to US$322,448 total on behalf of the Company.

(c) Commitments

The Company does not have significant commitments or long-term obligations as of the period end presented.

 

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Through and including                      (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

American Depositary Shares

Xinyuan Real Estate Co., Ltd.

(incorporated in the Cayman Islands with limited liability)

Representing                      Common Shares

 

 

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PROSPECTUS

 

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Merrill Lynch & Co.

 

Deutsche Bank Securities		Allen & Company LLC

 

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Cayman Islands law.    Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.

Memorandum and Articles of Association.    Our articles of association provide for indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such, except through their own willful neglect or default.

Indemnification Agreements.    Pursuant to indemnification agreements, the form of which is filed as Exhibit 10.17 to this Registration Statement, we have agreed to indemnify our directors and officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being such a director or officer.

SEC Position.    Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Pursuant to the underwriting agreement for this offering, the form of which is filed as Exhibit 1.1 to this Registration Statement, the underwriters will agree to indemnify our directors and officers and persons controlling us, within the meaning of the Securities Act, against certain liabilities that might arise out of or are based upon certain information furnished to us by any such underwriter.

ITEM 7. RECENT SALES OF UNREGISTERED SECURITIES.

On April 13, 2007, we issued $75 million principal amount of units consisting of floating rate notes due 2010 and $25 million subordinated convertibles notes due 2012. We also issued to the holders of the floating rate notes warrants, with each warrant representing the right to purchase such number of our common shares equal to the quotient obtained by dividing two-fifths of the face value of such holder’s floating rate note by the warrant exercise price, which will be equal to 80% of the price per common share derived from this offering of ADSs. These securities were issued in a transaction exempt from registration under the Securities Act pursuant to Regulation S under the Securities Act.

In April 2007, in connection with the issuance of the floating rate notes and convertible notes, we conducted a restructuring pursuant to a one-for-one share exchange, whereby all of the then existing shareholders of Xinyuan Real Estate, Ltd. (“Xinyuan Ltd.”) exchanged their respective securities of Xinyuan Ltd. for an equivalent number and class of our securities. This issuance of securities was exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act.

In April 2007, pursuant to the share exchange, we issued a total of 75,704,379 common shares, to Yong Zhang, Yuyan Yang, Blue Ridge China and Equity International in exchange for 60,000,000 common shares issued in January 2006 by Xinyuan Ltd. to Yong Zhang, 12,000,000 of which were immediately transferred to Yuyan Yang, and for a total of 15,704,379 common shares issued in November 2006 by Xinyuan Ltd. to Blue Ridge China and Equity International in connection with a private placement. Our issuances of common shares were exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act. The

 

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original issuances of shares by Xinyuan Ltd. were exempt from registration under the Securities Act pursuant to Regulation S under the Securities Act.

In April 2007, pursuant to the share exchange, we issued a total of 30,805,400 Series A convertible redeemable preference shares and warrants to Blue Ridge China and Equity International. These Series A convertible redeemable preference shares and warrants were issued in exchange for an equivalent number and class of shares and warrants issued in August 2006 by Xinyuan Ltd. to Blue Ridge China and Equity International in connection with a private placement. Our issuances of preference shares and warrants were exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act. The original issuances of securities by Xinyuan Ltd. were exempt from registration under the Securities Act pursuant to Regulation S under the Securities Act.

In April 2007, pursuant to the share exchange, we issued warrants to purchase a total of 1,852,172 of our common shares to Burnham Securities Inc. and Joel B. Gardner. These warrants were issued in exchange for the equivalent number of warrants issued in August 2006 by Xinyuan Ltd. to Burnham Securities Inc. and Joel B. Gardner in connection with certain financial advisory and capital raising services provided to us. Our issuance of warrants was exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act. The original issuance of warrants by Xinyuan Ltd. were exempt from registration under the Securities Act pursuant to Regulation S under the Securities Act.

ITEM 8. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

See Exhibit Index beginning on page II-7 of this registration statement.

(b) Financial Statement Schedules

Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the Consolidated Financial Statements or the Notes thereto.

ITEM 9. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 6, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and

 

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contained in a form of prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Zhengzhou, People’s Republic of China, on November 16, 2007.

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Yong Zhang and Longgen Zhang as attorneys-in-fact with full power of substitution, for him or her in any and all capacities, to do any and all acts and all things and to execute any and all instruments which said attorney and agent may deem necessary or desirable to enable the registrant to comply with the Securities Act of 1933, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the registration under the Act of common shares of the registrant (the “Shares”), including, without limitation, the power and authority to sign the name of each of the undersigned in the capacities indicated below to the Registration Statement on Form F-1 to be filed with the Securities and Exchange Commission with respect to such Shares, to any and all amendments or supplements to such Registration Statement, whether such amendments or supplements are filed before or after the effective date of such Registration Statement, to any related Registration Statement filed pursuant to Rule 462(b) under the Act, and to any and all instruments or documents filed as part of or in connection with such Registration Statement or any and all amendments thereto, whether such amendments are filed before or after the effective date of such Registration Statement; and each of the undersigned hereby ratifies and confirms all that such attorney and agent shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Yong Zhang Yong Zhang		Chairman and Chief Executive Officer		November 16, 2007
/s/ Yuyan Yang Yuyan Yang		Director		November 16, 2007
/s/ Longgen Zhang Longgen Zhang		Director and Chief Financial Officer and Chief Accounting Officer		November 16, 2007
/s/ Yue (Justin) Tang Yue (Justin) Tang		Director		November 16, 2007
/s/ Christopher J. Fiegan Christopher J. Fiegan		Director		November 16, 2007

 

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Signature		Title		Date
/s/ Yong Cui Yong Cui		Director		November 16, 2007

 

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SIGNATURE OF AUTHORIZED REPRESENTATIVE OF THE REGISTRANT

Pursuant to the Securities Act, the undersigned, the duly authorized representative in the United States of the Registrant, has signed this Registration Statement or amendment thereto in Newark, Delaware, on November 16, 2007.

 

 

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EXHIBIT INDEX

 

Exhibit Number		Description of Document
1.1		Form of Underwriting Agreement
3.1		Amended and Restated Memorandum and Articles of Association of Xinyuan Real Estate Co., Ltd.
*4.1		Form of American Depositary Receipt (included in Exhibit 4.3)
4.2		Specimen Certificate for Common Shares
*4.3		Form of Deposit Agreement among Xinyuan Real Estate Co., Ltd., JPMorgan Chase Bank, N.A., as depositary, and holders of American Depositary Shares
5.1		Opinion of Maples and Calder regarding the validity of the common shares being registered
*8.1		Opinion of Baker & McKenzie LLP regarding certain U.S. tax matters
10.1		2007 Equity Incentive Plan
10.2		2007 Long Term Incentive Plan
10.3		Form of Securities purchase agreement, dated as of April 13, 2007, between Xinyuan Real Estate Co., Ltd and purchaser
10.4		Indenture regarding the guaranteed senior secured floating rate notes due 2010, dated as of April 13, 2007, between Xinyuan Real Estate Co., Ltd and the Hongkong and Shanghai Banking Corporation Limited as Trustee
10.5		Warrant agreement, dated as of April 13, 2007, between Xinyuan Real Estate Co., Ltd. and the Hongkong and Shanghai Banking Corporation Limited
10.6		Indenture regarding the 2% guaranteed convertible subordinate notes due 2012, dated as of April 13, 2007, between Xinyuan Real Estate Co., Ltd and the Hongkong and Shanghai Banking Corporation Limited as Trustee
10.7		Equity registration right agreement, dated as of April 13, 2007, by and among Xinyuan Real Estate Co., Ltd., each of the holders of the Warrants and each of the holders of the Convertible Notes
10.8		Voting agreement, dated as of April 13, 2007, by and among Xinyuan Real Estate Co., Ltd., Drawbridge Global Macro Master Fund Ltd. and Mr. Yong Zhang and Ms. Yuyan Yang
10.9		Share exchange and assumption agreement, dated as of April 9, 2007, among Blue Ridge China Partners, L.P., EI Fund II China, LLC, Yong Zhang, Yuyan Yang, Xinyuan Real Estate, Ltd. and Xinyuan Real Estate Co., Ltd.
10.10		Amended and Restated shareholders agreement, dated as of October 31, 2007, among Blue Ridge China Partners, L.P., EI Fund II China, LLC, Yong Zhang, Yuyan Yang, Xinyuan Real Estate, Ltd., Xinyuan Real Estate Co., Ltd. and, to the extent set forth herein, Burnham Securities Inc. and Joel B. Gardner
10.11		Amended and Restated Warrant, dated as of August 28, 2007, between Xinyuan Real Estate Co., Ltd. and EI Fund II China, LLC
10.12		Amended and Restated Warrant, dated as of August 28, 2007, between Xinyuan Real Estate Co., Ltd. and Blue Ridge China Partners, L.P.
10.13		Burnham Warrants Holders Letter Agreement, dated April 9, 2007, among Xinyuan Real Estate Co., Ltd., Xinyuan Real Estate, Ltd., Burnham Securities Inc. and Joel B. Gardner
10.14		Credit agreement, dated as of December 7, 2006, among Blue Ridge China Partners, L.P., EI Fund II China, LLC, and Xinyuan Real Estate, Ltd.
10.15		Share purchase agreement, dated as of November 18, 2006, among Blue Ridge China Partners, L.P., EI Fund II China, LLC, Yong Zhang, Yuyan Yang and Xinyuan Real Estate, Ltd.
10.16		Securities purchase agreement, dated as of August 22, 2006, among Blue Ridge China Partners, L.P., EI Fund II China, LLC, Yong Zhang, Yuyan Yang and Xinyuan Real Estate, Ltd.

 

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Exhibit Number		Description of Document
*10.17		Form of Indemnification Agreement
*10.18		Form of employment agreement between the registrant and senior executives
*10.19		Form of confidentiality and non-competition agreement between the registrant and senior executives
*10.20		Form of service agreement between the registrant and the independent directors
10.21		English translation of the joint venture contract of Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd., dated August 20, 2005, among Henan Xinyuan Real Estate Co., Ltd., Zhengzhou General Construction Investment Company and Zhengzhou Jiantou Project Consulting Co., Ltd.
10.22		English translation of Financial Consulting Services Agreement, dated December 27, 2006, between Henan Xinyuan Real Estate Co., Ltd. and Beijing Runzheng Investment Consulting Co., Ltd.
10.23		(a) English translation of the share transfer agreement regarding Zhengzhou Mingyuan Landscape Engineering Co., Ltd., dated September 1, 2006, among Yong Zhang, Henan Xinyuan Real Estate Co., Ltd. and Zhengzhou Mingyuan Landscape Engineering Co., Ltd.
		(b) English translation of the share transfer agreement regarding Zhengzhou Mingyuan Landscape Engineering Co., Ltd., dated September 1, 2006, among Yuyan Yang, Henan Xinyuan Real Estate Co., Ltd. and Zhengzhou Mingyuan Landscape Engineering Co., Ltd.
10.24		(a) English translation of the share transfer agreement regarding Zhengzhou Xinyuan Computer Network Engineering Co., Ltd., dated September 1, 2006, among Yong Zhang, Henan Xinyuan Real Estate Co., Ltd. and Zhengzhou Xinyuan Computer Network Engineering Co., Ltd.
		(b) English translation of the share transfer agreement regarding Zhengzhou Xinyuan Computer Network Engineering Co., Ltd., dated September 1, 2006, among Yuyan Yang, Henan Xinyuan Real Estate Co., Ltd. and Zhengzhou Xinyuan Computer Network Engineering Co., Ltd.
10.25		English translation of the share transfer agreement regarding Henan Xinyuan Real Estate Agency Co., Ltd., dated September 1, 2006, among Yuyan Yang, Henan Xinyuan Real Estate Co., Ltd. and Henan Xinyuan Real Estate Agency Co., Ltd.
10.26		(a) English translation of the share transfer agreement regarding Henan Xinyuan Property Management Co., Ltd., dated September 1, 2006, among Yong Zhang, Henan Xinyuan Real Estate Co., Ltd. and Henan Xinyuan Property Management Co., Ltd.
		(b) English translation of the share transfer agreement regarding Henan Xinyuan Property Management Co., Ltd., dated September 1, 2006, among Yuyan Yang, Henan Xinyuan Real Estate Co., Ltd. and Henan Xinyuan Property Management Co., Ltd.
10.27		(a) English translation of the share transfer agreement regarding Henan Xinyuan Real Estate Co., Ltd., dated August 7, 2006, among Yong Zhang, Xinyuan (China) Real Estate, Ltd. and Henan Xinyuan Real Estate Co., Ltd.
		(b) English translation of the share transfer agreement regarding Henan Xinyuan Real Estate Co., Ltd., dated August 7, 2006, among Yuyan Yang, Xinyuan (China) Real Estate, Ltd. and Henan Xinyuan Real Estate Co., Ltd.
10.28		English translation of the share transfer agreement regarding Henan Wanzhong Real Estate Co., Ltd., dated March 16, 2006, among Yuyan Yang, Henan Xinyuan Real Estate Co., Ltd. and Henan Wanzhong Real Estate Co., Ltd.
21.1		Subsidiaries of Xinyuan Real Estate Co., Ltd.
23.1		Consent of Ernst & Young Hua Ming
23.2		Consent of Maples and Calder (included in Exhibit 5.1)
*23.3		Consent of Baker & McKenzie LLP
23.4		Consent of American Appraisal China Limited

 

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Exhibit Number		Description of Document
24.1		Powers of Attorney (included on signature page)
99.1		Code of Business Conduct and Ethics of Xinyuan Real Estate Co., Ltd.
99.2		Non-competition covenant and agreements, dated April 13, 2007, between Yong Zhang and the purchasers named therein

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*

To be filed by amendment.

 

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Exhibit 1.1

Xinyuan Real Estate Co., Ltd.

(a Cayman Islands exempted limited liability company)

[•] American Depositary Shares

Each Representing [•] Common Shares

(Par Value US$0.0001 Per Common Share)

UNDERWRITING AGREEMENT

[•], 2007

MERRILL LYNCH & CO.

Merrill Lynch, Pierce, Fenner & Smith Incorporated

as Representative of the several Underwriters

4 World Financial Center

250 Vesey Street New York, New York 10080

U.S.A.

Ladies and Gentlemen:

Xinyuan Real Estate Co., Ltd., an exempted limited liability company incorporated under the laws of the Cayman Islands (the “Company”) confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) and each of the other Underwriters named in Schedule A hereto (collectively, the “Underwriters,” which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch is acting as representative (in such capacity, the “Representative”), with respect to (i) the sale by the Company, and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of American Depositary Shares of the Company (“ADSs”), each ADS representing [•] of the Company’s common shares, par value US$0.0001 per share (the “Common Shares”) set forth in Schedule A hereto and (ii) the grant by the Company to the Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of [•] additional ADSs to cover overallotments, if any. The aforesaid [•] ADSs (the “Initial Securities”) to be purchased by the Underwriters and all or any part of the [•] ADSs subject to the option described in Section 2(b) hereof (the “Option Securities”) are hereinafter called, collectively, the “Securities.” Unless the context otherwise requires, each reference to the Initial Securities, the Option Securities or the Securities herein also includes the Common Shares represented by such Securities.

The Company understands that the Underwriters propose to make a public offering of the Securities in the United States and internationally outside of the People’s Republic of China (“PRC”) as soon as the Representative deems advisable after this Agreement has been executed and delivered. Solely for purposes of this Agreement, the term China excludes Taiwan, The Hong Kong Special Administrative Region and The Macau Special Administrative Region.

 

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The Company and the Underwriters agree that up to 5% of the initial Securities to be purchased by the Underwriters (the “Reserved Securities”) shall be reserved for sale by the Underwriters to certain eligible employees and persons having business relationships with the Company (the “Invitees”), as part of the distribution of the Securities by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the Financial Industry Regulatory Authority, Inc. (the “FINRA”) and all other applicable laws, rules and regulations. To the extent that such Reserved Securities are not orally confirmed for purchase by Invitees by the end of the first business day after the date of this Agreement, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby.

The Company has filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form F-1 (No. 333-•), including the related preliminary prospectus or prospectuses, covering the registration of the Securities under the Securities Act of 1933, as amended (the “1933 Act”). The Company has filed with the Commission a registration statement on Form F-6 (No. 333-•) covering the registration of the ADSs under the 1933 Act. Promptly after execution and delivery of this Agreement, the Company will prepare and file a prospectus in accordance with the provisions of Rule 430A (“Rule 430A”) of the rules and regulations of the Commission under the 1933 Act (the “1933 Act Regulations”) and paragraph (b) of Rule 424 (“Rule 424(b)”) of the 1933 Act Regulations. The information included in such prospectus that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective pursuant to paragraph (b) of Rule 430A is referred to as “Rule 430A Information.” Each prospectus used before such registration statement became effective, and any prospectus that omitted the Rule 430A Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “preliminary prospectus.” Such registration statement, including the amendments thereto, the exhibits and any schedules thereto, at the time it became effective, and including the Rule 430A Information, is herein called the “Registration Statement.” The registration statement relating to the ADSs, as amended at the time it became effective, is hereinafter referred to as the “ADS Registration Statement.” Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the “Rule 462(b) Registration Statement,” and after such filing the term “Registration Statement” shall include the Rule 462(b) Registration Statement. The final prospectus in the form first furnished to the Underwriters for use in connection with the offering of the Securities is herein called the “Prospectus.” For purposes of this Agreement, all references to the Registration Statement, the ADS Registration Statement, any preliminary prospectus, the Prospectus or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system (“EDGAR”).

The ADSs purchased by the Underwriters will be evidenced by American Depositary Receipts (“ADRs”) to be issued pursuant to a deposit agreement dated as of on or about [·], 2007 (the “Deposit Agreement”), to be entered into among the Company, JPMorgan Chase Bank, N.A., as depositary (the “Depositary”), and all owners and beneficial owners from time to time of the ADSs.

 

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SECTION 1. Representations and Warranties.

(a) Representations and Warranties by the Company. The Company represents and warrants to each Underwriter as of the date hereof, the Applicable Time referred to in Section 1(a)(i) hereof, the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each Underwriter, as follows:

(i) Compliance with Registration Requirements. Each of the Registration Statement, the ADS Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement, the ADS Registration Statement, any Rule 462(b) Registration Statement or any post-effective amendment thereto has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with.

At the respective times the Registration Statement, the ADS Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery (as defined below)), the Registration Statement, the ADS Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, any preliminary prospectus and any supplement thereto or prospectus wrapper prepared in connection therewith, at their respective times of issuance and at the Closing Time, complied and will comply in all material respects with any applicable laws or regulations of foreign jurisdictions in which the Prospectus and such preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the offer and sale of Reserved Securities. Neither the Prospectus nor any amendments or supplements thereto, at the time the Prospectus or any such amendment or supplement was issued and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

As of the Applicable Time (as defined below), neither (x) the Issuer General Use Free Writing Prospectus(es) (as defined below) issued at or prior to the Applicable Time and the Statutory Prospectus (as defined below) as of the Applicable Time and the information, if any, included on Schedule C hereto, all considered together (collectively, the “General Disclosure Package”), nor (y) any individual Issuer Limited Use Free Writing Prospectus, when considered together with the General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

 

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As used in this subsection and elsewhere in this Agreement:

“Applicable Time” means [•]:00 [a/p]m (New York City time) on [•], 2007 or such other time as agreed by the Company and Merrill Lynch.

“Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the 1933 Act Regulations (“Rule 433”), relating to the Securities that (i) is required to be filed with the Commission by the Company, (ii) is a “road show that is a written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission or (iii) is exempt from filing pursuant to Rule 433(d)(5)(i) because it contains a description of the Securities or of the offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).

“Issuer General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a Bona Fide Electronic Road Show (as defined below)), as evidenced by its being specified in Schedule C hereto.

“Issuer Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.

“Statutory Prospectus” as of any time means the prospectus relating to the Securities that is included in the Registration Statement immediately prior to that time, including any document incorporated by reference therein.

The Company has made available a “bona fide electronic road show,” as defined in Rule 433, in compliance with Rule 433(d)(8)(ii) (the “Bona Fide Electronic Road Show”) such that no filing of any “road show” (as defined in Rule 433(h)) is required in connection with the offering of the Securities.

Each Issuer Free Writing Prospectus, as of its issue date and at all subsequent times through the completion of the public offer and sale of the Securities or until any earlier date that the issuer notified or notifies the Representative as described in the next sentence, did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement, the ADS Registration Statement or the Prospectus, and any preliminary or other prospectus deemed to be a part thereof that has not been superseded or modified. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information then contained in the Registration Statement or the ADS Registration Statement or as a result of which such Issuer Free Writing Prospectus, if republished immediately following such event or development, would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, (i) the Company has promptly notified or will

 

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promptly notify the Representative and (ii) the Company has promptly amended or will promptly amend or supplement such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.

The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement, the Prospectus or any Issuer Free Writing Prospectus made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Merrill Lynch expressly for use therein.

Each preliminary prospectus (including the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto) complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T under the 1933 Act (“Regulation S-T”).

(A) At the time of filing the Registration Statement, the ADS Registration Statement, any 462(b) Registration Statement and any post-effective amendments thereto and (B) as of the date of the execution and delivery of this Agreement (with such date being used as the determination date for purpose of this clause (B), the Company was not and is not an “ineligible issuer,” as defined in Rule 405 of the 1933 Act Regulations.

(i) Independent Accountants. Ernst & Young Hua Ming, who have certified the financial statements and supporting schedules filed with the Commission as part of the Registration Statement, are independent public accountants as required by the 1933 Act, the 1933 Act Regulations and the regulations of the United States Public Company Accounting Oversight Board.

(ii) Financial Statements. The financial statements included in the Registration Statement, the General Disclosure Package and the Prospectus, together with the related schedules and notes, comply as to form in all material respects with the requirements of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “1934 Act”), and present fairly the financial position of the Company and its consolidated Subsidiaries (as defined below at the dates indicated and the statement of operations, stockholders’ equity and cash flows of the Company and its consolidated Subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) applied on a consistent basis throughout the periods involved. The supporting schedules present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Registration Statement, the General Disclosure Package and the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement.

 

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(iii) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a “Material Adverse Effect”), (B) there have been no transactions entered into by the Company or any of its Subsidiaries, other than those in the ordinary course of business, that are material with respect to the Company and its Subsidiaries considered as one enterprise, (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of shares of its share capital, (D) there has been no material adverse change in the share capital, short-term indebtedness, long-term indebtedness, consolidated net current assets or shareholders’ equity, consolidated net revenues or the total or per-share amounts of net income of the Company and its Subsidiaries, taken as a whole, and (E) there has been no obligation, direct or contingent (including any off-balance sheet obligations), incurred by the Company or any Subsidiary that would have a Material Adverse Effect.

(iv) Good Standing of the Company. The Company has been duly organized and is validly existing as a limited liability company in good standing under the laws of the Cayman Islands and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in Registration Statement, the General Disclosure Package and the Prospectus and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect.

(v) Good Standing of Subsidiaries. The Company does not own or control, directly or indirectly, any corporation, association or entity other than the subsidiaries (each a “Subsidiary” and collectively the “Subsidiaries”) as listed in Exhibit A hereto. Each Subsidiary has been duly organized and is validly existing in good standing, where applicable, under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in Registration Statement, the General Disclosure Package and the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing, where applicable, in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing, where applicable, would not result in a Material Adverse Effect; except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, all of the issued and outstanding share capital of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of share capital of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary.

 

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(vi) Capitalization. The Securities and all other outstanding share capital of the Company have been duly authorized; the authorized equity capitalization of the Company is as set forth in the General Disclosure Package and the Prospectus and upon the issuance and sale of the Initial Securities, the Company shall have an authorized and outstanding capital as set forth in the General Disclosure Package and the Prospectus in the column entitled “As Adjusted” under the caption “Capalization”; all outstanding share capital of the Company are, and, when the Securities and the underlying Common Shares have been, issued, delivered and paid for in accordance with this Agreement and the Deposit Agreement at the Closing Time or each Date of Delivery, as the case may be, such Securities will have been validly issued, fully paid and nonassessable and will conform to the information in the General Disclosure Package and to the description of such Securities contained in the Prospectus; except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the shareholders of the Company have no preemptive rights with respect to the Securities, and none of the outstanding share capital of the Company have been issued in violation of any preemptive or similar rights of any security holder; the Securities and the underlying Common Shares to be sold by the Company, when issued and delivered against payment heretofore pursuant to this Agreement and the Deposit Agreement, will not be subject to any security interest, other encumbrance or adverse claims, and have been issued in compliance with all federal and state securities laws and were not issued in violation of any preemptive right, right of first refusal or similar right; upon payment of the purchase price in accordance with this Agreement at the Closing Time or each Date of Delivery, the Depositary or its nominee, as the registered holder of the Common Shares represented by the Securities, will be, subject to the terms of the Deposit Agreement, entitled to all the rights of a shareholder conferred by the Memorandum and Articles of Association of the Company; except as disclosed in the General Disclosure Package and the Prospectus and subject to the terms and provisions of the Deposit Agreement, there are no restrictions on transfers of Common Shares represented by the Securities or the Securities under the laws of the Cayman Islands or the United States, as the case may be; the Common Shares represented by the Securities may be freely deposited by the Company with the Depositary or its nominee against issuance of ADRs evidencing the Securities as contemplated by the Deposit Agreement.

(vii) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by the Company.

(viii) Authorization and Description of Common Shares to be Offered. The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and fully paid and non-assessable; and will conform to all statements relating thereto contained in the Prospectus and such description confirms to the rights set forth in the instruments defining the same; no holder of the Common Shares will be subject to personal liability by reason of being such a holder; and the issuance of Common Shares is not subject to the preemptive or other similar rights.

 

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(ix) Authorization of Deposit Agreement. The Deposit Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by the Depositary, constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject, as to enforceability, to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles; upon due issuance by the Depositary of the ADRs evidencing the Securities against the deposit of the underlying Common Shares in respect thereof in accordance with the provisions of the Deposit Agreement, such ADRs will be duly and validly issued and the persons in whose names the ADRs are registered will be entitled to the rights specified therein and in the Deposit Agreement; the Deposit Agreement and the ADRs conform in all material respects to the descriptions thereof contained in the General Disclosure Package and the Prospectus.

(x) Listing. The ADSs have been approved for listing on New York Stock Exchange, subject only to notice of issuance.

(xi) Absence of Defaults and Conflicts. Neither the Company nor any of its subsidiaries is in violation of its Organizational Documents (as defined below) or in default (or with the giving of notice or lapse of time would be in default) in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any Subsidiary is subject, including, without limitation, the agreements listed on Exhibit B hereto (collectively, “Agreements and Instruments”) except for such defaults that would not, individually or in the aggregate, result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the Deposit Agreement, and the consummation of the transactions contemplated herein or therein and in the Registration Statement (including the issuance and sale of the Securities and the Common Shares represented by the Securities and the use of the proceeds from the sale of the Securities as described in the Statutory Prospectus included in the General Disclosure Package and the Prospectus under the heading “Use of Proceeds”) and compliance by the Company with its obligations hereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches, defaults or Repayment Events or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of Organizational Documents of the Company or any Subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their assets, properties or operations. As used herein, “Organizational Documents” means, with respect to any person, the memorandum of association, articles of association, articles of incorporation,

 

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certificate of incorporation, bylaws and any charter, partnership agreements, joint venture agreements or other organizational documents of such entity and any amendments thereto. A “Repayment Event” means any event or condition that gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any Subsidiary.

(xii) Absence of Labor Dispute. No labor dispute with the employees of the Company or any Subsidiary exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any Subsidiary’s principal suppliers, manufacturers, customers or contractors, which, in either case, would result in a Material Adverse Effect.

(xiii) Absence of Proceedings. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, there is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened or contemplated, against or affecting the Company or any Subsidiary, that is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might result in a Material Adverse Effect, or which might materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement or the Deposit Agreement or the performance by the Company of its obligations hereunder or thereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any Subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not result in a Material Adverse Effect.

(xiv) Accurate Disclosure. The statements in the Statutory Prospectus included in the General Disclosure Package and the Prospectus under the “Description of Debt and Equity-Linked Securities,” insofar as such statements summarize legal matters, agreements, documents or proceedings discussed therein, are accurate and fair summaries of such legal matters, agreements, documents or proceedings and present the material information required to be shown.

(xv) Accuracy of Exhibits. There are no legal or governmental proceedings or contracts or other documents which are required to be described in the Registration Statement, the ADS Registration Statement, any Rule 462(b) Registration Statement or the most recent preliminary prospectus or, in the case of documents, to be filed as exhibits to the Registration Statement or the ADS Registration Statement, that have not been described and filed as required.

(xvi) Possession of Intellectual Property. The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively,

 

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“Intellectual Property”) necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, individually or in the aggregate, would result in a Material Adverse Effect.

(xvii) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any person (including any counterparty to the Agreements and Instruments or any court or governmental authority or agency) is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement or the Deposit Agreement, except such as have been already obtained or as may be required under state securities laws and such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered.

(xviii) Absence of Manipulation. Neither the Company nor any affiliate of the Company has taken, nor will the Company or any affiliate take, directly or indirectly, any action which is designed to or which has constituted or which would be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities.

(xix) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, “Governmental Licenses”) issued by the appropriate national, provincial, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them, except where the failure so to possess would not, singly or in the aggregate, result in a Material Adverse Effect; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, result in a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not, singly or in the aggregate, result in a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. With respect to the projects described under the caption “Business” in the Registration Statement, the General Disclosure Package and the Prospectus as the Company’s completed projects and projects under construction and Jiantou Xinyuan’s completed project and projects under construction, (A) each of the relevant PRC Subsidiaries has legal and valid land-use right certificates, construction site planning permits, construction work planning permits, construction permits, pre-sale permits and completion acceptance certificates for each of the completed projects; (B) each

 

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of the relevant PRC Subsidiaries has legal and valid land-use right certificates, construction site planning permits, construction work planning permits and construction permits, and, if applicable, pre-sale permits, for each of the projects under construction, (C) the planning, design, construction, inspection, marketing and pre-sale, as the case may be, of each of the completed projects and projects under construction complies with all applicable PRC Laws (including, without limitation, the national and local urban planning regulations), except for any incompliance that would not have a Material Adverse Effect; and (C) there is no pending or threatened legal proceedings or action that would affect the size of, use of, or construction on any of the completed projects or projects under construction. With respect to the projects described under the caption “Business” in the Registration Statement, the General Disclosure Package and the Prospectus as the Company’s projects under planning and Jiantou Xinyuan’s project under planning, (A) each of the relevant PRC Subsidiaries has entered into land grant contracts for each of the projects under planning, which are valid, binding and enforceable in accordance with their respective terms under PRC law; (B) the relevant PRC subsidiaries has legal and valid land-use right certificates for [·] and [·], and to the best knowledge of the Company, a land-use right certificates should be issued to [·] and [·] so long as the Company submits all necessary documents and carries out all necessary procedures.

(i) Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Registration Statement, the General Disclosure Package and the Prospectus or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the General Disclosure Package and the Prospectus, are in full force and effect, and neither the Company nor any Subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease.

(ii) Investment Company Act. The Company is not required, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the General Disclosure Package and the Prospectus will not be required, to register as an “investment company” under the Investment Company Act of 1940, as amended.

(iii) Environmental Laws. Except as described in the Registration Statement and except as would not, individually or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any statute, law, rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to pollution or protection of human health, the environment

 

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(including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products, asbestos-containing materials or mold (collectively, “Hazardous Materials”) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, “Environmental Laws”), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that would reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws.

(iv) Registration Rights. Except as disclosed in the General Disclosure Package and the Prospectus, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act.

(v) Accounting Controls. The Company and each of its subsidiaries maintain a system of internal accounting controls, including, but not limited to, disclosure controls and procedures, internal controls over accounting matters and financial reporting, an internal audit function and legal and regulatory compliance controls (collectively, “Internal Controls”) that are sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management’s general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management’s general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Prospectus, since the end of the Company’s most recent audited fiscal year, there has been (1) no material weakness in the Company’s internal control over financial reporting (whether or not remediated) and (2) no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

(vi) Anti-Money Laundering Laws. Each of the Company, its subsidiaries and any of their respective officers and executive directors, and, to the knowledge of the Company, each of its affiliates, supervisors, managers, agents and employees, has not violated, and the Company’s participation in the offering of the Securities pursuant to this Agreement will not violate, any Anti-Money Laundering Laws (as defined below). The Company has instituted and maintains policies and procedures designed to ensure

 

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continued compliance with all applicable Anti-Money Laundering Laws. As used herein, “Anti-Money Laundering Laws” means all applicable federal, state, national, provincial, international, foreign or other laws, regulations or government guidance regarding anti-money laundering, including, without limitation, Title 18 U.S. Code section 1956 and 1957, the USA Patriot Act, the Bank Secrecy Act, and international anti-money laundering principals or procedures published by an intergovernmental group or organization, such as the Financial Action Task Force on Money Laundering, of which the United States is a member and with which designation the United States representative to the group or organization continues to concur, in each case as amended, and any executive order, directive, or regulation pursuant to the authority of any of the foregoing, or any orders or licenses issued thereunder.

(vii) Compliance with the Sarbanes-Oxley Act. The Company has taken all necessary actions to ensure that, upon the effectiveness of the Registration Statement, it will be in compliance with all provisions of the Sarbanes-Oxley Act of 2002 and all rules and regulations promulgated thereunder or implementing the provisions thereof (the “Sarbanes-Oxley Act”) that are then in effect and which the Company is required to comply with as of the effectiveness of the Registration Statement, and, in respect of provisions of the Sarbanes-Oxley Act that are not then but will later become applicable to it, is actively taking steps to ensure that it will be in compliance with such other provisions of the Sarbanes-Oxley Act when these provisions become applicable to it, at all times after the effectiveness of the Registration Statement.

(viii) Payment of Taxes. The Company and its subsidiaries have filed all tax returns that are required to have been filed by them pursuant to applicable federal, state, national, provincial, local and non-U.S. tax law except insofar as the failure to file such returns would not result in a Material Adverse Effect, and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company and its subsidiaries, except for such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Company in respect of any income and corporation tax liability for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined, except to the extent of any inadequacy that would not result in a Material Adverse Effect.

(ix) Insurance. The Company and its subsidiaries carry or are entitled to the benefits of insurance, with financially sound and reputable insurers, in such amounts and covering such risks as is generally maintained by companies of established repute engaged in the same or similar business, and all such insurance is in full force and effect. The Company has no reason to believe that it or any Subsidiary will not be able (A) to renew its existing insurance coverage as and when such policies expire or (B) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any Subsidiary has been denied any insurance coverage which it has sought or for which it has applied.

 

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(x) Statistical and Market-Related Data. Any statistical and market-related data included in the Registration Statement, the General Disclosure Package and the Prospectus are based on or derived from sources that the Company believes to be reliable and accurate, and, to the extent required, the Company has obtained the written consent to the use of such data from such sources and such consent has not been revoked; all statistical and operating data included in the Registration Statement, the General Disclosure Package and the Prospectus not based on third-party sources are true and accurate in all material respects. No consent from any party, including CIHAF, China Real Estate Business, YUBO Media and Institute of Finance and Trade Economics of Chinese Academy of Social Sciences (collectively, the “CHIAF Entities” and each a “CHIAF Entity”), is required for the use and inclusion of the information based on or derived from the “CIHAF Valuation Report on Real Estate Investment in PRC Cities” (the “CHIAF Report”) or for the inclusion of such party’s name in the Registration Statement, the General Disclosure Package or the Prospectus.

(xi) Payments in Foreign Currency. Except as disclosed in the General Disclosure Package and the Prospectus, under current laws and regulations of the Cayman Islands and any political subdivision thereof, all dividends and other distributions declared and payable on the Securities and the underlying Common Shares may be paid by the Company to the holder thereof in United States dollars and freely transferred out of the Cayman Islands and all such payments made to holders thereof or therein who are non-residents of the Cayman Islands will not be subject to income, withholding or other taxes under laws and regulations of the Cayman Islands, or any political subdivision or taxing authority thereof or therein and will otherwise be free and clear of any other tax, duty, withholding or deduction in the Cayman Islands or any political subdivision or taxing authority thereof or therein and without the necessity of obtaining any governmental authorization in the Cayman Islands or any political subdivision or taxing authority thereof or therein.

(xii) Business Practices. Neither the Company nor any of its subsidiaries nor any of their respective officers, employees, directors, representatives or agents has offered, promised, authorized or made, directly or indirectly, (A) any unlawful payments or (B) payments or other inducements (whether lawful or unlawful) to any Government Official (as defined below), with the intent or purpose of: (A) influencing any act or decision of such Government Official in his official capacity, (B) inducing such Government Official to do or omit to do any act in violation of the lawful duty of such Government Official, (C) securing any improper advantage, or (D) inducing such Government Official to use his influence with a government or instrumentality thereof, political party or international organization to affect or influence any act or decision of such government or instrumentality, political party or international organization, in order to assist the Company or any of its subsidiaries in obtaining or retaining business for or with, or directing business to, any person. Neither the Company nor any of its subsidiaries nor any of their respective officers, employees, directors, representatives or agents has offered, promised, authorized or made, directly or indirectly, any payments or other inducements specified in the proceeding sentence to a Government Officials in violation of either Cayman Islands or PRC law against improper payments. Notwithstanding provisions under the proceeding sentences, any facilitating or expediting payment made to a Government Official for the purpose of expediting or securing the performance of a routine governmental action by a Government Official shall not constitute a breach of the representation made in this subsection.

 

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As used in this subsection and elsewhere in this Agreement, “Government Official” means (A) any employee or official of any government, including any employee or official of any entity owned or controlled by a government, (B) any employee or official of a political party, (C) any candidate for political office or his employee, or (D) any employee or official of an international organization. For the avoidance of doubt, the term Government Official shall include any employee or official of a hospital, clinic or other healthcare institution owned or controlled by a government.

(xiii) OFAC. Neither the Company nor, to the knowledge of the Company, any director, officer, agent, employee, affiliate or person acting on behalf of the Company or any of its subsidiaries has conducted or entered into a contract to conduct any transaction with the governments or any of sub-division thereof, agents or representatives, residents of, or any entity based or resident in the countries that are currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and neither the Company nor any of its subsidiaries has financed the activities of any person currently subject to any U.S. sanctions administered by OFAC.

(xiv) No Finder’s Fee. There are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder’s fee or other like payment in connection with this offering.

(xv) Related Party Transactions. During the past three years, there has been no material relationships or transactions between the Company or any of its subsidiaries on one hand and their respective 10% or greater shareholders, affiliates, directors or officers, or any affiliates or members of the immediate families of such persons, on the other hand, that are not disclosed in the General Disclosure Package and the Prospectus.

(xvi) Passive Foreign Investment Company. The Company does not expect to be a Passive Foreign Investment Company (“PFIC”) within the meaning of Section 1297(a) of the United States Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder for the taxable year ending December 31, 2007, and has no plan or intention to conduct its business in a manner that would be reasonably expected to result in the Company becoming a PFIC in the future under current laws and regulations.

(xvii) Foreign Private Issuer. The Company is a “foreign private issuer” within the meaning of Rule 405 under the 1933 Act.

(xviii) No Transaction or Other Taxes. No transaction, stamp, capital or other issuance, registration, transaction, transfer or withholding taxes or duties are payable in the PRC and the Cayman Islands by or on behalf of the Underwriters to any PRC or Cayman Islands taxing authority in connection with (A) the issuance, sale and delivery of

 

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the Common Shares represented by the Securities by the Company, the issuance of the Securities by the Depositary, and the delivery of the Securities to or for the account of the Underwriters, (B) the purchase from the Company and the initial sale and delivery by the Underwriters of the Securities to purchasers thereof, (C) the deposit of the Common Shares with the Depositary and the Custodian (as defined in the Deposit Agreement) and the issuance and delivery of the ADRs evidencing the Securities, or (D) the execution and delivery of this Agreement or the Deposit Agreement.

(xix) Proper Form of Agreements. This Agreement and the Deposit Agreement are in proper form under the laws of the Cayman Islands for the enforcement thereof against the Company in accordance with the laws of the Cayman Islands and to ensure the legality, validity, enforceability or admissibility into evidence in the Cayman Islands of this Agreement and the Deposit Agreement; it is not necessary that this Agreement, the Deposit Agreement, the General Disclosure Package, the Prospectus or any other document be filed or recorded with any court or other authority in the Cayman Islands or that any Cayman Islands stamp duty or similar tax be paid on or in respect of this Agreement, the Deposit Agreement or any other document to be furnished hereunder or thereunder.

(xx) Validity of Choice of Law. The choices of the law of the State of New York as the governing law of this Agreement and the Deposit Agreement are valid choices of law under the laws of the Cayman Islands and the PRC and will be honored by courts in the Cayman Islands and the PRC. The Company has the power to submit, and pursuant to Section 16 of this Agreement and Section [•] of the Deposit Agreement, has legally, validly, effectively and irrevocably submitted, to the personal jurisdiction of each United States federal court and New York state court located in the Borough of Manhattan, in The City of New York, New York, United States (each, a “New York Court”), and the Company has the power to designate, appoint and authorize, and pursuant to Section 16 of this Agreement and Section [•] of the Deposit Agreement, has legally, validly, effectively and irrevocably designated, appointed an authorized agent for service of process in any action arising out of or relating to this Agreement, the Deposit Agreement or the Securities in any New York Court, and service of process effected on such authorized agent will be effective to confer valid personal jurisdiction over the Company as provided in Section 16 of this Agreement and Section [•] of the Deposit Agreement.

(xxi) No Immunity. Neither the Company or any Subsidiary nor any of their respective properties, assets or revenues has any right of immunity under Cayman Islands, the PRC, New York or United States federal law, from any legal action, suit or proceeding, from the giving of any relief in any such legal action, suit or proceeding, from set-off or counterclaim, from the jurisdiction of any Cayman Islands, the PRC, New York or United States federal court, from service of process, attachment upon or prior to judgment, or attachment in aid of execution of judgment, or from execution of a judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of a judgment, in any such court, with respect to its obligations, liabilities or any other matter under or arising out of or in connection with this Agreement, the Deposit Agreement or the Securities; and, to the extent that the Company, or any Subsidiary or

 

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any of their respective properties, assets or revenues may have or may hereafter become entitled to any such right of immunity in any such court in which proceedings may at any time be commenced, each of the Company and the subsidiaries waives or will waive such right to the extent permitted by law and has consented to such relief and enforcement as provided in Section 16 of this Agreement and Section [•] of the Deposit Agreement.

(xxii) Judgment Currency. Any final judgment for a fixed sum of money rendered by a New York Court having jurisdiction under New York law in respect of any suit, action or proceeding against the Company based upon this Agreement or the Deposit Agreement would be recognized and enforced against the Company by Cayman Islands courts without re-examining the merits of the case under the common law doctrine of obligation; provided that (A) adequate service of process has been effected and the defendant has had a reasonable opportunity to be heard, (B) such judgments or the enforcement thereof are not contrary to the law, public policy, security or sovereignty of the Cayman Islands, (C) such judgments were not obtained by fraudulent means and do not conflict with any other valid judgment in the same matter between the same parties, and (D) an action between the same parties in the same matter is not pending in any Cayman Islands court at the time the lawsuit is instituted in the foreign court.

(xxiii) Critical Accounting Policies. The section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the General Disclosure Package and the Prospectus accurately and fully describes (A) accounting policies that the Company believes are the most important in the portrayal of the Company’s financial condition and results of operations and that require management’s most difficult, subjective or complex judgments (“Critical Accounting Policies”); (B) judgments and uncertainties affecting the application of the Critical Accounting Policies; and (C) the likelihood that materially different amounts would be reported under different conditions or using different assumptions and an explanation thereof; and the Company’s management have reviewed and agreed with the selection, application and disclosure of the Critical Accounting Policies as described in the General Disclosure Package and the Prospectus.

(xxiv) No Unapproved Marketing Documents. The Company has not distributed and, prior to the later of the Closing Time or any Date of Delivery and completion of the distribution of the Securities, will not distribute any offering material in connection with the offering and sale of the Securities other than any preliminary prospectus, the Prospectus, any Issuer Free Writing Prospectus to which the Representative has consented in accordance with this Agreement and any Issuer Free Writing Prospectus set forth on Schedule C hereto.

(xxv) Employee Benefits. Except as set forth in the General Disclosure Package and the Prospectus, the Company has no obligation to provide retirement, death or disability benefits to any of the present or past employees of the Company or any Subsidiary, or to any other person; the Company and its subsidiaries are in compliance with all applicable laws relating to employee benefits.

 

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(xxvi) No Broker-Dealer Affiliation. Except as set forth in the General Disclosure Package and the Prospectus, there are no affiliations or associations between any member of the FINRA and any of the officers or directors of the Company or the subsidiaries, or holders of 5% or greater of the securities of the Company.

(xxvii) SAFE Compliance. The Company has taken all necessary steps to comply with, and to ensure compliance by all of the Company’s shareholders who are PRC residents or PRC citizens with any applicable rules and regulations of the State Administration of Foreign Exchange (the “SAFE Rules and Regulations”), including without limitation, requiring each shareholder that is, or is directly or indirectly owned or controlled by, a PRC resident or PRC citizen to complete any registration and other procedures required under applicable SAFE Rules and Regulations.

(xxviii) No Trading. None of the Company or any of the subsidiaries is engaged in any trading activities involving commodity contracts or other trading contracts that are not currently traded on a securities or commodities exchange and for which the market value cannot be determined.

(xxix) Lock-Up Agreement. Each officer, director and principal shareholder of the Company set forth on Schedule D hereto has furnished to the Representative, prior to the date of this Agreement, a letter or letters, substantially in the form of Exhibit B hereto (each such letter a “Lock-Up Agreement”).

(xxx) Forward-Looking Statement. Each “forward-looking statement” (within the meaning of Section 27A of the 1944 Act or Section 21E of the 1934 Act) contained in the General Disclosure Package and the Prospectus has been made or reaffirmed with a reasonable basis and in good faith.

(xxxi) Dividend Payment. Except as disclosed in the General Disclosure Package and the Prospectus, no Subsidiary is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such Subsidiary’s capital stock, from repaying to the Company any loans or advances to such Subsidiary from the Company or from transferring any of such Subsidiary’s property or assets to the Company or any other Subsidiary of the Company.

(xxxii) Reserved Share Program. The Company has not offered, or caused the Underwriters to offer, the Reserved Securities to any person pursuant to the Reserved Share Program with the intent to influence unlawfully (A) a customer or supplier of the Company or any of the Subsidiaries to alter the customer’s or supplier’s level or type of business with the Company or any of the Subsidiaries, or (B) a trade journalist or publication to write or publish favorable information about the Company or any of the Subsidiaries or any of their respective products or services.

(b) Officer’s Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Representative or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby.

 

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SECTION 2. Sale and Delivery to Underwriters; Closing.

(a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Company, at the price per ADS set forth in Schedule C, that proportion of the number of Initial Securities set forth in Schedule B opposite the name of the Company, which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter, plus any additional number of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, bears to the total number of Initial Securities, subject, in each case, to such adjustments among the Underwriters as the Representative in its sole discretion shall make to eliminate any sales or purchases of fractional securities.

(b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional [•] Option Securities, as set forth in Schedule B, at the price per ADS set forth in Schedule C, less an amount per ADS equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering overallotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by Merrill Lynch to the Company setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a “Date of Delivery”) shall be determined by Merrill Lynch, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter bears to the total number of Initial Securities, subject in each case to such adjustments as Merrill Lynch in its discretion shall make to eliminate any sales or purchases of fractional shares.

(c) Payment. The Company will deliver the Initial Securities to or as instructed by the Representative for the accounts of the several Underwriters through the facilities of the Depositary Trust Company (“DTC”) in a form reasonably acceptable to the Representative against payment of the purchase price by the Underwriters in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to the Representative drawn to the order of the Company for itself at 9:00 A.M., (New York City time), on the third (fourth, if the pricing occurs after 4:30 P.M. (New York City time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or at such other time not later than ten business days after such date as shall be agreed upon by the Representative, the Company (such time and date of payment and delivery being herein called the “Closing Time”).

 

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In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of, such Option Securities shall be made on each Date of Delivery as specified in the notice from the Representative to the Company.

The parties to this agreement understand that each Underwriter has authorized the Representative, for each such Underwriter’s account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, that it has agreed to purchase. Merrill Lynch, individually and not as Representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder.

(d) Denominations; Registration. The ADRs evidencing the Initial Securities and the Option Securities, if any, shall be in definitive form, in such denominations and registered in such names as the Representative may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be.

SECTION 3. Covenants of the Company.

(a) The Company covenants with each Underwriter as follows:

(i) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(a)(ii), will comply with the requirements of Rule 430A, and will notify the Representative immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement or the ADS Registration Statement shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement, the ADS Registration Statement or any amendment or supplement to the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, the ADS Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(e) of the 1933 Act concerning the Registration Statement or the ADS Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the 1933 Act in connection with the offering of the Securities. The Company will effect the filings required under Rule 424(b), in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment.

 

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(ii) Filing of Amendments and Exchange Act Documents. The Company will give the Representative notice of its intention to file or prepare any amendment to the Registration Statement or the ADS Registration Statement (including any filing under Rule 462(b)) or any amendment, supplement or revision to either the prospectus included in the Registration Statement or the ADS Registration Statement at the time it became effective or to the Prospectus, and will furnish the Representative with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Representative or counsel for the Underwriters shall object. The Company has given the Representative notice of any filings made pursuant to the 1934 Act or 1934 Act Regulations within 48 hours prior to the Applicable Time; the Company will give the Representative notice of its intention to make any such filing from the Applicable Time to the Closing Time and will furnish the Representative with copies of any such documents a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representative or counsel for the Underwriters shall object.

(iii) Delivery of Registration Statements. The Company has furnished or will deliver to the Representative and counsel for the Underwriters, without charge, signed copies of the Registration Statement and the ADS Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith and signed copies of all consents and certificates of experts, and will also deliver to the Representative, without charge, conformed copies of the Registration Statement and the ADS Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and the ADS Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

(iv) Delivery of Prospectuses. The Company has delivered to each Underwriter, without charge, as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Underwriter, without charge, during the period when the Prospectus is required to be delivered under the 1933 Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

(v) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to amend the Registration Statement or the ADS Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include any untrue

 

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statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or the ADS Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(a)(ii), such amendment or supplement or Issuer Free Writing Prospectus as may be necessary to correct such statement or omission or to make the Registration Statement, the ADS Registration Statement or the Prospectus comply with such requirements, and the Company will furnish to the Underwriters such number of copies of such amendment, supplement or Issuer Free Writing Prospectus as the Underwriters may reasonably request. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement or the ADS Registration Statement relating to the Securities or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances, prevailing at that subsequent time, not misleading, the Company will promptly notify Merrill Lynch and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.

(vi) Blue Sky Qualifications. The Company will use its reasonable best efforts, in cooperation with the Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.

(vii) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide to the Underwriters the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.

(viii) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the General Disclosure Package and the Prospectus under “Use of Proceeds.”

(ix) Listing. The Company will use its best efforts to effect and maintain the listing of the ADSs (including the Securities) on the New York Stock Exchange.

(x) Restriction on Sale of ADSs and Common Shares. The Company will not during the relevant Lock-Up Period, without the prior written consent of Merrill Lynch,

 

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(i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any Lock-up Securities, or file or publicly disclose its intention to file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Lock-up Securities, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of the Lock-Up Securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the sale and transfer of the ADSs and the underlying Common Shares in the current offering, (B) the issuance of stock options to the Company’s directors, officers and employees in accordance with and in the amounts specified in the Company’s existing share option plan and the filing of a Form S-8 in connection therewith (C) the issuance of the Common Shares upon the exercise of employee share options existing on the date of the Prospectus. Notwithstanding the foregoing, if (1) during the last 17 days of the Lock-Up Period the Company issues an earnings release, material news about the Company is released or a material event relating to the Company occurs or (2) prior to the expiration of the Lock-Up Period, the Company announces that it will make an earnings release or it becomes aware that material news about the Company will be released or a material event will occur during the 16-day period beginning on the last day of the Lock-Up Period, the restrictions imposed in this clause (x) shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the release of the material news or the occurrence of the material event. The Company will promptly provide the Representative with notice of any announcement described in clause (2) of the preceding sentence that gives rise to an extension of the Lock-Up Period.

(xi) Reporting Requirements. The Company, during the period when the Prospectus is required to be delivered under the 1933 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder. During the five-year period after the date of this Agreement, the Company will furnish to the Representative and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to the Representative, to the extent not in contradiction of applicable federal securities laws, (i) as soon as available, a copy of each report of the Company filed with the Commission under the 1934 Act or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as the Representative may reasonably request. However, so long as the Company is subject to the reporting requirements of either Section 13 or Section 15(d) of the 1934 Act and is timely filing reports with the Commission on its EDGAR reporting system, it is not required to furnish such reports or statements filed through EDGAR to the Representative.

(xii) Performance of Obligations. The Company will use its reasonable best efforts to do and perform all things required to be done or performed under this Agreement by the Company prior to the Closing Time or each Date of Delivery and to satisfy all conditions precedent to the delivery of the Initial Securities and the Option Securities.

 

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(xiii) No Stabilization. The Company will not take, and will cause its affiliates (within the meaning of Rule 144 under the 1933 Act) not to take, directly or indirectly, any action that constitutes or is designed to cause or result in, or which could reasonably be expected to constitute, cause or result in, the stabilization or manipulation of the price of any security to facilitate the sale or resale of the Securities.

(xiv) SAFE Compliance. The Company shall comply with the SAFE Rules and Regulations, and shall use reasonable best efforts to cause its shareholders and holders of its options that are, or that are directly or indirectly owned or controlled by, PRC residents or PRC citizens, to comply with the SAFE Rules and Regulations applicable to them in connection with the Company, including without limitation, requesting each shareholder and option holder, that is, or is directly or indirectly owned or controlled by, a PRC resident or PRC citizen to complete any registration and other procedures required under applicable SAFE Rules and Regulations.

(xv) Transfer Restrictions. The Company shall at all times maintain transfer restrictions with respect to the Company’s ADSs and Common Shares that are subject to transfer restrictions pursuant to this Agreement and the Lock-Up Agreements and shall ensure compliance with such restrictions on transfer of restricted ADSs and Common Shares. The Company shall retain all share certificates that are by their terms subject to transfer restrictions until such time as such transfer restrictions are no longer applicable to such securities.

(xvi) Deposit Agreement. The Company will comply with the terms of the Deposit Agreement so that the ADR evidencing the ADSs will be executed by the Depositary and delivered to each Underwriter’s participant account in DTC, pursuant to this Agreement at the Closing Time and the applicable Date of Delivery.

(xvii) Cayman Islands Approvals. The Company agrees (i) not to attempt to avoid any judgment obtained by it or denied to it in a court of competent jurisdiction outside the Cayman Islands; (ii) following the consummation of the offering of the Securities, it will use its best efforts to obtain and maintain all approvals required in the Cayman Islands to pay and remit outside the Cayman Islands all dividends declared by the Company and payable on the Common Shares; and (iii) it will use its best efforts to obtain and maintain all approvals required in the Cayman Islands for the Company to acquire sufficient foreign exchange for the payment of dividends and all other relevant purposes.

(xviii) Sarbanes-Oxley Act. The Company will use its best efforts to comply with the Sarbanes-Oxley Act, and to use its best efforts to cause the Company’s directors and officers, in their capacities as such, to comply with the Sarbanes-Oxley Act.

(xix) OFAC. The Company will not directly or indirectly use the proceeds of the Securities hereunder, or lend, contribute or otherwise make available such proceeds to

 

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any Subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

(xx) Compliance with FINRA Rule. The Company hereby agrees that it will ensure that the Reserved Securities will be restricted as required by the FINRA or the FINRA rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release.

(b) Issuer Free Writing Prospectuses. The Company represents and agrees that, unless it obtains the prior consent of the Representative, and each Underwriter represents and agrees that, unless it obtains the prior consent of the Company and the Representative, it has not made and will not make any offer relating to the Securities that would constitute an “issuer free writing prospectus,” as defined in Rule 433, or that would otherwise constitute a “free writing prospectus,” as defined in Rule 405, required to be filed with the Commission. Any such free writing prospectus consented to by the Company and the Representative is hereinafter referred to as a “Permitted Free Writing Prospectus.” The Company represents that it has treated or agrees that it will treat each Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433, and has complied and will comply with the requirements of Rule 433 applicable to any Permitted Free Writing Prospectus, including timely filing with the Commission when required, legending and record keeping.

SECTION 4. Payment of Expenses.

(a) Expenses. The Company will pay or cause to be paid all expenses incident to the performance of their obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) and the ADS Registration Statement as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the ADRs evidencing the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees and disbursements of the Company’s counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(a)(vi) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Permitted Free Writing

 

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Prospectus and of the Prospectus and any amendments or supplements thereto and any costs associated with electronic delivery of any of the foregoing by the Underwriters to investors, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities, (ix) the costs and expenses of the Company relating to investor presentations on any “road show” undertaken in connection with the marketing of the Securities, including without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel and lodging expenses of the Underwriters and officers of the Company and any such consultants, and the cost of aircraft and other transportation chartered in connection with the road show, (x) the filing fees incident to the review by the FINRA of the terms of the sale of the Securities, but excluding fees and disbursements of counsel to the Underwriters in connection therewith, (xi) the fees and expenses incurred in connection with the listing of the Securities on the New York Stock Exchange, and (xii) all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, in connection with matters related to the Reserved Securities which are designated by the Company for sale to Invitees.

(b) Termination of Agreement. If this Agreement is terminated by the Representative in accordance with the provisions of Section 5, Section 9(a)(i) or Section 11 hereof, the Company shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters.

SECTION 5. Conditions of Underwriters’ Obligations. The obligations of the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer of the Company or any Subsidiary of the Company delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions:

(a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, and the ADS Registration Statement have become effective and at the Closing Time no stop order suspending the effectiveness of the Registration Statement or the ADS Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) without reliance on Rule 424(b)(8) or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A.

(b) Opinion of U.S. Counsel for the Company. At the Closing Time, the Representative shall have received the favorable opinion, dated as of the Closing Time, of Baker & McKenzie LLP, U.S. counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, to the effect set forth in Exhibit C-1 and to such further effect as counsel to the Underwriters may reasonably request.

 

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(c) Opinion of Cayman Islands Counsel for the Company. At the Closing Time, the Representative shall have received the favorable opinion, dated as of the Closing Time, of Maples and Calder, Cayman Islands counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, to the effect set forth in Exhibit C-2 and to such further effect as counsel to the Underwriters may reasonably request.

(d) Opinion of PRC Counsel for the Company. At the Closing Time, the Representative shall have received the favorable opinion, dated as of the Closing Time, of TransAsia Lawyers, PRC counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, to the effect set forth in Exhibit C-3 and to such further effect as counsel to the Underwriters may reasonably request.

(e) Opinion of Depositary’s Counsel. At the Closing Time, the Representative shall have received the favorable opinion, dated as of Closing Time, of Ziegler, Ziegler & Associates LLP, counsel for the Depositary, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, to the effect set forth in Exhibit E hereto and to such further effect as counsel to the Underwriters may reasonably request.

(f) Opinion of U.S. Counsel for the Underwriters. At the Closing Time, the Representative shall have received the favorable opinion, dated as of the Closing Time, of Shearman & Sterling LLP, U.S. counsel for the Underwriters, in form and substance satisfactory to the Representative.

(g) Opinion of PRC Counsel for the Underwriters. At the Closing Time, the Representative shall have received the favorable opinion, dated as of the Closing Time, of King & Wood, PRC counsel for the Underwriters, in form and substance satisfactory to the Representative.

(h) Execution of Deposit Agreement. The Company and the Depositary shall have executed and delivered the Deposit Agreement and the Deposit Agreement shall be in full force and effect and the Company and the Depositary shall have taken all action necessary to permit the deposit of the Common Shares and the issuance of the Securities in accordance with the Deposit Agreement.

(i) Depositary’s Certificate. The Depositary shall have furnished or caused to be furnished to the Underwriters a certificate satisfactory to the Representative of one of its authorized officers with respect to the deposit with it of the Common Shares represented by the Securities against issuance of the ADRs evidencing the Securities, the execution, issuance, countersignature and delivery of the ADRs evidencing the Securities pursuant to the Deposit Agreement and such other matters related thereto as the Representative may reasonably request.

(j) Eligible for DTC Clearance. At or prior to the Closing Time, the Securities shall be eligible for clearance and settlement through the facilities of the DTC.

 

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(k) No Issuer Free Writing Prospectus. No Issuer Free Writing Prospectus, Prospectus or amendment or supplement to the Registration Statement, the ADS Registration Statement or the Prospectus shall have been filed to which the Representative objects in writing.

(l) Officers’ Certificates. At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus or the General Disclosure Package, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business that, in the sole judgment of the Representative (after consultation with the Company if practicable), would make it inadvisable to proceed with the public offering or the delivery of the Securities and the Common Shares being delivered at the Closing Time on the terms and in the manner contemplated in this Agreement (including any such development that results in either PRC counsel to the Company or PRC counsel to the Underwriters not being able to confirm, at the Closing Time, the respective opinions of such counsel). The Representative shall have received certificates of the chief executive officer and the chief financial officer of the Company, dated as of the Closing Time, to the effect that (i) there has been no such material adverse change, (ii) there has been no such adverse legislative or regulatory developments, (iii) confirming the accuracy of certain operating data in the General Disclosure Package and the Prospectus, (iv) the representations and warranties in Section 1(a) hereof are true and correct in all respects with the same force and effect as though expressly made at and as of the Closing Time, (v) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time, and (vi) no stop order suspending the effectiveness of the Registration Statement or the ADS Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to their knowledge, contemplated by the Commission.

(m) Accountant’s Comfort Letter. At the time of the execution of this Agreement, the Representative shall have received from Ernst & Young Hua Ming a letter dated such date, in form and substance satisfactory to the Representative, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants’ “comfort letters” to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the General Disclosure Package and the Prospectus.

(n) Bring-down Comfort Letter. At the Closing Time, the Representative shall have received from Ernst & Young Hua Ming a letter, dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (m) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time.

(o) Approval of Listing. At the Closing Time, the Securities shall have been approved for listing on the New York Stock Exchange, subject only to official notice of issuance.

(p) No Objection. The FINRA has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements.

 

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(q) Lock-Up Agreements. At the date of this Agreement, the Representative shall have received the Lock-Up Agreements substantially in the form of Exhibit B hereto signed by the persons listed on Schedule D hereto shall remain in force and not have been repudiated by any of the parties to such agreements.

(r) Conditions to Purchase of Option Securities. In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company and any Subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Representative shall have received:

(i) Officers’ Certificate. A certificate, dated such Date of Delivery, of the chief executive officer and the chief financial officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(l) hereof remains true and correct as of such Date of Delivery.

(ii) Depositary’ Certificate. A certificate, dated such Date of Delivery, of the authorized officers of the Depositary confirming that the certificate delivered at the Closing Time pursuant to Section 5(i) hereof remains true and correct as of such Date of Delivery.

(iii) Opinions of Counsels for Company. The favorable opinion of Baker & McKenzie LLP, U.S. counsel for the Company, together with the favorable opinions of Maples and Calder, Cayman Islands counsel of the Company, and TransAsia Lawyers, PRC counsel of the Company, each in form and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Sections 5(b), 5(c) and 5(d) hereof.

(iv) Opinions of Counsels for Underwriters. The favorable opinion of Shearman & Sterling LLP, counsel for the Underwriters, together with the favorable opinion of King & Wood, PRC counsel for the underwriters, each dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Sections 5(f) and 5(g) hereof.

(v) Opinion of Depositary’s Counsel. The favorable opinion of Ziegler, Ziegler & Associates LLP relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(e).

(vi) Bring-down Comfort Letter. A letter from Ernst & Young Hua Ming, in form and substance satisfactory to the Representative and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Representative pursuant to Section 5(m) hereof, except that the “specified date” in the letter furnished pursuant to this paragraph shall be a date not more than three days prior to such Date of Delivery.

 

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(vii) Additional Documents. At the Closing Time and at each Date of Delivery, counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Representative and counsel for the Underwriters. The Company will furnish the Representative with such conformed copies of such opinions, certificates, letters and documents as the Representative reasonably requests. The Representative may in its sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of a Closing Time, a Delivery Date or otherwise.

(viii) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several Underwriters to purchase the relevant Option Securities, may be terminated by the Representative by notice to the Company at any time at or prior to the Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect.

SECTION 6. Indemnification.

(a) Indemnification of Underwriters. The Company agrees to indemnify and hold harmless each Underwriter, its affiliates, as such term is defined in Rule 501(b) under the 1933 Act (each, an “Affiliate”), its selling agents and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:

(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the ADS Registration Statement (or any amendment thereto), including the Rule 430A Information or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus, any Issuer Free Writing Prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;

(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or

 

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omission, or any such alleged untrue statement or omission; provided that (subject to Section (d) below) any such settlement is effected with the written consent of the Company;

(iii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of the use and inclusion without consent of information based on or derived from the CHIAF Report or the inclusion without consent of any CHIAF Entity’s name in the Registration Statement, the General Disclosure Package or the Prospectus;

(iv) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;

provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information, or any preliminary prospectus, any Issuer Free Writing Prospectus or the Prospectus (or any amendment or supplement thereto).

(b) Indemnification of Company, Directors and Officers. Each Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information or any preliminary prospectus, any Issuer Free Writing Prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Merrill Lynch expressly for use therein.

(c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the

 

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same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.

(d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.

(e) Indemnification for Reserved Securities. In connection with the offer and sale of the Reserved Securities, the Company agrees to indemnify and hold harmless the Underwriters, their Affiliates and selling agents and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any and all loss, liability, claim, damage and expense (including, without limitation, any legal or other expenses reasonably incurred in connection with defending, investigating or settling any such action or claim), as incurred, (i) arising out of the violation of any applicable laws or regulations of foreign jurisdictions where Reserved Securities have been offered; (ii) arising out of any untrue statement or alleged untrue statement of a material fact contained in any prospectus wrapper or other material prepared by or with the consent of the Company for distribution to Invitees in connection with the offering of the Reserved Securities or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (iii) caused by the failure of any Invitee to pay for and accept delivery of Reserved Securities which have been orally confirmed for purchase by any Invitee by the end of the first business day after the date of the Agreement; or (iv) related to, or arising out of or in connection with, the offering of the Reserved Securities.

SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to

 

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reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Underwriters on the other hand in connection with the statements or omissions, which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.

The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the Underwriters, in each case as set forth on the cover of the Prospectus bear to the aggregate initial public offering price of the Securities as set forth on the cover of the Prospectus.

The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.

Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission.

No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and each Underwriter’s Affiliates and selling agents shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the

 

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Company. The Underwriters’ respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities set forth opposite their respective names in Schedule A hereto and not joint.

SECTION 8. Representations, Warranties and Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors, any person controlling the Company and (ii) delivery of and payment for the Securities.

SECTION 9. Termination of Agreement.

(a) Termination; General. The Representative may terminate this Agreement, by notice to the Company, at any time at or prior to the Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus and General Disclosure Package, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in either U.S., Cayman Islands, PRC or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representative, impracticable or inadvisable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the FINRA or any other governmental authority, or (iv) a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States, or (v) if a banking moratorium has been declared by either Federal or New York authorities.

If the Representative elects to terminate this Agreement as provided in this Section, the Company shall be promptly notified in writing.

(b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect.

SECTION 10. Default by One or More of the Underwriters. If one or more of the Underwriters shall fail at the Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the “Defaulted Securities”), the

 

34

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Representative shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representative shall not have completed such arrangements within such 24-hour period, then:

(i) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or

(ii) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the Underwriters to purchase and of the Company to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting Underwriter.

No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default.

In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the Underwriters to purchase and the Company to sell the relevant Option Securities, as the case may be, either the (i) Representative or (ii) the Company shall have the right to postpone the Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term “Underwriter” includes any person substituted for an Underwriter under this Section 10.

SECTION 11. Default by the Company.

If the Company shall fail at the Closing Time or at the Date of Delivery to sell the number of Securities that it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any nondefaulting party; provided, however, that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default.

SECTION 12. Tax Disclosure. Notwithstanding any other provision of this Agreement, immediately upon commencement of discussions with respect to the transactions contemplated hereby, the Company (and each employee, representative or other agent of the Company) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated by this Agreement and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such tax treatment

 

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and tax structure. For purposes of the foregoing, the term “tax treatment” is the purported or claimed U.S. federal income tax treatment of the transactions contemplated hereby, and the term “tax structure” includes any fact that may be relevant to understanding the purported or claimed U.S. federal income tax treatment of the transactions contemplated hereby.

SECTION 13. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representative at 4 World Financial Center, 250 Vesey Street, New York, New York 10080, U.S.A., attention of [•]; notices to the Company shall be directed to it at No. 18 Xinyuan Road, Zhengzhou, Henan 450011, People’s Republic of China, attention of Mr. Longgen Zhang.

SECTION 14. No Advisory or Fiduciary Relationship. The Company acknowledges and agrees that (a) the purchase and sale of the Securities pursuant to this Agreement, including the determination of the public offering price of the Securities and any related discounts and commissions, is an arm’s-length commercial transaction between the Company, on the one hand, and the several Underwriters, on the other hand, (b) in connection with the offering contemplated hereby and the process leading to such transaction each Underwriter is and has been acting solely as a principal and is not the agent or fiduciary of the Company, or its respective stockholders, creditors, employees or any other party, (c) no Underwriter has assumed or will assume an advisory or fiduciary responsibility in favor of the Company with respect to the offering contemplated hereby or the process leading thereto (irrespective of whether such Underwriter has advised or is currently advising the Company on other matters) and no Underwriter has any obligation to the Company with respect to the offering contemplated hereby except the obligations expressly set forth in this Agreement, (d) the Underwriters and their respective affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Company, and (e) the Underwriters have not provided any legal, accounting, regulatory or tax advice with respect to the offering contemplated hereby and the Company has consulted its own respective legal, accounting, regulatory and tax advisors to the extent it deemed appropriate.

SECTION 15. Parties. This Agreement shall each inure to the benefit of and be binding upon the Underwriters, the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters, the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase.

SECTION 16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.

 

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The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. The Company irrevocably and unconditionally waives any objection to the laying of venue of any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby in Federal and state courts in the Borough of Manhattan in The City of New York and irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such suit or proceeding in any such court has been brought in an inconvenient forum. The Company irrevocably appoints CT Corporation System, currently of 111 Eighth Avenue, New York, NY, 10011, as its authorized agent in the Borough of Manhattan in The City of New York upon which process may be served in any such suit or proceeding, and agree that service of process upon such agent, and written notice of said service to the Company by the person serving the same to the address provided in Section 13 hereof, shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. The Company further agrees to take any and all action as may be necessary to maintain such designation and appointment of such agent in full force and effect for a period of seven years from the date of this Agreement.

SECTION 17. Judgment Currency. The obligations of the Company pursuant to this Agreement in respect of any sum due to any Underwriter shall, notwithstanding any judgment in a currency other than United States dollars, not be discharged until the first business day, following receipt by such Underwriter of any sum adjudged to be so due in such other currency, on which (and only to the extent that) such Underwriter may in accordance with normal banking procedures purchase United States dollars with such other currency; if the United States dollars so purchased are less than the sum originally due to such Underwriter hereunder, the Company agrees, as a separate obligation and notwithstanding any such judgment, to indemnify such Underwriter against such loss. If the United States dollars so purchased are greater than the sum originally due to such Underwriter hereunder, such Underwriter agrees to pay to the Company an amount equal to the excess of the dollars so purchased over the sum originally due to such Underwriter hereunder.

SECTION 18. TIME. TIME SHALL BE OF THE ESSENCE OF THIS AGREEMENT. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.

SECTION 19. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement.

SECTION 20. Effect of Headings. The Section headings herein are for convenience only and shall not affect the construction hereof.

If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters and the Company in accordance with its terms.

 

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CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
By:
		Authorized Signatory

For itself and as Representative of the other Underwriters named in Schedule A hereto.

 

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SCHEDULE A

UNDERWRITERS

 

Name of Underwriters		Number of Initial Securities
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Deutsche Bank Securities Inc.
Allen & Company LLC
Total

 

Sch A

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SCHEDULE B

 

		Number of Initial Securities to be Sold		Maximum Number of Option Securities to Be Sold
Total

 

Sch B

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SCHEDULE C

GENERAL USE FREE WRITING PROSPECTUSES

(INCLUDED IN THE GENERAL DISCLOSURE PACKAGE)

“General Use Issuer Free Writing Prospectus” includes each of the following documents:

[1. Final term sheet, dated             , a copy of which is attached hereto.]

[2. [•]]

Other Information Included in the General Disclosure Package

The following information is also included in the General Disclosure Package:

1. The initial public offering price per ADS for the Securities, determined as provided in said Section 2, shall be $[].

2. The purchase price per ADS for the Securities to be paid by the several Underwriters shall be $[•], being an amount equal to the initial public offering price set forth above less $[•] per ADS; provided that the purchase price per ADS for any Option Securities purchased upon the exercise of the overallotment option described in Section 2 shall be reduced by an amount per ADS equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities.

 

Sch C

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SCHEDULE D

LIST OF PERSONS AND ENTITIES SUBJECT TO LOCK-UP

 

Exhibit A

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EXHIBIT A

LIST OF SUBSIDIARIES

Xinyuan Real Estate, Ltd.

100% owned by the Company

Xinyuan (China) Real Estate, Ltd.

100% owned by the Company

Xinyuan Real Estate (Chengdu) Co., Ltd.

100% owned by the Company

Henan Xinyuan Real Estate Co., Ltd.

100% owned by the Company

Henan Wanzhong Real Estate Co., Ltd.

100% owned by the Company

Qingdao Xinyuan Real Estate Co., Ltd.

100% owned by the Company

Shandong Xinyuan Real Estate Co., Ltd.

100% owned by the Company

Henan Xinyuan Property Management Co., Ltd.

100% owned by the Company

Henan Xinyuan Real Estate Agency Co., Ltd.

100% owned by the Company

Zhengzhou Mingyuan Landscape Engineering Co., Ltd.

100% owned by the Company

Zhengzhou Xinyuan Computer Network Engineering Co., Ltd.

100% owned by the Company

Suzhou Xinyuan Real Estate Development Co., Ltd.

100% owned by the Company

Anhui Xinyuan Real Estate Co., Ltd.

100% owned by the Company

Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd.

45% owned by the Company

 

Exhibit A

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Exhibit B

[Form of lock-up from directors, officers or other stockholders pursuant to Section 5(v)]

[•], 2007

MERRILL LYNCH & CO.

Merrill Lynch, Pierce, Fenner & Smith Incorporated,

as Representative of the several

Underwriters to be named in the

within-mentioned Purchase Agreement

4 World Financial Center

250 Vesey Street

New York, New York 10080

U.S.A.

Re: Proposed Public Offering by Xinyuan Real Estate Co., Ltd.

Dear Sirs:

The undersigned, a shareholder [and/or an officer and/or director] of Xinyuan Real Estate Co., Ltd., an exempted limited liability company incorporated under the laws of the Cayman Islands (the “Company”), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) propose to enter into an Underwriting Agreement (the “Underwriting Agreement”) with the Company providing for the public offering (the “Offering”) of American Depositary Shares (the “ADSs”) of the Company, each ADS representing [•] of the Company’s common shares, par value US$0.0001 per share (the “Ordinary Shares”). In recognition of the benefit that the Offering will confer upon the undersigned as a shareholder [and/or an officer and/or director] of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the Underwriting Agreement that, during a period of 180 days from the date of the Underwriting Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase or underwrite, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any ADSs or Ordinary Shares or any securities convertible into or exercisable or exchangeable for the ADSs or Ordinary Shares (collectively, the “Lock-Up Securities”), whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file, or cause to be filed, any registration statement under the Securities Act of 1933, as amended, with respect to any Lock-up Securities (other than registration statements on Form S-8 in respect of the Company’s equity incentive plans) or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part,

 

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directly or indirectly, the economic consequence of ownership of the Lock-Up Securities, whether any such swap or transaction is to be settled by delivery of ADSs or Ordinary Shares or other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) any sale or transfer by the undersigned of ADSs and the underlying Ordinary Shares in the Offering pursuant to the Underwriting Agreement, (B) any exercise of stock options existing on the date of, and disclosed in, the Prospectus (as defined in the Underwriting Agreement), (C) any bona fide gift or gifts, provided that the donee or donees thereof agrees in writing with Merrill Lynch to be bound by the terms of this lock-up agreement, (D) any disposition to any foundation, trust, partnership or limited liability company, as the case may be, solely for the direct or indirect benefit of the undersigned and/or the immediate family of the undersigned, provided that such entity agrees in writing with Merrill Lynch to be bound by the terms of this lock-up agreement and provided further that any such disposition shall not be made for value, and (F) any disposition by a partnership to a partner of such partnership or by a limited liability company to a member of such limited liability company, as the case may be, provided that such partner or member agrees in writing with Merrill Lynch to be bound by the terms of this lock-up letter agreement and provided further that any such disposition shall not be made for value.

Notwithstanding the foregoing, if:

(1) during the last 17 days of the 180-day lock-up period, the Company issues an earnings release, material news about the Company is released or a material event relating to the Company occurs; or

(2) prior to the expiration of the 180-day lock-up period, the Company announces that it will release earnings results or becomes aware that material news about the Company will be released or a material event will occur during the 16-day period beginning on the last day of the 180-day lock-up period,

the restrictions imposed by this lock-up agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the release of the material news or the occurrence of the material event, as applicable, unless Merrill Lynch waives, in writing, such extension.

The undersigned hereby acknowledges and agrees that written notice of any extension of the 180-day lock-up period pursuant to the previous paragraph will be delivered by Merrill Lynch to the Company (in accordance with Section 13 of the Underwriting Agreement) and that any such notice properly delivered will be deemed to have been given to, and received by, the undersigned. The undersigned further agrees that, prior to engaging in any transaction or taking any other action that is subject to the terms of this lock-up agreement during the period from the date of this lock-up agreement to and including the 34^th day following the expiration of the initial 180-day lock-up period, it will give notice thereof to the Company and will not consummate such transaction or take any such action unless it has received written confirmation from the Company that the 180-day lock-up period (as may have been extended pursuant to the previous paragraph) has expired.

If (i) the Company notifies Merrill Lynch and you in writing that it does not intend to proceed with the Offering, or if (ii) the Registration Statement filed with the Securities and

 

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Exchange Commission with respect to the Offering is withdrawn, this lock-up letter agreement shall be terminated and the undersigned released from its obligations hereunder.

The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the Lock-Up Securities, except in compliance with the foregoing restrictions.

 

 

3

Exhibit 3.1

THE COMPANIES LAW (2007 REVISION)

OF THE CAYMAN ISLANDS

COMPANY LIMITED BY SHARES

AMENDED AND RESTATED

MEMORANDUM AND ARTICLES

OF

ASSOCIATION

OF

 

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XINYUAN REAL ESTATE CO., LTD.

 

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Adopted by Special Resolution passed on November 9, 2007 and effective

immediately upon completion of the Company’s initial public offering of

common shares represented by American Depositary Shares

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THE COMPANIES LAW (2007 REVISION)

OF THE CAYMAN ISLANDS

COMPANY LIMITED BY SHARES

AMENDED AND RESTATED

MEMORANDUM OF ASSOCIATION

OF

XINYUAN REAL ESTATE CO., LTD.

Adopted by Special Resolution passed on November 9, 2007 and effective

immediately upon completion of the Company’s initial public offering of

common shares represented by American Depositary Shares

 

1	The name of the Company is Xinyuan Real Estate Co., Ltd.

 

2	The registered office of the Company shall be at the offices of M&C Corporate Services Limited, PO Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands, or at such other place as the Directors may from time to time decide.

 

3	The objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the Companies Law (2007 Revision) or as the same may be revised from time to time, or any other law of the Cayman Islands.

 

4	The liability of each Shareholder is limited to the amount from time to time unpaid on such Shareholder’s shares.

 

5

The share capital of the Company is US$50,000, divided into 500,000,000 Common Shares, par value of US$0.0001 per share. The Company has the power to redeem or purchase any of its shares and to increase or reduce the said capital subject to the provisions of the Companies Law (2007 Revision) and the Articles of Association, and to issue any part of its capital, whether original, redeemed or increased, with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions, and so that unless the conditions of issue shall otherwise expressly declare every issue of shares whether declared to be preference or otherwise shall be subject to the powers hereinbefore contained.

 

6	The Company has power to register by way of continuation as a body corporate limited by shares under the laws of any jurisdiction outside the Cayman Islands and to be deregistered in the Cayman Islands.

 

7

Capitalised terms that are not defined in this Memorandum of Association bear the same meaning as those given in the Articles of Association of the Company adopted by Special Resolution passed on November 9, 2007 and effective immediately upon completion of the Company’s initial public offering of common shares represented by American Depositary Shares.

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THE COMPANIES LAW (2007 REVISION)

OF THE CAYMAN ISLANDS

COMPANY LIMITED BY SHARES

AMENDED AND RESTATED

ARTICLES OF ASSOCIATION

OF

XINYUAN REAL ESTATE CO., LTD.

Adopted by Special Resolution passed on November 9, 2007 and effective

immediately upon completion of the Company’s initial public offering of

common shares represented by American Depositary Shares

INTERPRETATION

 

1	In these Articles Table A in the First Schedule to the Statute does not apply and, unless there is something in the subject or context inconsistent therewith:

 

“Affiliate”		means, with respect to a specified entity, an individual or entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the entity specified and for these purposes, “control” (including the terms “controlling”, “controlled by,” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a specified entity, whether through the ownership of voting securities, by contract or otherwise.
“Articles”		means these articles of association of the Company.
“Auditor”		means the person for the time being performing the duties of auditor of the Company (if any).
“Common Share”		means a share in the capital of the Company of US$0.0001 par value designated as a Common Share and having the rights provided for under these Articles.
“Company”		means the above named company.
“Directors”		means the directors for the time being of the Company.
“Dividend”		includes an interim dividend.

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“Electronic Record”		has the same meaning as in the Electronic Transactions Law (2003 Revision).
“Liquidation”		means any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.
“Memorandum”		means the memorandum of association of the Company.
“Ordinary Resolution”		means a resolution passed by a simple majority of the Shareholders as, being entitled to do so, vote in person or, where proxies are allowed, by proxy at a general meeting, and includes a written resolution signed by the holders of Shares carrying a simple majority of the voting rights eligible to be exercised in respect of the matter in question. In computing voting rights and the relevant majority, regard shall be had to the number of votes to which each Shareholder is entitled pursuant to these Articles.
“Register of Shareholders”		means the register maintained in accordance with the Statute and includes (except where otherwise stated) any duplicate Register of Shareholders.
“Registered Office”		means the registered office for the time being of the Company.
“Seal”		means the common seal of the Company and includes every duplicate seal.
“Securities Act”		means the Securities Act of 1933 of the United States of America, as amended, or any similar federal statute and the rules and regulations of the U.S. Securities and Exchange Commission thereunder, all as the same shall be in effect at the time.
“Share” and “Shares”		means a share or shares in the Company and includes a fraction of a share.
“Shareholder”		has the same meaning as in the Statute.
“Special Resolution”		has the same meaning as in the Statute, and includes a unanimous written resolution.
“Statute”		means the Companies Law (2007 Revision) of the Cayman Islands.

 

2	In the Articles:

 

2.1

words importing the singular number include the plural number and vice versa;

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2.2

words importing the masculine gender include the feminine gender;

 

2.3

words importing persons include corporations;

 

2.4

“written” and “in writing” include all modes of representing or reproducing words in visible form, including in the form of an Electronic Record;

 

2.5

references to provisions of any law or regulation shall be construed as references to those provisions as amended, modified, re-enacted or replaced from time to time;

 

2.6

any phrase introduced by the terms “including”, “include”, “in particular” or any similar expression shall be construed as illustrative and shall not limit the sense of the words preceding those terms;

 

2.7

headings are inserted for reference only and shall be ignored in construing these Articles; and

 

2.8

in these Articles, Section 8 of the Electronic Transactions Law (2003 Revision) shall not apply.

COMMENCEMENT OF BUSINESS

 

3	The business of the Company may be commenced as soon after incorporation as the Directors shall see fit.

 

4	The Directors may pay, out of the capital or any other monies of the Company, all expenses incurred in or about the formation and establishment of the Company, including the expenses of registration.

ISSUE OF SHARES

 

5

Subject to the provisions, if any, in the Memorandum and these Articles and to any direction that may be given by the Company in a general meeting, the Directors may, in their absolute discretion and without approval of the holders of Common Shares, cause the Company to issue such amounts of Common Shares and/or preferred shares, grant rights over existing shares or issue other securities in one or more series as they deem necessary and appropriate and determine designations, powers, preferences, privileges and other rights, including dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the powers and rights associated with the Common Shares, at such times and on such other terms as they think proper.

 

6	The Company shall not issue Shares to bearer.

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RIGHTS ATTACHING TO COMMON SHARES

 

7	The holders of Common Shares shall have all of the rights ascribed to such Common Shares, and to a Shareholder in general in these Articles, including the following special rights:

 

7.1

As to voting: the holder of a Common Share shall (in respect of such Common Share) have the right to receive notice of, attend at and vote as a Shareholder at any general meeting of the Company;

 

7.2

As to income: the Common Shares shall confer on the holders thereof the right to receive Dividends, when and as declared in accordance with these Articles and the laws of the Cayman Islands;

 

7.3

As to capital: on a Liquidation, the Common Shares shall confer on the holders thereof the right to receive, pro rata to their respective holdings of Common Shares, all of the assets and funds of the Company remaining after the payment of all creditors of the amounts which they are entitled to receive upon such Liquidation, as herein provided.

REGISTER OF SHAREHOLDERS

 

8	The Company shall maintain or cause to be maintained the Register of Shareholders in accordance with the Statute.

FIXING RECORD DATE

 

9

For the purpose of determining Shareholders entitled to notice of, or to vote at any meeting of Shareholders or any adjournment thereof, or to consent to a resolution in writing, or in order to make a determination of Shareholders entitled to receive payment of any Dividend, or in order to make a determination of Shareholders for any other purpose, the Directors may fix, in advance, a record date for any such determination, which record date, in the case of a meeting, shall be not more than 75 nor less than 10 days before the date of such meeting, in the case of a resolution in writing of Shareholders, shall be not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Directors, and in the case of a Dividend or any other purpose, shall be not more than 75 days prior to such dividend payment or other action.

 

10

If no record date is fixed for the determination of Shareholders entitled to notice of, or to vote at, a meeting of Shareholders, or for the determination of Shareholders entitled to receive payment of a Dividend or for the determination of Shareholders for any other purpose, the day preceding the date on which notice of the meeting is sent or the date on which the resolution of the Directors declaring such Dividend or for any other purpose is adopted, as the case may be, shall be the record date for such determination of Shareholders. If no record date has been fixed for a consent to a resolution in writing, then the record date shall be: (i) if no prior action by Directors is required, the first date on which a signed written resolution setting forth the action taken or proposed to be taken is delivered to the Secretary at the registered office of the Company; and (ii) if prior action by

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the Directors is required, then the record date shall be at the close of business on the day on which the Directors adopt the resolution taking such prior action. When a determination of Shareholders entitled to vote at any meeting of Shareholders has been made as provided in this Article, such determination shall apply to any adjournment thereof.

CERTIFICATES FOR SHARES

 

11

Directors may authorize certificates representing Shares, which shall be in such form as the Directors may determine. Share certificates shall be signed by one or more Directors or other person authorised by the Directors. The Directors may authorise certificates to be issued with the authorised signature(s) affixed by mechanical process. All certificates for Shares shall be consecutively numbered or otherwise identified and shall specify the Shares to which they relate. All certificates surrendered to the Company for transfer shall be cancelled and subject to these Articles no new certificate shall be issued until the former certificate representing a like number of relevant Shares shall have been surrendered and cancelled.

 

12	The Company shall not be bound to issue more than one certificate for Shares held jointly by more than one person and delivery of a certificate to one joint holder shall be a sufficient delivery to all of them.

 

13

If a share certificate is defaced, worn out, lost or destroyed, it may be renewed on such terms (if any) as to evidence and indemnity and on the payment of such expenses reasonably incurred by the Company in investigating evidence, as the Directors may prescribe, and (in the case of defacement or wearing out) upon delivery of the old certificate.

 

14	Every share certificate of the Company shall bear legends required under the applicable laws, including the Securities Act.

TRANSFER OF SHARES

 

15

Shares shall be freely transferable, subject to (i) the restrictions set forth in these Articles, and (ii) the restrictions in any agreement. The instrument of transfer of any Share shall be in writing and shall be executed by or on behalf of the transferor (and if the Directors so require, signed by the transferee). The transferor shall be deemed to remain the holder of a Share until the name of the transferee is entered in the Register of Shareholders.

 

15.1

If a Shareholder dies the survivor or survivors where he was a joint holder, and his legal personal representatives where he was a sole holder, shall be the only persons recognised by the Company as having any title to his interest. The estate of a deceased Shareholder is not thereby released from any liability in respect of any Share, which had been jointly held by him.

 

15.2

Any person becoming entitled to a Share in consequence of the death or bankruptcy or liquidation or dissolution of a Shareholder (or in any other way than by transfer) may, upon such evidence being produced as may from time to time be required by the Directors, elect either to become the holder of the Share or to have some person nominated by him as the

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transferee. If he elects to become the holder he shall give notice to the Company to that effect, but the Directors shall, in either case, have the same right to decline or suspend registration as they would have had in the case of a transfer of the Share by that Shareholder before his death or bankruptcy, as the case may be.

 

15.3	If the person so becoming entitled shall elect to be registered himself as holder he shall deliver or send to the Company a notice in writing signed by him stating that he so elects.

 

15.4

A person becoming entitled to a Share by reason of the death or bankruptcy or liquidation or dissolution of the holder (or in any other case than by transfer) shall be entitled to the same Dividends and other advantages to which he would be entitled if he were the registered holder of the Share. However, he shall not, before being registered as a Shareholder in respect of the Share, be entitled in respect of it to exercise any right conferred on Shareholders in relation to meetings of the Company and the Directors may at any time give notice requiring any such person to elect either to be registered himself or to transfer the Share. If the notice is not complied with within ninety (90) days the Directors may thereafter withhold payment of all Dividends, bonuses or other monies payable in respect of the Share until the requirements of the notice have been complied with.

REDEMPTION AND REPURCHASE OF SHARES

 

16

Subject to the provisions of the Statute and these Articles, the Company may issue Shares that are to be redeemed or are liable to be redeemed at the option of the Shareholder or the Company. The redemption of such Shares shall be effected in such manner as the Company may, by Special Resolution, determine before the issue of the Shares.

 

17	Subject to the provisions of the Statute and these Articles, the Company may purchase its own Shares (including any redeemable Shares) provided that the Shareholders shall have approved the manner of purchase by Ordinary Resolution.

 

18	The Company may make a payment in respect of the redemption or purchase of its own Shares in any manner permitted by the Statute, including out of capital.

VARIATION OF RIGHTS OF SHARES

 

19

The rights attaching to any class of Shares (unless otherwise provided by the terms of issue of the Shares of that class) may, whether or not the Company is being wound up, be varied or abrogated with the consent (whether obtained in writing or at a meeting of the relevant Shareholders) of the holders of a simple majority of the voting rights of the issued Shares of that class (calculated in accordance with these Articles), or with the sanction of a Special Resolution passed at a general meeting of the holders of the shares of that class.

 

20

The provisions of these Articles relating to general meetings shall apply to every class meeting of the holders of one class of Shares except that the necessary quorum shall be one or more persons holding or represented by proxy, representing not less than fifty per cent of the total issued Shares of the class and that any holder of Shares of the class present in person or by proxy may demand a poll.

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21

The rights conferred upon the holders of the Shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the Shares of that class, be deemed to be varied by the creation or issue of further Shares ranking pari passu therewith, which may be effected by the Directors as provided in the Memorandum and these Articles without any vote or consent of the holders of Common Shares.

COMMISSION ON SALE OF SHARES

 

22

The Company may, in so far as the Statute permits, pay a commission to any person in consideration of his subscribing or agreeing to subscribe whether absolutely or conditionally for any Shares of the Company. Such commissions may be satisfied by the payment of cash and/or the issue of fully or partly paid-up Shares. The Company may also on any issue of Shares pay such brokerage as may be lawful.

NON RECOGNITION OF TRUSTS

 

23

The Company shall not be bound by or compelled to recognise in any way (even when notified) any equitable, contingent, future or partial interest in any Share, or (except only as is otherwise provided by these Articles or the Statute) any other rights in respect of any Share other than an absolute right to the entirety thereof in the registered holder.

LIEN ON SHARES

 

24

The Company shall have a first and paramount lien on all Shares registered in the name of a Shareholder (whether solely or jointly with others) for any amount payable to the Company in respect of such Share until any such amount is fully paid to the Company, but the Directors may at any time declare any Share to be wholly or in part exempt from the provisions of this Article. The registration of a transfer of any such Share shall operate as a waiver of the Company’s lien thereon.

 

25

The Company may sell, in such manner as the Directors think fit, any Shares on which the Company has a lien, if a sum in respect of which the lien exists is presently payable, and is not paid within fourteen clear days after notice has been given to the holder of the Shares, or to the person entitled to it in consequence of the death or bankruptcy of the holder, demanding payment and stating that if the notice is not complied with the Shares may be sold.

 

26

To give effect to any such sale the Directors may authorise any person to execute an instrument of transfer of the Shares sold to, or in accordance with the directions of, the purchaser. The purchaser or his nominee shall be registered as the holder of the Shares comprised in any such transfer, and he shall not be bound to see to the application of the purchase money, nor shall his title to the Shares be affected by any irregularity or invalidity in the sale or the exercise of the Company’s power of sale under these Articles.

 

27

The net proceeds of such sale after payment of costs, shall be applied in payment of such part of the amount in respect of which the lien exists as is presently payable and any residue shall (subject to a like lien for sums not presently payable as existed upon the Shares before the sale) be paid to the person entitled to the Shares at the date of the sale.

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AMENDMENTS OF MEMORANDUM AND ARTICLES OF ASSOCIATION

AND ALTERATION OF CAPITAL

 

28	Subject to any special rights attaching to any class or series of Shares, and to the other provisions of these Articles (including in particular but without limitation Articles 19 to 21), the Company may by Ordinary Resolution:

 

28.1

increase the share capital by such sum as the resolution shall prescribe and with such rights, priorities and privileges annexed thereto, as the Company in general meeting may determine;

 

28.2

consolidate and divide all or any of its share capital into Shares of larger amount than its existing Shares;

 

28.3

by subdivision of its existing Shares or any of them divide the whole or any part of its share capital into Shares of smaller amount than is fixed by the Memorandum or into Shares without par value; and

 

28.4

cancel any Shares that at the date of the passing of the resolution have not been taken or agreed to be taken by any person.

 

29	All new Shares created in accordance with the provisions of the preceding Article shall be subject to the same provisions of the Articles with reference to the payment of calls, liens, transfer, transmission, forfeiture and otherwise as the Shares in the original share capital.

 

30	Subject to the provisions of the Statute and the provisions of these Articles (including in particular but without limitation Articles 19 to 21), the Company may by Special Resolution:

 

30.1

change its name;

 

30.2

alter or add to these Articles;

 

30.3

alter or add to the Memorandum with respect to any objects, powers or other matters specified therein; and

 

30.4

reduce its share capital and any capital redemption reserve fund.

REGISTERED OFFICE

 

31	Subject to the provisions of the Statute, the Company may by resolution of the Directors change the location of its Registered Office.

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GENERAL MEETINGS

 

32	All general meetings other than annual general meetings shall be called extraordinary general meetings.

 

33

The Company shall, if required by the Statute, in each year hold a general meeting as its annual general meeting, and shall specify the meeting as such in the notices calling it. The annual general meeting shall be held at such time and place as the Directors shall appoint. At these meetings the report of the Directors (if any) shall be presented.

 

34	The Company may hold an annual general meeting, but shall not (unless required by Statute, or applicable rules of the New York Stock Exchange, for so long as the Company’s securities are listed or traded on the New York Stock Exchange) be obliged to hold an annual general meeting.

 

35	The Directors may call general meetings and they shall, on a Shareholders’ requisition, forthwith proceed to convene an extraordinary general meeting of the Company.

 

36

A Shareholders’ requisition is a requisition of Shareholders of the Company holding at the date of deposit of the requisition Shares representing not less than twenty five per cent of the total voting rights of Shares which, as at that date, carries the right of voting at general meetings of the Company.

 

37	The requisition must state the objects of the meeting and must be signed by the requisitionists and deposited at the Registered Office, and may consist of several documents in like form each signed by one or more requisitionists.

 

38

If the Directors do not within twenty-one days from the date of the deposit of the requisition duly proceed to convene a general meeting to be held within a further twenty-one days, the requisitionists, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a general meeting, but any meeting so convened shall not be held after the expiration of three months after the expiration of the said twenty-one days.

 

39	A general meeting convened as aforesaid by requisitionists shall be convened in the same manner as nearly as possible as that in which general meetings are to be convened by Directors.

NOTICE OF GENERAL MEETINGS

 

40

At least twenty days’ notice shall be given of any general meeting. Every notice shall be exclusive of the day on which it is given or deemed to be given at the end of the day for which it is given and shall specify the place, the day and the hour of the meeting and the general nature of the business and shall be given in the manner hereinafter mentioned or in such other manner if any as may be prescribed by the Company, provided that a general meeting of the Company shall, whether or not the notice specified in this regulation has been given and whether or not the provisions of the Articles regarding general meetings have been complied with, be deemed to have been duly convened if it is so agreed:

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40.1

in the case of an annual general meeting, by all the Shareholders (or their proxies) entitled to attend and vote thereat; and

 

40.2

in the case of an extraordinary general meeting, by a majority in number of the Shareholders (or their proxies) having a right to attend and vote at the meeting, being a majority together holding not less than ninety five per cent in par value of the Shares giving that right.

 

41	The accidental omission to give notice of a general meeting to, or the non receipt of notice of a meeting by, any person entitled to receive notice shall not invalidate the proceedings of that meeting.

 

42

No business may be transacted at any annual general meeting, other than business that is either (A) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Directors (or any duly authorized committee thereof), (B) otherwise properly brought before the annual general meeting by or at the direction of the Directors (or any duly authorized committee thereof) or (C) otherwise properly brought before the annual general meeting by any Shareholder of the Company who (i) is a Shareholder of record on both (x) the date of giving of the notice provided for in Article 43 and (y) the record date for the determination of Shareholders entitled to vote at such annual meeting and (ii) complies with the notice procedures set forth in Article 43.

 

43

In addition to any other applicable requirements, for business to be properly brought before an annual general meeting by a Shareholder, such Shareholder must have given timely notice thereof in proper written form to the Secretary of the Company. To be timely, a Shareholder’s notice shall be delivered to the Secretary at the principal executive offices of the Company not less than twenty (20) days nor more than sixty (60) days prior to the first anniversary of the preceding year’s annual general meeting; provided, however, that in the event that the date of the annual general meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date, notice by the Shareholder to be timely must be delivered not earlier than the sixtieth (60th) day prior to such annual general meeting and not later than the close of business on the later of the twentieth (20th) day prior to such annual general meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made. To be in proper written form, a Shareholder’s notice to the Secretary must set forth as to each matter such Shareholder proposes to bring before the annual general meeting (1) a brief description of the business desired to be brought before the annual general meeting and the reasons for conducting such business at the annual general meeting, (2) the name and record address of such Shareholder and (3) the class or series and number of Shares of the Company which are owned beneficially or of record by such Shareholder.

PROCEEDINGS AT GENERAL MEETINGS

 

44

No business shall be transacted at any general meeting unless a quorum is present. Two or more Shareholders being individuals present in person or by proxy or if a corporation or other non-natural person by its duly authorised representative, representing not less than fifty per cent of the total voting rights of Shares which, as at that date, carries the right of

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voting at general meetings of the Company shall be a quorum unless the Company has only one Shareholder entitled to vote at such general meeting in which case the quorum shall be that one Shareholder present in person or by proxy or (in the case of a corporation or other non-natural person) by a duly authorised representative.

 

45

A resolution (including a Special Resolution) in writing (in one or more counterparts) signed by Shareholders holding shares representing the requisite majority as specified in these Articles or in the Statute, as appropriate shall be as valid and effective as if the resolution had been passed at a general meeting of the Company duly convened and held. The Company shall promptly send a copy of each written resolution to each Shareholder who would, were the resolution in question being proposed at a meeting of the Shareholders, be entitled to receive notice of such meeting, other than the Shareholders which have signed such resolution; provided that failure to send such copy shall not affect the validity and effectiveness of such resolution.

 

46

If a quorum is not present within half an hour from the time appointed for the meeting or if during such a meeting a quorum ceases to be present, the meeting, if convened upon the requisition of Shareholders, shall be dissolved and in any other case it shall stand adjourned to the same day in the next week at the same time and place or to such other day, time or such other place as the Directors may determine, and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting the Shareholders present shall be a quorum.

 

47

The chairman, if any, of the board of Directors shall preside as chairman at every general meeting of the Company, or if there is no such chairman, or if he shall not be present within fifteen minutes after the time appointed for the holding of the meeting, or is unwilling to act, the Directors present shall elect one of their number to be chairman of the meeting.

 

48	If no Director is willing to act as chairman or if no Director is present within fifteen minutes after the time appointed for holding the meeting, the Shareholders present shall choose one of their number to be chairman of the meeting.

 

49

The chairman may, with the consent of a meeting at which a quorum is present (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. When a general meeting is adjourned for thirty days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. Otherwise it shall not be necessary to give any such notice.

 

50

A resolution put to the vote of the meeting shall be decided on a show of hands unless before, or on the declaration of the result of, the show of hands, the chairman demands a poll, or any other Shareholder or Shareholders collectively present in person or by proxy and holding at least ten per cent. in par value of the Shares giving a right to attend and vote at the meeting demand a poll.

 

51	Unless a poll is duly demanded a declaration by the chairman that a resolution has been carried or carried unanimously, or by a particular majority, or lost or not carried by a

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particular majority, an entry to that effect in the minutes of the proceedings of the meeting shall be conclusive evidence of that fact without proof of the number or proportion of the votes recorded in favour of or against such resolution.

 

52	The demand for a poll may be withdrawn.

 

53	Except on a poll demanded on the election of a chairman or on a question of adjournment, a poll shall be taken as the chairman directs, and the result of the poll shall be deemed to be the resolution of the general meeting at which the poll was demanded.

 

54

A poll demanded on the election of a chairman or on a question of adjournment shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the general meeting directs, and any business other than that upon which a poll has been demanded or is contingent thereon may proceed pending the taking of the poll.

 

55	In the case of an equality of votes, whether on a show of hands or on a poll, the chairman shall be entitled to a second or casting vote.

VOTES OF SHAREHOLDERS

 

56

Subject to any rights or restrictions attached to any Shares, on a show of hands every Shareholder who (being an individual) is present in person or by proxy or, if a corporation or other non-natural person is present by its duly authorised representative or proxy, shall have one vote and on a poll every Shareholder shall have one vote for every Share of which he is the holder.

 

57

In the case of joint holders of record the vote of the senior holder who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and seniority shall be determined by the order in which the names of the holders stand in the Register of Shareholders.

 

58

A Shareholder of unsound mind, or in respect of whom an order has been made by any court, having jurisdiction in lunacy, may vote, whether on a show of hands or on a poll, by his committee, receiver, curator bonis, or other person on such Shareholder’s behalf appointed by that court, and any such committee, receiver, curator bonis or other person may vote by proxy.

 

59	No person shall be entitled to vote at any general meeting or at any separate meeting of the holders of a class of Shares unless he is registered as a Shareholder on the record date for such meeting nor unless all calls or other monies then payable by him in respect of Shares have been paid.

 

60

No objection shall be raised to the qualification of any voter except at the general meeting or adjourned general meeting at which the vote objected to is given or tendered and every vote not disallowed at the meeting shall be valid. Any objection made in due time shall be referred to the chairman whose decision shall be final and conclusive.

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61

On a poll or on a show of hands votes may be cast either personally or by proxy. A Shareholder may appoint more than one proxy or the same proxy under one or more instruments to attend and vote at a meeting. Where a Shareholder appoints more than one proxy the instrument of proxy shall state which proxy is entitled to vote on a show of hands.

 

62

A Shareholder holding more than one Share need not cast the votes in respect of his Shares in the same way on any resolution and therefore may vote a Share or some or all such Shares either for or against a resolution and/or abstain from voting a Share or some or all of the Shares and, subject to the terms of the instrument appointing him, a proxy appointed under one or more instruments may vote a Share or some or all of the Shares in respect of which he is appointed either for or against a resolution and/or abstain from voting.

PROXIES

 

63	The instrument appointing a proxy shall be in writing, be executed under the hand of the appointor or of his attorney duly authorised in writing, or, if the appointor is a corporation under the hand of an officer or attorney duly authorised for that purpose. A proxy need not be a Shareholder.

 

64	The instrument appointing a proxy shall be deposited at the Registered Office or at such other place as is specified for that purpose in the notice convening the meeting, or in any instrument of proxy sent out by the Company:

 

64.1

not less than 48 hours before the time for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote; or

 

64.2

in the case of a poll taken more than 48 hours after it is demanded, be deposited as aforesaid after the poll has been demanded and not less than 24 hours before the time appointed for the taking of the poll; or

 

64.3

where the poll is not taken forthwith but is taken not more than 48 hours after it was demanded be delivered at the meeting at which the poll was demanded to the chairman or to the secretary or to any director;

 

64.4

provided that the Directors may in the notice convening the meeting, or in an instrument of proxy sent out by the Company, direct that the instrument appointing a proxy may be deposited (no later than the time for holding the meeting or adjourned meeting) at the Registered Office or at such other place as is specified for that purpose in the notice convening the meeting, or in any instrument of proxy sent out by the Company. The chairman may in any event at his discretion direct that an instrument of proxy shall be deemed to have been duly deposited. An instrument of proxy that is not deposited in the manner permitted shall be invalid.

 

65	The instrument appointing a proxy may be in any usual or common form and may be expressed to be for a particular meeting or any adjournment thereof or generally until revoked. An instrument appointing a proxy shall be deemed to include the power to demand or join or concur in demanding a poll.

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66

Votes given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the Share in respect of which the proxy is given unless notice in writing of such death, insanity, revocation or transfer was received by the Company at the Registered Office before the commencement of the general meeting, or adjourned meeting at which it is sought to use the proxy.

CORPORATE SHAREHOLDERS

 

67

Any corporation or other non-natural person which is a Shareholder may in accordance with its constitutional documents, or in the absence of such provision by resolution of its directors or other governing body, authorise such person as it thinks fit to act as its representative at any meeting of the Company or of any class of Shareholders, and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as the corporation could exercise if it were an individual Shareholder.

SHARES THAT MAY NOT BE VOTED

 

68	Shares in the Company that are beneficially owned by the Company shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding Shares at any given time.

DIRECTORS

 

69

There shall be a board of Directors consisting of not more than nine persons (exclusive of alternate Directors) provided however that the Company may by Ordinary Resolution increase or reduce the limits in the number of Directors. The first Directors shall be determined in writing by, or appointed by a resolution of, the subscribers.

POWERS OF DIRECTORS

 

70

Subject to the provisions of the Statute, the Memorandum and the Articles and to any directions given by Special Resolution, the business of the Company shall be managed by the Directors who may exercise all the powers of the Company. No alteration of the Memorandum or Articles and no such direction shall invalidate any prior act of the Directors which would have been valid if that alteration had not been made or that direction had not been given. A duly convened meeting of Directors at which a quorum is present may exercise all powers exercisable by the Directors.

 

71	All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for monies paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed as the case may be in such manner as the Directors shall determine by resolution.

 

72

The Directors on behalf of the Company may pay a gratuity or pension or allowance on retirement to any Director who has held any other salaried office or place of profit with the Company or to his widow or dependants and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance.

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73

Subject to the other provisions of these Articles, the Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital or any part thereof and to issue debentures, debenture stock, mortgages, bonds and other such securities whether outright or as security for any debt, liability or obligation of the Company or of any third party.

APPOINTMENT AND REMOVAL OF DIRECTORS

 

74	The Company may by Ordinary Resolution appoint any person to be a Director or may by Special Resolution remove any Director.

 

75	Each Director shall hold office until he resigns, vacates his office in accordance with the provisions below, or is removed by the Shareholders.

 

76

The board of Directors shall have a Chairman of the board of Directors (the “Chairman”) elected and appointed by a majority of the Directors then in office. The Directors may also elect a Co-Chairman or a Vice-chairman of the board of Directors (the “Co-Chairman”). The Chairman shall preside as chairman at every meeting of the board of Directors. To the extent the Chairman is not present at a meeting of the board of Directors, the Co-Chairman, or in his or her absence, the attending Directors may choose one Director to be the chairman of the meeting. The Chairman’s voting right as to the matters to be decided by the board of Directors shall be the same as other Directors.

 

77	Subject to these Articles and the Companies Law, the Company may by Ordinary Resolution elect any person to be a Director either to fill a casual vacancy on the Board or as an addition to the existing Board.

 

78

The Directors by the affirmative vote of a simple majority of the remaining Directors present and voting at a Board meeting, or the sole remaining Director, shall have the power from time to time and at any time to appoint any person as a Director to fill a casual vacancy on the Board or as an addition to the existing Board, provided that the appointment does not cause the number of Directors to exceed any number fixed by or in accordance with the Articles as the maximum number of Directors.

VACATION OF OFFICE OF DIRECTOR

 

79	The office of a Director shall be vacated if:

 

79.1

he gives notice in writing to the Company that he resigns the office of Director; or

 

79.2

if he absents himself (without being represented by proxy or an alternate Director appointed by him) from three consecutive meetings of the board of Directors without special leave of absence from the Directors, and they pass a resolution that he has by reason of such absence vacated office; or

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79.3

if he dies, becomes bankrupt or makes any arrangement or composition with his creditors generally; or

 

79.4

if he is found to be or becomes of unsound mind;

 

79.5

if all the other Directors (being not less than two in number) resolve that he should be removed as a Director; or

 

79.6

if he is removed by the Shareholders in accordance with the provisions of these Articles.

PROCEEDINGS OF DIRECTORS

 

80

The quorum for the transaction of the business of the Directors shall be a majority of the Directors then in office. A person who holds office as an alternate Director shall, if his appointor is not present, be counted in the quorum. A Director who also acts as an alternate Director shall, if his appointor is not present, count twice towards the quorum.

 

81

Subject to the provisions of the Articles, the Directors may regulate their proceedings as they think fit. Questions arising at any meeting shall be decided by a majority of votes. In the case of an equality of votes, the chairman shall have a second or casting vote. A Director who is also an alternate Director shall be entitled in the absence of his appointor to a separate vote on behalf of his appointor in addition to his own vote.

 

82

A person may participate in a meeting of the Directors or committee of Directors by conference telephone or other communications equipment by means of which all the persons participating in the meeting can communicate with each other at the same time. Participation by a person in a meeting in this manner is treated as presence in person at that meeting. Unless otherwise determined by the Directors the meeting shall be deemed to be held at the place where the chairman is at the start of the meeting.

 

83

A resolution in writing (in one or more counterparts) signed by all the Directors or all the members of a committee of Directors (an alternate Director being entitled to sign such a resolution on behalf of his appointor) shall be as valid and effectual as if it had been passed at a meeting of the Directors, or committee of Directors as the case may be, duly convened and held.

 

84

A Director or alternate Director may, or other officer of the Company on the requisition of a Director or alternate Director shall, call a meeting of the Directors by at least two days’ notice in writing to every Director and alternate Director which notice shall set forth the general nature of the business to be considered unless notice is waived by all the Directors (or their alternates) either at, before or after the meeting is held.

 

85

The continuing Directors may act notwithstanding any vacancy in their body, but if and so long as their number is reduced below the number fixed by or pursuant to these Articles as the necessary quorum of Directors the continuing Directors or Director may act for the purpose of increasing the number of Directors to that number, or of summoning a general meeting of the Company, but for no other purpose.

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86

All acts done by any meeting of the Directors or of a committee of Directors (including any person acting as an alternate Director) shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any Director or alternate Director, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and qualified to be a Director or alternate Director as the case may be.

 

87	A Director but not an alternate Director may be represented at any meetings of the board of Directors by a proxy appointed in writing by him. The proxy shall count towards the quorum and the vote of the proxy shall for all purposes be deemed to be that of the appointing Director.

PRESUMPTION OF ASSENT

 

88

A Director who is present at a meeting of the board of Directors at which action on any Company matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent from such action with the person acting as the chairman or secretary of the meeting before the adjournment thereof or shall forward such dissent by registered post to such person immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favour of such action.

DIRECTORS’ INTERESTS

 

89	A Director may hold any other office or place of profit under the Company (other than the office of Auditor) in conjunction with his office of Director for such period and on such terms as to remuneration and otherwise as the Directors may determine.

 

90	A Director may act by himself or his firm in a professional capacity for the Company and he or his firm shall be entitled to remuneration for professional services as if he were not a Director or alternate Director.

 

91

A Director or alternate Director may be or become a director or other officer of or otherwise interested in any company promoted by the Company or in which the Company may be interested as shareholder or otherwise, and no such Director or alternate Director shall be accountable to the Company for any remuneration or other benefits received by him as a director or officer of, or from his interest in, such other company.

 

92

No person shall be disqualified from the office of Director or alternate Director or prevented by such office from contracting with the Company, either as vendor, purchaser or otherwise, nor shall any such contract or any contract or transaction entered into by or on behalf of the Company in which any Director or alternate Director shall be in any way interested be or be liable to be avoided, nor shall any Director or alternate Director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or transaction by reason of such Director holding office or of the fiduciary relation thereby established. A Director (or his alternate Director in his absence) shall be at liberty to vote in respect of any contract or transaction in which he is interested provided that the nature of the interest of any Director or alternate Director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote thereon.

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93

A general notice that a Director or alternate Director is a shareholder, director, officer or employee of any specified firm or company and is to be regarded as interested in any transaction with such firm or company shall be sufficient disclosure for the purposes of voting on a resolution in respect of a contract or transaction in which he has an interest, and after such general notice it shall not be necessary to give special notice relating to any particular transaction.

MINUTES

 

94

The Directors shall cause minutes to be made in books kept for the purpose of all appointments of officers made by the Directors, all proceedings at meetings of the Company or the holders of any class of Shares and of the Directors, and of committees of Directors including the names of the Directors or alternate Directors present at each meeting.

DELEGATION OF DIRECTORS’ POWERS

 

95

The Directors may delegate any of their powers to any committee consisting of one or more Directors. They may also delegate to any managing director or any Director holding any other executive office such of their powers as they consider desirable to be exercised by him provided that an alternate Director may not act as managing director and the appointment of a managing director shall be revoked forthwith if he ceases to be a Director. Any such delegation may be made subject to any conditions the Directors may impose, and either collaterally with or to the exclusion of their own powers and may be revoked or altered. Subject to any such conditions, the proceedings of a committee of Directors shall be governed by the Articles regulating the proceedings of Directors, so far as they are capable of applying.

 

96

The Directors may establish any committees, local boards or agencies or appoint any person to be a manager or agent for managing the affairs of the Company and may appoint any person to be a member of such committees or local boards. Any such appointment may be made subject to any conditions the Directors may impose, and either collaterally with or to the exclusion of their own powers and may be revoked or altered. Subject to any such conditions, the proceedings of any such committee, local board or agency shall be governed by the Articles regulating the proceedings of Directors, so far as they are capable of applying. Without limiting the foregoing and without prejudice to the freedom of the Directors to establish any other committees, the Directors shall establish a compensation committee, a nomination committee and an audit committee (the “Audit Committee”), for so long as any securities of the Company are listed or traded on the New York Stock Exchange.

 

97	For so long as any securities of the Company are listed or traded on the New York Stock Exchange, the composition and responsibilities of the Audit Committee shall comply with applicable law, rules or regulations and the rules of the New York Stock Exchange.

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98	The Directors may by power of attorney or otherwise appoint any person to be the agent of the Company on such conditions as the Directors may determine, provided that the delegation is not to the exclusion of their own powers and may be revoked by the Directors at any time.

 

99

The Directors may by power of attorney or otherwise appoint any company, firm, person or body of persons, whether nominated directly or indirectly by the Directors, to be the attorney or authorised signatory of the Company for such purpose and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Directors under these Articles) and for such period and subject to such conditions as they may think fit, and any such powers of attorney or other appointment may contain such provisions for the protection and convenience of persons dealing with any such attorneys or authorised signatories as the Directors may think fit and may also authorise any such attorney or authorised signatory to delegate all or any of the powers, authorities and discretions vested in him.

 

100

The Directors may appoint such officers as they consider necessary on such terms, at such remuneration and to perform such duties, and subject to such provisions as to disqualification and removal as the Directors may think fit. Unless otherwise specified in the terms of his appointment an officer may be removed by resolution of the Directors or Shareholders.

ALTERNATE DIRECTORS

 

101	Any Director (other than an alternate Director) may by writing appoint any other Director, or any other person willing to act, to be an alternate Director and by writing may remove from office an alternate Director so appointed by him.

 

102

An alternate Director shall be entitled to receive notice of all meetings of Directors and of all meetings of committees of Directors of which his appointor is a member, to attend and vote at every such meeting at which the Director appointing him is not personally present, and generally to perform all the functions of his appointor as a Director in his absence.

 

103	An alternate Director shall cease to be an alternate Director if his appointor ceases to be a Director.

 

104	Any appointment or removal of an alternate Director shall be by notice to the Company signed by the Director making or revoking the appointment or in any other manner approved by the Directors.

 

105	An alternate Director shall be deemed for all purposes to be a Director and the alternate Director, as well as the Director appointing such alternate Director, shall be responsible for the alternate Director’s own acts and defaults.

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NO MINIMUM SHAREHOLDING

 

106	The Company in general meeting may fix a minimum shareholding required to be held by a Director, but unless and until such a shareholding qualification is fixed a Director is not required to hold Shares.

REMUNERATION OF DIRECTORS

 

107

The remuneration to be paid to the Directors, if any, shall be such remuneration as the Directors shall determine. The Directors shall also be entitled to be paid all travelling, hotel and other expenses properly incurred by them in connection with their attendance at meetings of Directors or committees of Directors, or general meetings of the Company, or separate meetings of the holders of any class of Shares or debentures of the Company, or otherwise in connection with the business of the Company, or to receive a fixed allowance in respect thereof as may be determined by the Directors, or a combination partly of one such method and partly the other.

 

108

The Directors may by resolution approve additional remuneration to any Director for any services other than his ordinary routine work as a Director. Any fees paid to a Director who is also counsel or solicitor to the Company, or otherwise serves it in a professional capacity shall be in addition to his remuneration as a Director.

SEAL

 

109

The Company may, if the Directors so determine, have a Seal. The Seal shall only be used by the authority of the Directors or of a committee of the Directors authorised by the Directors. Every instrument to which the Seal has been affixed shall be signed by at least one person who shall be either a Director or some officer or other person appointed by the Directors for the purpose.

 

110	The Company may have for use in any place or places outside the Cayman Islands a duplicate Seal or Seals each of which shall be a facsimile of the common Seal of the Company and, if the Directors so determine, with the addition on its face of the name of every place where it is to be used.

 

111

A Director or officer, representative or attorney of the Company may without further authority of the Directors affix the Seal over his signature alone to any document of the Company required to be authenticated by him under seal or to be filed with the Registrar of Companies in the Cayman Islands or elsewhere wheresoever.

DIVIDENDS, DISTRIBUTIONS AND RESERVE

 

112

Subject to the Statute and these Articles, the Directors may declare Dividends and distributions on Shares in issue and authorise payment of the Dividends or distributions out of the funds of the Company lawfully available therefor. No Dividend or distribution shall be paid except out of the realised or unrealised profits of the Company, or out of the share premium account or as otherwise permitted by the Statute.

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113

Except as otherwise provided by the rights attached to Shares, all Dividends shall be declared and paid according to the par value of the Shares that a Shareholder holds. If any Share is issued on terms providing that it shall rank for Dividend as from a particular date, that Share shall rank for Dividend accordingly.

 

114	The Directors may deduct from any Dividend or distribution payable to any Shareholder all sums of money (if any) then payable by him to the Company on account of calls or otherwise.

 

115

The Directors may declare that any Dividend or distribution be paid wholly or partly by the distribution of specific assets and in particular of shares, debentures, or securities of any other company or in any one or more of such ways and where any difficulty arises in regard to such distribution, the Directors may settle the same as they think expedient and in particular may issue fractional Shares and fix the value for distribution of such specific assets or any part thereof and may determine that cash payments shall be made to any Shareholders upon the basis of the value so fixed in order to adjust the rights of all Shareholders and may vest any such specific assets in trustees as may seem expedient to the Directors.

 

116

Any Dividend, distribution, interest or other monies payable in cash in respect of Shares may be paid by wire transfer to the holder or by cheque or warrant sent through the post directed to the registered address of the holder or, in the case of joint holders, to the registered address of the holder who is first named on the Register of Shareholders or to such person and to such address as such holder or joint holders may in writing direct. Every such cheque or warrant shall be made payable to the order of the person to whom it is sent. Any one of two or more joint holders may give effectual receipts for any Dividends, bonuses, or other monies payable in respect of the Share held by them as joint holders.

 

117	No Dividend or distribution shall bear interest against the Company.

 

118

Any Dividend which cannot be paid to a Shareholder and/or which remains unclaimed after six months from the date of declaration of such Dividend may, in the discretion of the Directors, be paid into a separate account in the Company’s name, provided that the Company shall not be constituted as a trustee in respect of that account and the Dividend shall remain as a debt due to the Shareholder. Any Dividend which remains unclaimed after a period of six years from the date of declaration of such Dividend shall be forfeited and shall revert to the Company.

CAPITALISATION

 

119

The Directors may capitalise any sum standing to the credit of any of the Company’s reserve accounts (including share premium account and capital redemption reserve fund) or any sum standing to the credit of profit and loss account or otherwise available for distribution and to appropriate such sum to Shareholders in the proportions in which such sum would have been divisible amongst them had the same been a distribution of profits by way of Dividend and to apply such sum on their behalf in paying up in full unissued Shares for allotment and distribution credited as fully paid-up to and amongst them in the

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proportion aforesaid. In such event the Directors shall do all acts and things required to give effect to such capitalisation, with full power to the Directors to make such provisions as they think fit for the case of Shares becoming distributable in fractions (including provisions whereby the benefit of fractional entitlements accrue to the Company rather than to the Shareholders concerned). The Directors may authorise any person to enter on behalf of all of the Shareholders interested into an agreement with the Company providing for such capitalisation and matters incidental thereto and any agreement made under such authority shall be effective and binding on all concerned.

BOOKS OF ACCOUNT

 

120

The Directors shall cause proper books of account to be kept with respect to all sums of money received and expended by the Company and the matters in respect of which the receipt or expenditure takes place, all sales and purchases of goods by the Company and the assets and liabilities of the Company. Proper books shall not be deemed to be kept if there are not kept such books of account as are necessary to give a true and fair view of the state of the Company’s affairs and to explain its transactions.

 

121

The Directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company or any of them shall be open to the inspection of Shareholders not being Directors and no Shareholder (not being a Director, ) shall have any right of inspecting any account or book or document of the Company except as conferred by Statute or authorised by the Directors or by the Company in general meeting.

 

122	The Directors may from time to time cause to be prepared and to be laid before the Company in general meeting profit and loss accounts, balance sheets, group accounts (if any) and such other reports and accounts as may be required by law.

AUDIT

 

123

The Directors may appoint an Auditor of the Company who shall hold office until removed from office by a resolution of the Directors, and may fix his or their remuneration. Notwithstanding the above, for so long as any the shares are listed or traded on the New York Stock Exchange, the Audit Committee is directly responsible for the appointment, remuneration, retension and oversight of the Company’s Auditors.

 

124

Every Auditor of the Company shall have a right of access at all times to the books and accounts and vouchers of the Company and shall be entitled to require from the Directors and officers of the Company such information and explanation as may be necessary for the performance of the duties of the Auditor.

 

125

Auditors shall, if so required by the Directors, make a report on the accounts of the Company during their tenure of office at the next annual general meeting following their appointment in the case of a company which is registered with the Registrar of Companies as an ordinary company, and at the next extraordinary general meeting following their appointment in the case of a company which is registered with the Registrar of Companies as an exempted company, and at any other time during their term of office, upon request of the Directors or any general meeting of the Shareholders.

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NOTICES

 

126

Notices shall be in writing and may be given by the Company to any Shareholder either personally or by sending it by courier, post, fax or e-mail to him or to his address as shown in the Register of Shareholders (or where the notice is given by e-mail by sending it to the e-mail address provided by such Shareholder). Any notice, if posted from one country to another, is to be sent airmail.

 

127

Where a notice is sent by courier, service of the notice shall be deemed to be effected by delivery of the notice to a courier company, and shall be deemed to have been received on the third day (not including Saturdays or Sundays or public holidays) following the day on which the notice was delivered to the courier. Where a notice is sent by post, service of the notice shall be deemed to be effected by properly addressing, pre paying and posting a letter containing the notice, and shall be deemed to have been received on the fifth day (not including Saturdays or Sundays or public holidays) following the day on which the notice was posted. Where a notice is sent by fax, service of the notice shall be deemed to be effected by properly addressing and sending such notice and shall be deemed to have been received on the same day that it was transmitted. Where a notice is given by e-mail service shall be deemed to be effected by transmitting the e-mail to the e-mail address provided by the intended recipient and shall be deemed to have been received on the same day that it was sent, and it shall not be necessary for the receipt of the e-mail to be acknowledged by the recipient.

 

128

A notice may be given by the Company to the person or persons which the Company has been advised are entitled to a Share or Shares in consequence of the death or bankruptcy of a Shareholder in the same manner as other notices which are required to be given under these Articles and shall be addressed to them by name, or by the title of representatives of the deceased, or trustee of the bankrupt, or by any like description at the address supplied for that purpose by the persons claiming to be so entitled, or at the option of the Company by giving the notice in any manner in which the same might have been given if the death or bankruptcy had not occurred.

 

129

Notice of every general meeting shall be given in any manner hereinbefore authorised to every person shown as a Shareholder in the Register of Shareholders on the record date for such meeting except that in the case of joint holders the notice shall be sufficient if given to the joint holder first named in the Register of Shareholders and every person upon whom the ownership of a Share devolves by reason of his being a legal personal representative or a trustee in bankruptcy of a Shareholder of record where the Shareholder of record but for his death or bankruptcy would be entitled to receive notice of the meeting, and no other person shall be entitled to receive notices of general meetings.

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WINDING UP

 

130

Subject always to the Statute and to the other provisions of these Articles, if the Company shall be wound up, and the assets available for distribution amongst the Shareholders shall be insufficient to repay the whole of the share capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by the Shareholders in proportion to the par value of the Shares held by them. Subject to the Statute if in a winding up the assets available for distribution amongst the Shareholders shall be more than sufficient to repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst the Shareholders in proportion to the par value of the Shares held by them at the commencement of the winding up subject to a deduction from those Shares in respect of which there are monies due, of all monies payable to the Company for unpaid calls or otherwise. This Article is without prejudice to the rights of the holders of any class or series of Shares issued with special rights or upon special terms and conditions.

 

131

Subject always to the Statute and to the other provisions of these Articles, if the Company shall be wound up the liquidator may, with the sanction of a Special Resolution of the Company and any other sanction required by the Statute, divide amongst the Shareholders in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for that purpose value any assets and determine how the division shall be carried out as between the Shareholders or different classes of Shareholders. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the Shareholders as the liquidator, with the like sanction, shall think fit, but so that no Shareholder shall be compelled to accept any asset upon which there is a liability.

INDEMNITY

 

132

Every Director, agent or officer of the Company acting in relation to any of the affairs of the Company, and everyone of their heirs, executors and administrators, shall, to the fullest extent permissible by the Statute, be indemnified and secured harmless out of the assets and profits of the Company from and against all actions, costs, charges, losses, damages and expenses which they or any of them, their or any of their heirs, executors or administrators, shall or may incur or sustain by or by reason of any act done, concurred in or omitted in or about the execution of their duty, or supposed duty, in their respective offices or trusts; and none of them shall be answerable for the acts, receipts, neglects or defaults of the other or others of them or for joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any moneys or effects belonging to the Company shall or may be lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to the Company shall be placed out on or invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts, or in relation thereto; provided that, this indemnity shall not extend to any matter in respect of any fraud or wilful default which may attach to any of said persons. Each Shareholder agrees to waive any claim or right of action he might have, whether individually or by or in the right of the Company, against any Director on account of any action taken by such Director, or the failure of such Director to take any action in the performance of his duties with or for the Company; provided that, such waiver shall not extend to any matter in respect of any fraud or wilful default which may attach to such Director.

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FINANCIAL YEAR

 

133	Unless the Directors otherwise prescribe, the financial year of the Company shall end on 31st December in each year and, following the year of incorporation, shall begin on 1st January in each year.

TRANSFER BY WAY OF CONTINUATION

 

134

If the Company is exempted as defined in the Statute, it shall, subject to the provisions of the Statute and with the approval of a Special Resolution, have the power to register by way of continuation as a body corporate under the laws of any jurisdiction outside the Cayman Islands and to be deregistered in the Cayman Islands.

Exhibit 4.2

 

Xinyuan Real Estate Co., Ltd.
		XINYUAN REAL ESTATE CO., LTD.
		(Incorporated under the laws of the Cayman Islands)
Number:
XX		Number				Common Shares
		XX				XX
Common Shares:		US$[XX] Share Capital divided into
XX		[XX] Common Shares of a par value of US$0.0001 each
Issued to:
XX		THIS IS TO CERTIFY THAT                                                 XX                        is the registered   holder of                                                 XX                        Common Shares in the above-named   Company subject to the memorandum and articles of association thereof.
Dated XX
Transferred from:
XX		EXECUTED for and on behalf of the Company on                          2007.
XX
		DIRECTOR

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		TRANSFER
		I				(the Transferor) for the value received
		DO HEREBY transfer to				(the Transferee) the
						shares standing in my name in the
		undertaking called XINYUAN REAL ESTATE CO., LTD.
		To hold the same unto the Transferee
		Dated
		Signed by the Transferor
		in the presence of:
		Witness		Transferor

Exhibit 5.1

Xinyuan Real Estate Co., Ltd.

PO Box 309GT, Ugland House,

South Church Street, George Town,

Grand Cayman, Cayman Islands

[·] November 2007

 

To:	Maples and Calder

1504 One International Finance Centre

1 Harbour View Street

Hong Kong

Dear Sirs

Xinyuan Real Estate Co., Ltd. (the “Company”)

I, [·], being a director of the Company, am aware that you are being asked to provide a legal opinion (the “Opinion”) in relation to certain aspects of Cayman Islands law. Capitalised terms used in this certificate have the meaning given to them in the Opinion. I hereby certify that:

 

1

The amended and restated memorandum and articles of association of the Company as adopted by a special resolution passed on 9 April 2007 remain in full force and effect and save for further amendments as conditionally adopted by a special resolution passed on [·] November 2007, are otherwise unamended.

 

2	The written resolutions of the shareholders dated [·] November 2007 (the “Shareholders’ Resolutions”) were signed by all shareholders in the manner prescribed in the articles of association of the Company.

 

3

The written resolutions of the board of directors dated 23 August 2007 and 8 November 2007 (these, together with the Shareholders’ Resolutions are collectively referred to as the “IPO Resolutions”) were signed by all the directors in the manner prescribed in the articles of association of the Company.

 

4	The authorised share capital of the Company is US$50,000 divided into (i) 450,000,000 Common Shares of par value US$0.0001 each and (ii) 50,000,000 Series A Preferred Shares of US$0.0001 each.

 

5	The shareholders of the Company have not restricted or limited the powers of the directors in any way. There is no contractual or other prohibition (other than as arising under Cayman Islands law) binding on the Company prohibiting it from issuing and allotting the Common Shares.

 

6	The IPO Resolutions were duly adopted, are in full force and effect at the date hereof and have not been amended, varied or revoked in any respect.

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I confirm that you may continue to rely on this Certificate as being true and correct on the day that you issue the Opinion unless I shall have previously notified you personally (Attn: Mr. Richard Thorp) to the contrary.

 

 

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Our ref            AEO/629097/2156566v5

Your ref

Subject to review and amendment

 

Xinyuan Real Estate Co., Ltd. No. 18 Xinyuan Road, Zhengzhou Henan 450011 People’s Republic of China				Direct: Mobile: E-mail:		+852 2971 3007 +852 9020 8007 richard.thorp@maplesandcalder.com

[16 November] 2007

Dear Sirs

Xinyuan Real Estate Co., Ltd.

We have acted as Cayman Islands legal advisers to Xinyuan Real Estate Co., Ltd. (the “Company”) in connection with the Company’s registration statement on Form F-1, including all amendments or supplements thereto (the “Registration Statement”), that was confidentially submitted with the Securities and Exchange Commission under the U.S. Securities Act of 1933 on 29 August 2007, as amended to date relating to the offering by the Company of certain American Depositary Shares representing the Company’s Common Shares of par value US$0.0001 each (the “Common Shares”). We are furnishing this opinion as Exhibit 5.1 to the Registration Statement.

1 DOCUMENTS REVIEWED

For the purposes of this opinion, we have reviewed only originals, copies or final drafts of the following documents:

 

1.1

the Certificate of Incorporation dated 26 March 2007, the Amended and Restated Memorandum and Articles of Association of the Company as adopted by special resolution passed on 9 April 2007 and the Amended and Restated Memorandum and Articles of Association of the Company as conditionally adopted by special resolution passed on [·] 2007 (the “Memorandum and Articles of Association”);

 

1.2	the written shareholders’ resolutions dated [·] 2007;

 

1.3	the written resolutions of the board of Directors dated 23 August 2007 and 8 November 2007;

 

1.4	a certificate from a Director of the Company addressed to this firm dated [·] 2007, a copy of which is attached hereto (the “Director’s Certificate”); and

 

1.5	the Registration Statement.

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2 ASSUMPTIONS

Save as aforesaid we have not been instructed to undertake and have not undertaken any further enquiry or due diligence in relation to the transaction the subject of this opinion. The following opinions are given only as to and based on circumstances and matters of fact existing at the date hereof and of which we are aware consequent upon the instructions we have received in relation to the matter the subject of this opinion and as to the laws of the Cayman Islands as the same are in force at the date hereof. In giving this opinion, we have relied upon the completeness and accuracy (and assumed the continuing completeness and accuracy as at the date hereof) of the Director’s Certificate as to matters of fact without further verification and have relied upon the following assumptions, which we have not independently verified:

 

(i)	Copy documents or drafts of documents provided to us are true and complete copies of, or in the final forms of, the originals.

 

(ii)	The genuineness of all signatures and seals.

 

(iii)

There is no contractual or other prohibition (other than as may arise by virtue of the laws of the Cayman Islands) binding on the Company or on any other party prohibiting it from entering into and performing its obligations.

3 OPINION

The following opinions are given only as to matters of Cayman Islands law and we have assumed that there is nothing under any other law that would affect or vary the following opinions.

Based upon the foregoing and subject to the qualifications set out below and having regard to such legal considerations as we deem relevant, we are of the opinion that:

 

3.1	The Company has been duly incorporated as an exempted company with limited liability for an unlimited duration and is validly existing under the laws of the Cayman Islands.

 

3.2	The authorised share capital of the Company is US$50,000 divided into (i) 450,000,000 Common Shares of par value US$0.0001 each and (ii) 50,000,000 Series A Preferred Shares of par value US$0.0001 each.

 

3.3	The issue and allotment of the Common Shares has been duly authorised. When allotted, issued and paid for as contemplated in the Registration Statement and registered in the register of members (shareholders), the Common Shares will be legally issued and allotted, fully paid and non-assessable.

 

3.5	The statements under the caption “Taxation” in the prospectus forming part of the Registration Statement, to the extent that they constitute statements of Cayman Islands law, are accurate in all material respects and that such statements constitute our opinion.

 

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4 QUALIFICATIONS

Except as specifically stated herein, we make no comment with respect to any representations and warranties which may be made by or with respect to the Company in the Registration Statement or otherwise with respect to the commercial terms of the transactions the subject of this opinion.

We hereby consent to the use of this opinion in, and the filing hereof as an Exhibit to, the Registration Statement and to the reference to our name under the headings “Enforceability of Civil Liabilities”, “Taxation” and “Legal Matters” and elsewhere in the prospectus included in the Registration Statement. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the U.S. Securities Act of 1933, as amended, or the Rules and Regulations of the Commission thereunder.

Yours faithfully

MAPLES and CALDER

 

3

Exhibit 10.1

Execution Version

XINYUAN REAL ESTATE CO., LTD.

2007 EQUITY INCENTIVE PLAN

SECTION 1. PURPOSE

The purpose of the 2007 Equity Incentive Plan (the “Plan”) of Xinyuan Real Estate Co., Ltd., a Cayman Islands holding company (the “Company”) is to promote the interests of the Company by enabling it to attract, retain and motivate key employees, directors and consultants responsible for the success and growth of the Company and its subsidiaries by providing them with appropriate incentives and rewards and enabling them to participate in the growth of the Company. The Plan provides for the grant of Stock Bonus Awards and Options to purchase shares of Company Stock. Options granted under the Plan may include Non Qualified Stock Options as well as Incentive Stock Options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).

Certain capitalized terms used in this Plan are defined in Section 2.

SECTION 2. DEFINITIONS

a. “Award” means any Option or Stock Bonus Award granted under the Plan.

b. “Award Agreement” means the written agreement or other written instrument between the Company and a Participant that evidences and sets forth the terms, conditions and restrictions pertaining to a Participant’s Award.

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

d. “Cause” means (i) misconduct by the Participant in the performance of the Participant’s duties and obligations to the Company or its Subsidiaries; (ii) dishonesty, fraud, breach of duty of loyalty, insubordination, violation of Company policies, gross negligence, gross incompetence, any intentional act contrary to the interests of the Company, embezzlement or misappropriation by the Participant relating to the Company or any of its affiliates or any of their funds, properties or assets or failure to follow any lawful directive of the Board; (iii) the neglect or failure by the Participant, after written notice and thirty (30) days to cure (or such shorter period of cure as the Board reasonably determines is necessary to avoid an adverse effect on the business of the Company), to perform the duties assigned to him or her or; (iv) any material breach of any employment agreement, noncompetition agreement or other agreement with the Company and/or its affiliates; (v) the conviction by Participant or plea of nolo contendere (or similar plea) to any facts constituting a felony or a misdemeanor involving moral turpitude; (vi) acting in a manner or making any statements which the Board reasonably determines to have an adverse effect on the reputation, operations, prospects or business relations of the Company or its affiliates (vii) any conduct by Participant which is reported in the general or trade press or otherwise achieves general notoriety and which is scandalous, immoral, or illegal, or (viii) the Participant’s use of controlled substances or alcohol in any manner that interferes with the performance of his or her duties. Determination of Cause will be made by the Board in its sole discretion.

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e. “Change in Control” the occurrence of any of the following events:

i. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (A) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) below; or

ii. Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

iii. Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of

 

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the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

iv. Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

Notwithstanding the foregoing, for the purposes of this Plan and with respect to any and all clauses of this Section of the Plan, an IPO or any transactions or events constituting part of an IPO shall not be deemed to constitute or in any way effect a Change in Control.

f. “Committee” means a committee of the Board, as described in Section 3(a).

g. “Consultant” means a person who performs bona fide services for the Company or a Subsidiary as a consultant or advisor, excluding Employees and Directors.

h. “Director” means a non-employee member of the Board.

i. “Employee” means any individual who is a common-law employee of the Company or a Subsidiary.

j. “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

k. “Exercise Price” means the amount for which one Share may be purchased when an Option is exercised, as specified by the Board in the applicable Award Agreement.

l. “Fair Market Value,” as of a particular date, means:

i. if the Shares are then listed or admitted to trading on the New York Stock Exchange or another national securities exchange or such other regulated market, or reported on NASDAQ, the closing price of a Share on the New York Stock exchange, on another national securities exchange or on NASDAQ as of the last trading day on which the Shares were sold or reported prior to the date of determination; or

ii. if the Shares are not then listed or admitted to trading on the New York Stock Exchange or another national securities exchange or such other regulated market or reported on NASDAQ, such value as the Board, acting in good faith and in compliance with Code Section 409A, determines.

m. “IPO” means a bona fide underwritten initial public offering of Company Stock, or other securities evidencing the Company Stock, with an independent underwriter on an established national securities exchange or such other regulated market, for total proceeds to the Company of not less than US $50 million.

 

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n. “Incentive Stock Option” or “ISO” means a stock option intended to qualify as an incentive stock option within the meaning of Code Section 422. ISOs under the Plan may only be granted to Participants who are U.S. taxpayers.

o. “Nonqualified Stock Option” or “NQSO” means a stock option granted pursuant to the Plan that is not an ISO.

p. “Option” means an ISO or NQSO granted under the Plan that entitles the holder to purchase Shares.

q. “Participant” means a person selected by the Board to receive an Award under the Plan.

r. “Performance Objective” means one or more objective, measurable performance factors as determined by the Board (as described in Section 3(b) of the Plan) with respect to each Performance Period based upon one or more of the factors set forth in Section 9 of the Plan.

s. “Performance Period” means a period for which Performance Objectives are set and during which performance is to be measured to determine whethere a Participant is entitled to payment of an Award under the Plan. A Performance Period may coincide with one or more complete or partial calendar or fiscal years of the Company. Unless otherwise designated by the Board, the Performance Period will be based on the calendar year.

t. “Publicly Held Corporation” means a corporation issuing any class of common equity securities required to be registered under Section 12 of the Exchange Act.

u. “Service” means service as an Employee, Consultant or Director.

v. “Share” means one share of Stock issuable under a Stock Bonus Award or when an Option is exercised, as adjusted in accordance with Section 8 (if applicable).

w. “Stock” means the common stock of the Company.

x. “Stock Bonus Award” means an award of Stock or denominated in Stock under the Plan. All or part of any Stock Bonus Award may be subject to conditions established by the Board, and set forth in the Award Agreement, which may include, but are not limited to, continuous Service, achievement of specific business objectives, increases in specified indices, attaining growth rates, and other comparable measurements of the Company or its Subsidiaries’ performance, including Performance Objectives. Shares under a Stock Bonus Award may be issuable to the Participant either at the time of grant of the Award or upon the lapse or satisfaction of the above vesting conditions as set forth in the Award Agreement.

y. “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns shares possessing 50% or more of the total combined voting power of all classes of shares in one of the other corporations in the chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan will be considered a Subsidiary commencing as of that date.

 

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SECTION 3. ADMINISTRATION

a. Committees of the Board. The Plan may be administered by one or more Committees. A Committee will consist of two or more members of the Board, and will have the authority and be responsible for those functions assigned to it by the Board. If no Committee is appointed, the entire Board will administer the Plan. Any reference to the Board in the Plan will be construed as a reference to the Committee, if any, to which the Board assigns a particular function in connection with the Plan. If the Company is a Publicly Held Corporation, the Plan shall be administered by a Committee appointed by the Board consisting of not less than two directors who fulfill the “nonemployee director” requirements of Rule 16b-3 under the Exchange Act, the independence requirements of the principal exchange or quotation system upon which the Shares are listed or quoted, and the “outside director” requirements of Code Section 162(m).

b. Compliance with Code Section 162(m). The Board may, but is not required to, grant Awards that are intended to qualify as performance-based compensation exempt from the deductibility limitations of Code Section 162(m). Any such grants shall be made and certified only by a Committee (or a subcommittee thereof) consisting solely of two or more “outside directors” (as such term is defined under Code Section 162(m)).

c. Powers of the Board. Subject to the provisions of the Plan, the has the discretionary authority and power to:

i. Determine and designate those individuals selected to receive Awards;

ii. Determine the terms of Awards, including the time at which each Award will be granted and the number of Shares subject to each Award;

iii. Establish the terms and conditions upon which Awards may be exercised, vested or paid (including any requirements that the Participant or the Company satisfy performance criteria of Performance Objectives);

iv. Prescribe, amend, or rescind any rules and regulations necessary or appropriate for the administration of the Plan;

v. Grant Awards in substitution for options or other equity interests held by individuals who become Employees of the Company or one of its Subsidiaries as a result of the Company’s acquiring or merging with the individual’s employer. If necessary to conform the Awards to the interests for which they are substitutes, the Board or a Committee may grant substitute Awards under terms and conditions that vary from those the Plan otherwise requires;

vi. Correct any defect, supply any deficiency, and reconcile any inconsistency in the Plan or in any related Award or agreement; and

 

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vii. Make other determinations and take such other action in connection with the administration of the Plan as it deems necessary or advisable.

d. Delegation of Duties. The Board may delegate to designated officers of the Company any of its duties and authority under the Plan pursuant to such conditions or limitations as the Board may establish from time to time including, without limitation, the authority to recommend individuals for the grant of Awards and the form and terms of their Awards; provided, however, the Board may not delegate to any person the authority (i) to grant Awards or (ii) if the Company is a Publicly Held Corporation, to take any action which would contravene the requirements of Rule 16b-3 under the Exchange Act or the Sarbanes-Oxley Act of 2002.

e. Interpretation of Plan. The Board has the discretionary authority and power to interpret and construe the Plan and all related Awards and agreements, to resolve any ambiguities and determine the amount of benefits payable to a person under the Plan. All decisions, interpretations and determinations of the Board with respect to the Plan will be final and binding on all Participants and all persons deriving their rights from Participants.

f. Indemnification. Each member of the Board is indemnified and held harmless by the Company against any cost or expense (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Plan to the extent permitted by applicable law. This indemnification is in addition to any rights of indemnification a member may have as a Director or otherwise under the Bylaws of the Company or a Subsidiary, any agreement, any vote of shareholders or disinterested directors, or otherwise.

SECTION 4. ELIGIBILITY

a. General Rule. All Employees, Directors and Consultants of the Company or any Subsidiary who are capable of contributing significantly to the successful performance of the Company, in the determination of the Board, are eligible to be Participants in the Plan. Nonqualified Stock Options and Stock Bonus Awards may be granted to Employees, Consultants and Directors. Incentive Stock Options may be granted only to Employees.

b. Ten-Percent Shareholders. An individual who owns more than 10% of the total combined voting power of all classes of outstanding shares of the Company or any of its Subsidiaries (as determined in accordance with Code Section 424(d)) will not be eligible for the grant of an ISO unless (i) the Exercise Price is at least 110% of the Fair Market Value of a Share on the date of grant and (ii) the Option by its terms is not exercisable after the expiration of 5 years from the date of grant.

SECTION 5. STOCK SUBJECT TO PLAN

a. Basic Limitation. The aggregate number of Shares that may be issued under the Plan on exercise of Options or on vesting of a Stock Bonus Award must not exceed 6,802,495 shares, subject to adjustment pursuant to Section 8. Shares offered under the Plan may be authorized but unissued Shares or treasury Shares. The number of Shares that are subject to Awards outstanding at any time under the Plan must not exceed the number of Shares that then remain available for issuance under the Plan.

 

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b. Additional Shares. In the event that any outstanding Award for any reason expires, is terminated unexercised, or is forfeited or settled in a manner that results in fewer shares outstanding than were initially awarded, the Shares subject to the Award, to the extent of such expiration, termination, or forfeiture, again will be available for purposes of the Plan. If Shares issued under the Plan are reacquired by the Company, those Shares again will be available for purposes of the Plan. Without limiting the foregoing, if payment for the exercise of an Award is made by transfer to the Company of Shares owned by the Participant, the shares transferred to the Company will be added to the Company’s treasury or canceled and become authorized and unissued shares.

SECTION 6. TERMS AND CONDITIONS OF AWARDS

a. Award Agreements. Each grant of an Award under the Plan will be evidenced by an Award Agreement between the Participant and the Company. The Award will be subject to terms and conditions that are consistent with the Plan and that the Board deems appropriate for inclusion in an Award Agreement. The provisions of Award Agreements entered into under the Plan need not be identical.

b. Number of Shares. Each Award Agreement will specify the formula for determining the number of Shares that are subject to the Stock Bonus Award or the Option and will provide for the adjustment of that number in accordance with Section 8. The Award Agreement also will specify whether an Option is an ISO or NQSO. However, if any portion of an Option does not meet the requirements to qualify as an ISO, that portion will be an NQSO.

c. Exercise Price. Each Award Agreement pertaining to an Option will specify the Exercise Price as determined by the Board. The Exercise Price of any Option will be determined by the Board in its sole discretion, except that the Exercise Price of an ISO may not be less than 100% of the Fair Market Value of a Share on the date of grant, and any higher percentage required by Section 4(b) or except as provided under Section 8(a) relating to capitalization adjustments.

d. Limitation on ISO Amount. To the extent that the aggregate Fair Market Value (determined with respect to each ISO as of the time the ISO is granted) of the Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under all plans of the Company and its Subsidiaries) exceeds US $100,000, the Option or portions of the Option that exceed such limit will be treated as NQSOs (in the reverse order in which they were granted, so that the last ISO will be the first to be treated as NQSO).

e. Code Section 162(m) Limitations on Awards. Subject to the provisions of Section 8(a) relating to capitalization adjustments, in the case of any Award intended to comply with Code Section 162(m), no Employee or Director shall be eligible to be granted in any calendar year (i) one or more Options which in the aggregate cover more than six (6) million Shares or (ii) one or more Stock Bonus Awards which in the aggregate cover more than seven (6) million Shares. To the extent required by Code Section 162(m), in applying the foregoing

 

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limitation with respect to an Employee or Director, if any Award intended to comply with Section 162(m) is canceled, the cancelled Award shall continue to count against the maximum number of Shares with respect to which an Award may be granted to an Employee or Director.

f. Withholding Taxes. As a condition to the exercise of an Option or the issuance of Stock under a Stock Bonus Award, the Participant will make such arrangements as the Board may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise or issuance.

g. Exercisability of an Option. Each Award Agreement granting an Option to a Participant will specify when all or any installment of the Option becomes exercisable. The exercisability provisions of any Award Agreement will be determined by the Board in its sole discretion.

h. Vesting and Payment of Stock Bonus Awards. Stock Bonus Awards may be subject to restrictions and vesting conditions, including time-based vesting conditions and/or the attainment of performance-based vesting conditions or Performance Objectives, as determined by the Administrator and, with regard to performance Objectives, determined and certified by the Board (in the manner prescribed by Code Section 162(m)). To the extent consistent with the Company’s Bylaws, at the Board’s election, Shares issuable to a Participant may be (i) held in book entry form subject to the Company’s instructions until any restrictions relating to the Stock Bonus Award lapse; or (ii) evidenced by a certificate, which certificate shall be held in such form and manner as determined by the Board. An Award Agreement may provide that Shares under a Stock Bonus Award may be issuable to the Participant either at the time of grant of the Award or upon the lapse or satisfaction of vesting conditions, including Performance Objectives. The Stock Bonus Awards will become nonforfeitable at such times and in such manner as the board determines; provided, however, that, except with respect to Awards the Board designates as covered by Performance Objectives for purposes of Code Section 162(m), the Board may, on such terms and conditions as it determines appropriate, accelerate the time at which restrictions or other conditions on such Stock Bonus Awards will lapse. Except as otherwise provided in a Participant’s Award Agreement, payment of a Stock Bonus Award whose underlying Shares are issuable to the Participant upon vesting, shall be made within 90 days of the day of vesting. An Award Agreement may provide that a Stock Bonus Awards may be settled in cash or in Shares (or in a combination thereof) that have an aggregate Fair Market Value equal to the value of the earned underlying Shares.

i. Consideration for Stock Bonus Award. The Board may accept any form of legal consideration, if any, that satisfies Cayman Islands corporate law requirements regarding adequate consideration for Stock Bonus Awards.

j. Basic Term. The Award Agreement will specify the term of the Award. The Board in its sole discretion may determine when an Option or Stock Bonus Award is to expire, except that the term may not exceed ten (10) years from the date of grant.

k. Nontransferability of Awards. Except as the Board may otherwise determine or provide in an Award Agreement, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or

 

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by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. If necessary to comply with Rule 16b-3 under the Exchange Act, the Participant may not transfer or pledge Shares acquired under an Award until at least six months have elapsed from (but excluding) the date of grant of the Award, unless the Board approves otherwise in advance.

l. Termination of Service Before an IPO. If a Participant’s Service terminates for any reason prior to an IPO, any outstanding unexercised Option or unvested Stock Bonus Award awarded to the Participant will expire and be forfeited for no consideration on the date of the Participant’s termination of Service.

m. Stock Bonus Awards and Termination of Service After an IPO. Unless otherwise provided in the Award Agreement or as determined by the Board, upon termination of a Participant’s Service for any reason on or following an IPO, all unvested portions of any outstanding Stock Bonus Awards shall be immediately forfeited without consideration.

n. Options and Termination of Service (Except by Death) After an IPO. Unless otherwise provided in a Participant’s Award Agreement, if a Participant’s Service terminates for any reason on or following an IPO, other than for the Participant’s death, any exercisable Options granted to the Participant that have not yet been exercised will expire on the earliest of the following:

i. The expiration date determined pursuant to subsection 6(j) above;

ii. The date 90 days after the date of the termination of the Participant’s Service for any reason other than Cause, or a later date as the Board may determine; or

iii. The date of the termination of the Participant’s Service for Cause, or a later date as the Board may determine;

The Participant may exercise all or part of his or her Options at any time before the expiration of the Options under this subsection, but only to the extent that the Options had become exercisable before the date the Participant’s Service terminated. Those Options that are not exercisable immediately before the date of termination of Service will expire on the date of termination. If the Participant dies after the termination of his or her Service but before the expiration of the Participant’s Options, all or part of the Options may be exercised (prior to expiration) by the executors or administrators of the Participant’s estate or by any person who has acquired the Options directly from the Participant by beneficiary designation, bequest or inheritance, or in the case of NQSOs only, by other transfer, if permitted, but in any event only to the extent that the Options had become exercisable before the Participant’s Service terminated (or became exercisable as a result of the termination). For purposes of this subsection 6(n), the date of termination means the date the Participant is given notice of termination by the Company or the date of death.

o. Leaves of Absence. Service will be deemed to continue while the Participant is on a bona fide leave of absence for less than six months, or if longer, if the Participant retains a right to reemployment with the Company under an applicable law or under the terms of a contract (as determined by the Company).

 

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p. Options and Death of Participant After an IPO. If a Participant dies while in Service following an IPO, any exercisable Options granted to the Participant that have not yet been exercised will expire on the earlier of the following dates:

i. The expiration date determined pursuant to subsection 6(i) above; or

ii. The date 12 months after the Participant’s death.

At any time before the expiration of the Options under the preceding sentence, all or part of the Participant’s exercisable Options may be exercised by the executors or administrators of the Participant’s estate or by any person who has acquired the Options directly from the Participant by beneficiary designation, bequest or inheritance, or in the case of NQSOs only, by other transfer, if permitted, but in any event only to the extent that the Options had become exercisable before the Participant’s death. Those Options that are not exercisable immediately before the Participant’s death will expire on the Participant’s death.

q. No Rights as a Shareholder. Unless otherwise specified in an Award Agreement, a Participant, or a transferee of a Participant, has no rights as a shareholder with respect to any Shares covered by an Option or a Stock Bonus Award prior to the date of issuance to the Participant or transferee of a certificate or certificates for the Shares.

r. Modification and Extension of Awards. Within the limitations of the Plan, the Board may modify or extend outstanding Awards. However, without the consent of the Participant, no modification may impair the Participant’s rights or increase the Participant’s obligations under the Award.

s. Restrictions on Transfer of Shares. Any Shares issued in respect of a Stock Bonus Award or on exercise of an Option will be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Board may determine. These restrictions will be set forth in the applicable Award Agreement and will apply in addition to any restrictions that may apply to holders of Shares generally. The Company will be under no obligation to issue, sell or deliver Shares on vesting of a Stock Bonus Award or on exercise of Options under the Plan unless the Participant executes an agreement giving effect to the restrictions in the form prescribed by the Company.

t. Lock-Up Period; Insider Information. By accepting any Award, the Participant shall be deemed to have agreed that, if so requested by the Company or any representative of the underwriters (the “Managing Underwriter”) in connection with any registration of the offering of any securities of the Corporation under the Securities Act of 1933 as amended (“Securities Act”) the Participant shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the “Market Standoff Period”) following the effective date of a registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration

 

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statement of the Corporation to become effective under the Securities Act that includes securities to be sold on behalf of the Corporation in an underwritten public offering under the Securities Act. The Corporation may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of the Market Standoff Period. By accepting any Award, the Participant also shall be deemed to have agreed to abide by the Company’s inside information guidelines, including any prohibitions on the sale or transfers of any Shares or other securities of the Company during “blackout periods,” as provided therein. Notwithstanding any other provision of this Plan all Awards shall be immediately forfeited at the option of the Board in the event of the Participant purchasing or selling securities of the Company without written authorization in accordance with the Company’s inside information guidelines then in effect.

SECTION 7. PAYMENT FOR SHARES EXERCISED UNDER AN OPTION.

a. General Rule. The entire Exercise Price of Shares issued under an Option is payable in cash or cash equivalents when the Shares are purchased.

b. Surrender of Stock. To the extent an Award Agreement so provides, all or any part of the Exercise Price of an Option may be paid by surrendering, or attesting to the ownership of, Shares that are already owned by the Participant. These Shares will be surrendered to the Company in good form for transfer and will be valued at their Fair Market Value on the date when the Option is exercised. Unless the Board otherwise determines, the Participant will not surrender, or attest to the ownership of, Shares in payment of the Exercise Price if that action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes.

c. Promissory Note. To the extent that an Award Agreement so provides, all or a portion of the Exercise Price of Shares issued under an Option may be paid with a full recourse promissory note. The Shares will be pledged as a security for payment of the principal amount of the promissory note and interest on it. The interest rate payable under the terms of the promissory note will not be less than the minimum rate (if any) required to avoid the imputation of additional interest under the Code. Subject to the foregoing, the Board of Directors (at its sole discretion) will specify the term, interest rate, amortization requirements (if any) and other provisions of the note. Provided, however, that if the Company is a Publicly Held Corporation, any payment by promissory note may be made only if and to the extent that the Company determines that it is permissible under section 402 of the Sarbanes-Oxley Act of 2002 as amended from time to time.

d. Exercise/Sale. To the extent that an Award Agreement so provides, and if the Stock is publicly traded, payment on exercise of an Option may be made all or in part by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell the Shares and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes.

e. Exercise/Pledge. To the extent that an Award Agreement so provides, and if the Stock is publicly traded, payment on exercise of an Option may be made all or in part by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge the Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes.

 

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SECTION 8. ADJUSTMENT OF SHARES; CORPORATE EVENTS

a. Capitalization Adjustments. If the outstanding shares of Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, the Board shall make such appropriate and proportionate adjustments as it deems necessary or appropriate in one or more of (i) the number and class of shares subject to the Plan, (ii) the number of shares or class of shares covered by each outstanding Option and Stock Bonus Award and (iii) the Exercise Price under each outstanding Option.

b. Corporate Transactions. In the event that the Company is a party to a Change in Control, the Board may provide for any of the following: (i) the cancellation of each outstanding Award after payment to the Participant of an amount, if any, in cash or cash equivalents equal to (x) the Fair Market Value of the Shares subject to the Award at the time of the merger, consolidation or other reorganization minus, in the case of an Option, (y) the Exercise Price of the Shares subject to the Option; (ii) the assumption or continuation by any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) of any or all Awards outstanding under the Plan or substitution of similar awards for Awards outstanding under the Plan (including but not limited to, awards to acquire the same consideration paid to the stockholders of the Company pursuant to the Change in Control), and any assignment by the Company to the successor of the Company (or the successor’s parent company, if any) of any reacquisition or repurchase rights held by the Company in respect of Shares issued pursuant to Awards, in connection with such Change in Control; (iii) the acceleration of exercisability or vesting of all or a portion of the Awards (in full or in part) to a date prior to the effective time of such Change in Control (contingent upon the effectiveness of the Corporate Transaction) as the Board shall determine, and (iv) termination of Awards if not exercised (if applicable) at or prior to the effective time of the Change in Control, and lapse of any reacquisition or repurchase rights held by the Company with respect to such Awards (contingent upon the effectiveness of the Corporate Transaction).

c. Reservation of Rights. Except as provided in this Section, a Participant has no rights by reason of (i) any subdivision or consolidation of shares of any class, (ii) the payment of any dividend or (iii) any other increase or decrease in the number of shares of any class. Any issuance by the Company of shares of Stock of any class, or securities convertible into shares of Stock of any class, will not affect the number of Shares subject to a Stock Bonus Award or the number or Exercise Price of Shares subject to an Option. The grant of an Award under the Plan will not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets.

 

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SECTION 9. PERFORMANCE AWARDS

a. Performance Rules. Subject to the terms of the Plan, the Board will have the authority to establish and administer performance-based grant and/or vesting conditions and Performance Objectives with respect to such Awards as it considers appropriate, which Performance Objectives must be satisfied, as the Board specifies, before the Participant receives or retains an Award or before the Award becomes nonforfeitable. Where such Awards are granted to “covered employees” within the meaning of Code Section 162(m), and the Company is a Publicly Held Corporation, the Board (as described in Section 3(b) of the Plan) may designate the Awards as subject to the requirements of Code Section 162(m), in which case the provisions of the Awards are intended to conform with all provisions of Code Section 162(m) to the extent necessary to allow the Company to claim a U.S. federal income tax deduction for the Awards as “qualified performance-based compensation.” However, the Board retains the discretion to grant Awards that do not so qualify and to determine the terms and conditions of such Awards including the Performance Objectives or other performance-based vesting conditions that shall apply to such Awards. Notwithstanding satisfaction of applicable Performance Objectives, to the extent specified on the date of grant of an Award, the number of Shares or other benefits received under an Award that are otherwise earned upon satisfaction of such Performance Objectives may be reduced by the Board (but not increased) on the basis of such further considerations that the Board in its sole discretion shall determine. No Award intended to conform with the provisions of Code Section 162(m) shall be granted or vest, as applicable, unless and until the date that the Board has certified, in the manner prescribed by Code Section 162(m), the extent to which the Performance Objectives for the Performance Period have been attained and has made its decisions regarding the extent, if any, of a reduction of such Award.

b. Performance Objective. Performance Objectives will be based on one or more of the following performance-based measures determined based on the Company and its Subsidiaries on a group-wide basis or on the basis of Subsidiary, business platform, or operating unit results: (i) earnings per share (on a fully diluted or other basis), (ii) pretax or after tax net income, (iii) operating income, (iv) gross revenue, (v) profit margin, (vi) stock price targets or stock price maintenance, (vi) working capital, (vii) free cash flow, (viii) cash flow, (ix) return on equity, (x) return on capital or return on invested capital, (xi) earnings before interest, taxes, depreciation, and amortization (EBITDA), (xii) strategic business criteria, consisting of one or more objectives based on meeting specified revenue, market penetration, geographic business expansion goals, cost targets, or objective goals relating to acquisitions or divestitures, or (xiv) any combination of these measures. The Board shall determine whether such Performance Objectives are attained, and such determination will be final and conclusive. Each Performance Objective may be expressed in absolute and/or relative terms, may be based on or use comparisons with internal targets, the past performance of the Company (including the performance of one or more Subsidiaries, divisions, business platforms, and/or operating units) and/or the past or current performance of other companies. In the case of earnings-based measures, Performance Objectives may use comparisons relating to capital (including, but not limited to, the cost of capital), shareholders’ equity and/or shares outstanding, or to assets or net assets. In respect of Performance Awards intended to comply with Code Section 162(m), Performance objectives shall be established no later tan ninety (90) days after the beginning of any performance period applicable to such Performance Awards, or at such other date as may be required or permitted for “performance-based compensation” under Code Section 162(m).

 

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SECTION 10. CONDITIONS UPON ISSUANCE OF SHARES

a. Securities Law Requirements. Shares may not be issued under the Plan unless the issuance and delivery of these Shares comply with (or are exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated under it, state and federal securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company’s securities then may be traded.

b. Investment Representations. As a condition to the exercise of an Option, the Board may require the person exercising the Option to represent and warrant at the time of exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute the Shares if, in the opinion of counsel for the Company, such a representation is required.

c. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares under this Plan, will relieve the Company of any liability in respect of the failure to issue or sell those Shares as to which the requisite authority has not been obtained.

SECTION 11. NO RETENTION RIGHTS

Nothing in the Plan or in any Award granted under the Plan will confer on the Participant any right to continue in Service for any period of time or will interfere with or otherwise restrict in any way the rights of the Company (or any Subsidiary) or of the Participant, which rights are expressly reserved by each, to terminate his or her Service at any time and for any reason.

SECTION 12. DURATION AND AMENDMENTS

a. Term of the Plan. Subject to the approval of the Company’s shareholders, the Plan is effective on                      2007, the date of its adoption by the Board. If the shareholders fail to approve the Plan within 12 months after its adoption by the Board, any grants of Awards that already have occurred will be rescinded, and no additional grants will be made. The Plan will terminate automatically on                      2017, ten (10) years after its adoption by the Board, and may be terminated on any earlier date pursuant to subsection (b) below.

b. Right to Amend or Terminate the Plan. The Board may amend, suspend or terminate the Plan at any time and for any reason. However, (i) any amendment of the Plan that increases the number of Shares available for issuance under the Plan (except as provided in Section 8), or that materially changes the class of persons who are eligible for the grant of Awards, is subject to the approval of the Company’s shareholders and (ii) no amendment shall be effective unless approved by the shareholders of the Company to the extent shareholder approval is necessary to satisfy the listing requirements of any stock exchange on which the Shares are traded or applicable law. The Board, in its sole discretion, may submit any other amendment to

 

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the Plan for shareholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Code Section 162(m) and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers.

c. Right to Amend Awards. The Board at any time, and from time to time, may amend the terms of any one or more Awards; provided, however, that the rights under any Award shall not be impaired by any such amendment without the consent of the Participant.

d. Effect of Amendment or Termination. No Shares will be issued or sold under the Plan after its termination, except on exercise of an Option granted prior to the termination. No amendment, suspension, or termination of the Plan will, without the consent of the Participant, alter or impair any rights or obligations under any Award previously granted under the Plan.

SECTION 13. APPLICABLE LAW

The Plan and all Awards granted under it will be construed and interpreted in accordance with, and governed by, the laws of the Cayman Islands, other than its laws regarding choice of law.

SECTION 14. EXECUTION

To record the adoption of the Plan by the Board, the Company has caused its authorized officer to execute it.

 

 

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Exhibit 10.2

EXECUTION VERSION

XINYUAN REAL ESTATE CO., LTD.

2007 LONG TERM INCENTIVE PLAN

Section 1. Purpose

The purpose of the 2007 Long Term Incentive Plan (the “Plan”) of Xinyuan Real Estate Co., Ltd., a Cayman Islands holding company (the “Company”) is to promote the interests of the Company by enabling it to attract, retain and motivate key employees, directors and consultants responsible for the success and growth of the Company and its subsidiaries by providing them with appropriate incentives and rewards and enabling them to participate in the growth of the Company. The Plan provides for the grant of Options, Restricted Shares, Restricted Stock Units, Stock Appreciation Rights and Other Stock-Based Awards to purchase shares of Company Stock. Options granted under the Plan may include Non Qualified Stock Options as well as Incentive Stock Options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).

Certain capitalized terms used in this Plan are defined in Section 2.

Section 2. Definitions

(a) “Award” means any Option, Stock Appreciation Right, Restricted Share, Restricted Stock Unit, or Other Stock-Based Award granted under the Plan.

(b) “Award Agreement” means the written agreement or other written instrument between the Company and a Participant that evidences and sets forth the terms, conditions and restrictions pertaining to a Participant’s Award.

(c) “Board” means the Board of Directors of the Company.

(d) “Cause” means (i) misconduct by the Participant in the performance of the Participant’s duties and obligations to the Company or its Subsidiaries; (ii) dishonesty, fraud, breach of duty of loyalty, insubordination, violation of Company policies, gross negligence, gross incompetence, any intentional act contrary to the interests of the Company, embezzlement or misappropriation by the Participant relating to the Company or any of its affiliates or any of their funds, properties or assets or failure to follow any lawful directive of the Board; (iii) the neglect or failure by the Participant, after written notice and thirty (30) days to cure (or such shorter period of cure as the Board reasonably determines is necessary to avoid an adverse effect on the business of the Company), to perform the duties assigned to him or her or; (iv) any material breach of any employment agreement, noncompetition agreement or other agreement with the Company and/or its affiliates; (v) the conviction by Participant or plea of nolo contendere (or similar plea) to any facts constituting a felony or a misdemeanor involving moral turpitude; (vi) acting in a manner or making any statements which the Board reasonably determines to have an adverse effect on the reputation, operations, prospects or business relations of the Company or its affiliates (vii) any conduct by Participant which is reported in the general or trade press or otherwise achieves general notoriety and which is scandalous, immoral, or illegal, or (viii) the Participant’s use of controlled substances or alcohol in any manner that interferes with the performance of his or her duties. Determination of Cause will be made by the Board in its sole discretion.

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(e) “Change in Control” means the occurrence of any of the following events:

(i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”), within any period of 12 consecutive months, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (A) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) below; or

(ii) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease, within any period of 12 consecutive months, for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

(iii) Consummation of a reorganization, merger or consolidation of the Company(a “Business Combination”) or a sale or other disposition of all or substantially all of the assets of the Company having a total gross fair market value equal to or more than 50% of the Outstanding Company Common Stock or Outstanding Company Voting Securities other than to a “related party,” as such term is defined in the regulations issued under Section 409A of the Code, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (B) no Person (excluding any corporation resulting from such Business Combination or

 

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any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

Notwithstanding the foregoing and anything to the contrary in the Plan, for the purposes of this Plan and with respect to any and all clauses of this Section of the Plan, (i) an IPO or any transactions or events constituting part of an IPO shall not be deemed to constitute or in any way effect a Change in Control and (ii) if it is determined than an Award hereunder is subject to the requirements of Section 409A of the Code, the Company will not be deemed to have undergone a Change in Control unless the Company is deemed to have undergone a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company (as such terms are defined in Section 409A of the Code and the regulations thereunder) for purposes of the payment of any amounts pursuant to Section 12(b) or any other provision of the Plan.

(f) “Committee” means a committee of the Board, as described in Section 3(a).

(g) “Consultant” means a person who performs bona fide services for the Company or a Subsidiary as a consultant or advisor, excluding Employees and Directors.

(h) “Covered Employee” means a named executive officer who is one of the group of “covered employees,” as defined in Code Section 162(m) and Treasury Regulation Section 1.162-27(c) (or its successor), during any period that the Company is a Publicly Held Corporation.

(i) “Director” means a non-employee member of the Board.

(j) “Employee” means any individual who is a common-law employee of the Company or a Subsidiary.

(k) “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

(l) “Exercise Price” means the amount for which one Share may be purchased when an Option is exercised, as specified by the Board in the applicable Award Agreement.

(m) “Fair Market Value,” as of a particular date, means:

 

(i)

if the Shares are then listed or admitted to trading on the New York Stock Exchange or another national securities exchange or such other regulated market, or reported on NASDAQ, the closing price of a Share on the New York Stock exchange, on another national securities exchange or on NASDAQ as of the last trading day on which the Shares were sold or reported prior to the date of determination; or

 

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(ii)

if the Shares are not then listed or admitted to trading on the New York Stock Exchange or another national securities exchange or such other regulated market or reported on NASDAQ, such value as the Board, acting in good faith and in compliance with Code Section 409A, determines.

(n) “IPO” means a bona fide underwritten initial public offering of Company Stock, or other securities evidencing the Company Stock, with an independent underwriter on an established national securities exchange or such other regulated market, for total proceeds to the Company of not less than US $50 million.

(o) “Incentive Stock Option” or “ISO” means a stock option intended to qualify as an incentive stock option within the meaning of Code Section 422. ISOs under the Plan may only be granted to Participants who are U.S. taxpayers.

(p) “Nonqualified Stock Option” or “NQSO” means a stock option granted pursuant to the Plan that is not an ISO.

(q) “Option” means an ISO or NQSO granted under the Plan that entitles the holder to purchase Shares.

(r) “Other Stock-Based Awards” are Awards (other than Options, Stock Appreciation Rights, Restricted Shares or Restricted Stock Units) granted pursuant to Section 10 hereof that are denominated in, valued in whole or in part by reference to, or otherwise based on or related to, Shares.

(s) “Participant” means a person selected by the Board to receive an Award under the Plan.

(t) “Performance Objective” means one or more objective, measurable performance factors as determined by the Board with respect to each Performance Period based upon one or more of the factors set forth in Section 13(b) of the Plan.

(u) “Performance Period” means a period for which Performance Objectives are set and during which performance is to be measured to determine whether a Participant is entitled to payment of an Award under the Plan. A Performance Period may coincide with one or more complete or partial calendar or fiscal years of the Company. Unless otherwise designated by the Board, the Performance Period will be based on the calendar year.

 

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(v) “Publicly Held Corporation” means a corporation issuing any class of common equity securities required to be registered under Section 12 of the Exchange Act.

(w) “Restricted Shares” means Shares granted to a Participant under Section 8 hereof which are subject to certain restrictions (which may include, but are not limited to, continuous Service, achievement of specific business objectives, increases in specified indices, attaining growth rates, and other comparable measurements of the Company or its Subsidiaries’ performance) and to a risk of forfeiture or repurchase by the Company.

(x) “Restricted Stock Unit” or “RSU” means a bookkeeping entry representing an unfunded right to receive (if conditions are met) an amount equal to the Fair Market Value of one Share, granted pursuant to Section 9 hereof.

(y) “Service” means service as an Employee, Consultant or Director.

(z) “Share” means one share of Stock issuable under an Award, as adjusted in accordance with Section 12 hereof (if applicable).

(aa) “Stock” means the common stock of the Company.

(bb) “Stock Appreciation Right” or “SAR” means an Award granted to a Participant, as described in Section 7 hereof.

(cc) “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns shares possessing 50% or more of the total combined voting power of all classes of shares in one of the other corporations in the chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan will be considered a Subsidiary commencing as of that date.

Section 3. Administration

(a) Committees of the Board. The Plan may be administered by one or more Committees. A Committee will consist of two or more members of the Board, and will have the authority and be responsible for those functions assigned to it by the Board. If no Committee is appointed, the entire Board will administer the Plan. Any reference to the Board in the Plan will be construed as a reference to the Committee, if any, to which the Board assigns a particular function in connection with the Plan. If the Company is a Publicly Held Corporation, the Plan shall be administered by a Committee appointed by the Board consisting of not less than two directors who fulfill the “nonemployee director” requirements of Rule 16b-3 under the Exchange Act, the independence requirements of the principal exchange or quotation system on which the Shares are listed or quoted, and the “outside director” requirements of Code Section 162(m).

(b) Compliance with Code Section 162(m). The Board may, but is not required to, grant Awards that are intended to qualify as performance-based compensation exempt from the deductibility limitations of Code Section 162(m) (“Qualified Performance Awards”). Any such grants shall be made and certified only by a Committee (or a subcommittee thereof) consisting solely of two or more “outside directors” (as such term is defined under Code Section 162(m)).

 

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(c) Powers of the Board. Subject to the provisions of the Plan, the has the discretionary authority and power to:

(i) Determine and designate those individuals selected to receive Awards;

(ii) Determine the terms of Awards, including the time at which each Award will be granted and the number of Shares subject to each Award;

(iii) Establish the terms and conditions upon which Awards may be exercised, vested or paid (including any requirements that the Participant or the Company satisfy performance criteria or Performance Objectives);

(iv) Prescribe, amend, or rescind any rules and regulations necessary or appropriate for the administration of the Plan;

(v) Grant Awards in substitution for options or other equity interests held by individuals who become Employees of the Company or one of its Subsidiaries as a result of the Company’s acquiring or merging with the individual’s employer. If necessary to conform the Awards to the interests for which they are substitutes, the Board or a Committee may grant substitute Awards under terms and conditions that vary from those the Plan otherwise requires. Notwithstanding anything in the foregoing to the contrary, any Award to any participant who is a U.S. taxpayer will be adjusted appropriately to comply with Code Section 409A or 424, if applicable;

(vi) Correct any defect, supply any deficiency, and reconcile any inconsistency in the Plan or in any related Award or agreement; and

(vii) Make other determinations and take such other action in connection with the administration of the Plan as it deems necessary or advisable.

(d) Delegation of Duties. The Board may delegate to designated officers of the Company any of its duties and authority under the Plan pursuant to such conditions or limitations as the Board may establish from time to time including, without limitation, the authority to recommend individuals for the grant of Awards and the form and terms of their Awards; provided, however, the Board may not delegate to any person the authority (i) to grant Awards or (ii) if the Company is a Publicly Held Corporation, to take any action which would contravene the requirements of Rule 16b-3 under the Exchange Act or the Sarbanes-Oxley Act of 2002.

(e) Interpretation of Plan. The Board has the discretionary authority and power to interpret and construe the Plan and all related Awards and agreements, to resolve any ambiguities and determine the amount of benefits payable to a person under the Plan. All decisions, interpretations and determinations of the Board with respect to the Plan will be final and binding on all Participants and all persons deriving their rights from Participants.

 

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(f) Indemnification. Each member of the Board is indemnified and held harmless by the Company against any cost or expense (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Plan to the extent permitted by applicable law. This indemnification is in addition to any rights of indemnification a member may have as a Director or otherwise under the Bylaws of the Company or a Subsidiary, any agreement, any vote of shareholders or disinterested directors, or otherwise.

(g) Restriction Prior to IPO. The Board may grant Awards under the Plan prior to an IPO, provided that no Awards granted under the Plan may vest prior to the completion of an IPO.

Section 4. Eligibility

(a) General Rule. All Employees, Directors and Consultants of the Company or any Subsidiary who are capable of contributing significantly to the successful performance of the Company, in the determination of the Board, are eligible to be Participants in the Plan. Any Awards, other than ISOs, may be granted to Employees, Consultants and Directors. ISOs may be granted only to Employees.

(b) Ten-Percent Shareholders. An individual who owns more than 10% of the total combined voting power of all classes of outstanding shares of the Company or any of its Subsidiaries (as determined in accordance with Code Section 424(d)) will not be eligible for the grant of an ISO unless (i) the Exercise Price is at least 110% of the Fair Market Value of a Share on the date of grant and (ii) the Option by its terms is not exercisable after the expiration of 5 years from the date of grant.

Section 5. Stock Subject To Plan

(a) Basic Limitation. The aggregate number of Shares that may be issued under the Plan or covered by Awards of SARs, RSUs or Other Stock-Based Awards must not exceed ten (10) million shares, subject to adjustment pursuant to Section 12. Shares offered under the Plan may be authorized but unissued Shares or treasury Shares. The number of Shares that are subject to Awards outstanding at any time under the Plan must not exceed the number of Shares that then remain available for issuance under the Plan.

(b) Additional Shares. In the event that any outstanding Award for any reason expires, is terminated unexercised, or is forfeited or settled or in a manner that results in fewer shares outstanding than were initially awarded, the Shares subject to the Award, to the extent of such expiration, termination, or forfeiture, again will be available for purposes of the Plan. If Shares issued under the Plan are reacquired by the Company, those Shares again will be available for purposes of the Plan. Without limiting the foregoing, if payment for the exercise of an Award is made by transfer to the Company of Shares owned by the Participant, the shares transferred to the Company will be added to the Company’s treasury or canceled and become authorized and unissued shares. Shares in respect of an outstanding Award that is settled in cash shall not be available for purposes of the Plan.

 

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(c) Code Section 162(m) Limitations on Awards. During any period that the Company is a Publicly Held Corporation, unless the Board determines that a particular Award granted to a Covered Employee is not intended to be a Qualified Performance Award, the following rules shall apply to grants of Awards to Covered Employees:

(i) Subject to the provisions of Section 12(a), relating to capitalization adjustments, the maximum aggregate number of Shares that may be granted (in the case of Stock Options and SARs) or that may vest (in the case of Restricted Shares, Restricted Stock Units or Other Stock-Based Awards), as applicable, in any calendar year pursuant to any Award held by any individual Covered Employee shall be eight (8) million Shares.

(ii) The maximum aggregate cash payout (with respect to any Awards paid out in cash) in any calendar year which may be made to any Covered Employee shall be US $10 million.

(iii) To the extent required by Code Section 162(m), in applying the foregoing limitation with respect to a Covered Employee, if any Award intended to comply with Section 162(m) is canceled, the cancelled Award shall continue to count against the maximum number of Shares with respect to which an Award may be granted to a Covered Employee.

Section 6. Terms And Conditions Of Options

(a) Written Agreement. Each grant of an Option under the Plan will be evidenced by an Award Agreement between the Participant and the Company. The Award will be subject to terms and conditions that are consistent with the Plan and that the Board deems appropriate for inclusion in an Award Agreement. The provisions of Award Agreements entered into under the Plan need not be identical.

(b) Number of Shares. Each Award Agreement will specify the formula for determining the number of Shares that are subject to the Option and will provide for the adjustment of that number in accordance with Section 12. The Award Agreement also will specify whether an Option is an ISO or NQSO. However, if any portion of an Option does not meet the requirements to qualify as an ISO, that portion will be an NQSO.

(c) Exercise Price. Each Award Agreement pertaining to an Option will specify the Exercise Price as determined by the Board. The Exercise Price of Options awarded to United States taxpayers shall not be less than 100% of the Fair Market Value of a Share on the date of grant, and, in the case of ISOs, any higher percentage required by Section 4(b), except where a lower Exercise Price is required to comply with Code Section 409A or 424 in the event of an Option substitution, as contemplated by Section 3(c)(v), or except as provided under Section 12(a) relating to capitalization adjustments.

(d) Term. The Award Agreement will specify the term of the Option. The Board in its sole discretion may determine when an Option is to expire, except that the term may not exceed ten years from the date of grant or five (5) years from the date of grant for an ISO granted to 10% or greater shareholder as required by Section 4(b).

 

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(e) Exercisability of an Option. Each Award Agreement granting an Option to a Participant will specify when all or any installment of the Option becomes exercisable. The exercisability provisions of any Award Agreement will be determined by the Board in its sole discretion.

(f) No Rights as a Shareholder. Unless otherwise specified in an Award Agreement, a Participant, or a transferee of a Participant, has no rights as a shareholder with respect to any Shares covered by an Option prior to the date of issuance to the Participant or transferee of a certificate or certificates for the Shares.

(g) $100,000 Annual Limitation on ISO. To the extent that the aggregate Fair Market Value (determined with respect to each ISO as of the time the ISO is granted) of the Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under all plans of the Company and its Subsidiaries) exceeds US $100,000, the Option or portions of the Option that exceed such limit will be treated as NQSOs (in the reverse order in which they were granted, so that the last ISO will be the first to be treated as NQSO).

(h) Method of Exercise and Payment. Options shall be exercised by the delivery of a signed written notice of exercise to the Company which must be received as of a date set by the Company in advance of the effective date of the proposed exercise. The notice shall set forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Exercise Price upon exercise of any Option shall be payable to the Company in full in the following manner:

(i) in cash or cash equivalents when the Shares are purchased;

(ii) subject to prior approval by the Board in its discretion, by surrendering, or attesting to the ownership of, Shares that are already owned by the Participant. These Shares will be surrendered to the Company in good form for transfer and will be valued at their Fair Market Value on the date when the Option is exercised. Unless the Board otherwise determines, the Participant will not surrender, or attest to the ownership of, Shares in payment of the Exercise Price if that action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes;

(iii) subject to prior approval by the Board in its discretion, with a full recourse promissory note. These Shares will be pledged as a security for payment of the principal amount of the promissory note and interest on it. The interest rate payable under the terms of the promissory note will not be less than the minimum rate (if any) required to avoid the imputation of additional interest under the Code. Subject to the foregoing, the Board (at its sole discretion) will specify the term, interest rate, amortization requirements (if any) and other provisions of the note;

(iv) subject to prior approval by the Board in its discretion, and if the Stock is publicly traded, by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell the Shares and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes;

 

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(v) subject to prior approval by the Board in its discretion, and if the Stock is publicly traded, by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge the Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes; or

(vi) subject to prior approval by the Board in its discretion, any combination of the above methods of payment.

Notwithstanding anything to the contrary in this Section 6, if the Company is a Publicly Held Corporation, any payment by a promissory note or a broker-assisted exercise may be made only if and to the extent that the Company determines that it is permissible under section 402 of the Sarbanes-Oxley Act of 2002 as amended from time to time.

Section 7. Stock Appreciation Rights

(a) Written SAR Agreement. Each SAR will be evidenced by an Award Agreement that will specify the grant price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Board, in its sole discretion, may determine.

(b) Terms of SAR Awards. Subject to the terms of the Plan and any applicable Award Agreement, a SAR granted under the Plan shall confer on the holder thereof a right to receive, upon exercise thereof, the excess of (i) the Fair Market Value of one Share on the date of exercise over (ii) the sum of (A) the grant price of the SAR as specified by the Board in the Award Agreement, which shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the SAR and (B) unless the holder elects to pay such tax in cash, any amount of tax that must be withheld in connection with such exercise. Subject to the terms of the Plan, the grant price, term, methods of exercise, methods of settlement (including whether the Participant will be paid in cash, Shares or any combination thereof), and any other terms and conditions of any SARs shall be determined by the Board. The Board may impose such conditions or restrictions on the exercise of any SARs as it may deem appropriate.

Section 8. Restricted Shares

(a) Written Restricted Share Agreement. The terms and conditions of each grant of Restricted Shares shall be evidenced by an Award Agreement.

(b) Vesting, Payment and Other Terms. Awards of Restricted Shares may be subject to restrictions and vesting conditions, including time-based vesting conditions and/or the attainment of performance-based vesting conditions or Performance Objectives, as determined by the Board and, with regard to Performance Objectives, determined and certified by the Board (in the manner prescribed by Code Section 162(m)). To the extent consistent with the Company’s Bylaws, at the Board’s election, Restricted Shares may be (i) held in book entry form subject to the Company’s instructions until any restrictions relating to the Restricted Shares lapse; or (ii) evidenced by a certificate, which certificate shall be held in such form and manner as determined by the Board. The Restricted Shares will become nonforfeitable at such times and in such manner as the Board determines; provided, however, that, except with respect to Restricted Share awards the Board designates as Qualified Performance Awards, the Board may,

 

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on such terms and conditions as it determines appropriate, accelerate the time at which restrictions or other conditions on such awards of Restricted Shares will lapse. Unless otherwise specified by the Board in the Award Agreement, the Restricted Shares that are subject to restrictions which are not satisfied shall be forfeited and all rights of the Participant to such Shares shall terminate.

(c) Rights as a Stockholder. Unless otherwise specified in the Award Agreement, each Award of Restricted Shares shall constitute an immediate transfer of the record and beneficial ownership of the Restricted Shares to the Participant in consideration of the performance of services as an Employee, Consultant or Director, as applicable, entitling such Participant to all voting, dividends and other ownership rights in such Shares. As specified in the Award Agreement, an Award of Restricted Shares may limit the Participant’s dividend rights during the period in which the Restricted Shares are subject to a “substantial risk of forfeiture” (within the meaning given to such term under Code Section 83) and restrictions on transfer. Rights as a Stockholder. Unless otherwise specified in the Award Agreement, each Award of Restricted Shares shall constitute an immediate transfer of the record and beneficial ownership of the Restricted Shares to the Participant in consideration of the performance of services as an Employee, Consultant or Director, as applicable, entitling such Participant to all voting, dividends and other ownership rights in such Shares. As specified in the Award Agreement, an Award of Restricted Shares may limit the Participant’s dividend rights during the period in which the Restricted Shares are subject to a “substantial risk of forfeiture” (within the meaning given to such term under Code Section 83) and restrictions on transfer. In the Award Agreement, the Board, in its discretion, may apply any other restrictions on the dividend rights that the Board deems appropriate.

(d) Consideration for Restricted Shares. Restricted Shares shall be awarded for no additional consideration or such additional consideration as the Board may determine satisfies Cayman Islands corporate law requirements, which consideration may be less than, equal to or more than the Fair Market Value of the shares of Restricted Shares on the grant date.

Section 9. Restricted Stock Units

(a) Written RSU Agreement. The terms and conditions of each grant of RSUs shall be evidenced by an Award Agreement, including the number of RSUs, the vesting criteria and such other provisions as the Board shall determine. RSUs shall be credited as a bookkeeping entry in the name of the Participant in an account maintained by the Company. No Shares are actually issued to the Participant in respect of RSUs on their date of grant.

(b) Vesting Criteria and Payment Terms. The Board shall set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of RSUs that will be paid out to the Participant. Unless otherwise provided in an Award Agreement, upon meeting the applicable vesting criteria, the Participant shall be entitled to receive a payout as specified in the RSU Award Agreement. At any time after the grant of RSUs, except with respect to RSU awards the Board designates as Qualified Performance Awards, the Board, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout. The Board, in its sole discretion, may pay RSUs in cash or in Shares (or in a combination thereof) that have an aggregate Fair Market Value equal to the value of the

 

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earned RSUs. Payments in settlement of RSUs shall be made not later than the March 15 following the year in which the vesting criteria are met to the extent that such Awards are intended to qualify for the “short-term deferral” exception under Code Section 409A.

(c) Rights as a Stockholder. A Participant shall possess no incidents of ownership with respect to the Shares underlying RSUs granted hereunder.

(d) Dividend Equivalents. At the discretion of the Board, a Participant may be awarded the right to receive Dividend Equivalents, which may be paid currently or credited to an account for the Participant, and may be settled in cash and/or Shares, as determined by the Board in its sole discretion, subject in each case to such terms and conditions as the Board shall establish. Without limiting the generality of the preceding sentence, if RSUs and/or the Dividend Equivalents is designated as a Qualified Performance Award, the Board may apply any restrictions it deems appropriate to the payment of Dividend Equivalents awarded with respect to such RSUs, such that the RSUs and/or Dividend Equivalents maintain eligibility for the Code Section 162(m) performance-based exception.

(e) Cancellation. On the date set forth in the Award Agreement, all unvested RSUs shall be forfeited to the Company.

Section 10. Other Stock-Based Awards

The Board may grant Other Stock-Based Awards that are denominated in, valued in whole or in part by reference to, or otherwise based on or related to, Shares. The purchase, exercise, exchange or conversion of Other Stock-Based Awards and all other terms and conditions applicable to such Awards will be determined by the Board in its sole discretion and set forth in an Award Agreement. Such Awards may be settled in Shares, cash or any combination thereof.

Section 11. Termination Of Service

(a) Termination of Service Before an IPO. If a Participant’s Service terminates for any reason prior to an IPO, any outstanding unexercised or unvested Award awarded to the Participant will expire and be forfeited for no consideration on the date of the Participant’s termination of Service.

(b) Termination of Service Other after an IPO.

(i) Unless otherwise provided in the Award Agreement, upon termination of a Participant’s Service on or following an IPO for any reason other than for death, all unvested portions of any outstanding Awards shall be immediately forfeited without consideration, the vested portion of any outstanding RSUs or Other Stock-Based Awards shall be settled upon termination and the Participant shall have a period of three (3) months (twelve (12) months in the case of termination of Service due to death), commencing with the date the Participant’s Service has terminated, to exercise the vested portion of any outstanding Options or SARs, subject to the term of the Option or SAR. The Participant may exercise all or part of his or her Options or SARs at any time before their expiration under this subsection, but only to the extent that the Options or SARs had become exercisable before the date the Participant’s Service

 

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terminated. Those Options or SARs that are not exercisable immediately before the date of termination of Service will expire on the date of termination of Service. If the Participant dies after the termination of his or her Service but before the expiration of the Participant’s Options or SARs, all or part of the Options or SARs may be exercised (prior to expiration) by the executors or administrators of the Participant’s estate or by any person who has acquired the Options or SARs directly from the Participant by beneficiary designation, bequest or inheritance, or in the case of NQSOs only, by other transfer, if permitted, but in any event only to the extent that the Options or SARs had become exercisable before the Participant’s Service terminated (or became exercisable as a result of the termination of Service).

(ii) Unless otherwise provided in the Award Agreement or in an employment or other compensation agreement between the Participant and the Company or any of its Subsidiaries, for purposes of this Subsection (b), the date of termination of Service occurs on the date the Participant is given notice of termination by the Company, the date in which the Participant gives notice of termination to the Company or the date of death.

(c) Leaves of Absence. Service will be deemed to continue while the Participant is on a bona fide leave of absence for less than six months, or if longer, if the Participant retains a right to reemployment with the Company under an applicable law or under the terms of a contract (as determined by the Company).

Section 12. Adjustment Of Shares; Corporate Events

(a) Capitalization Adjustments. If the outstanding shares of Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, the Board shall make such appropriate and proportionate adjustments as it deems necessary or appropriate in one or more of (i) the number and class of shares subject to the Plan, (ii) the number of shares or class of shares covered by each outstanding Award and (iii) the Exercise Price or grant price under each outstanding Option or SAR.

(b) Corporate Transactions. In the event that the Company is a party to a Change in Control, the Board may provide for any of the following: (i) the cancellation of each outstanding Award after payment to the Participant of an amount, if any, in cash or cash equivalents equal to (x) the Fair Market Value of the Shares subject to the Award at the time of the merger, consolidation or other reorganization minus, in the case of an Option or SAR, (y) the Exercise Price and grant price of the Shares subject to the Option or SAR; (ii) the assumption or continuation by any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) of any or all Awards outstanding under the Plan or substitution of similar awards for Awards outstanding under the Plan (including but not limited to, awards to acquire the same consideration paid to the stockholders of the Company pursuant to the Change in Control), and any assignment by the Company to the successor of the Company (or the successor’s parent company, if any) of any reacquisition or repurchase rights held by the Company in respect of Shares issued pursuant to Awards, in connection with such Change in Control, provided that the terms of any assumptions, continuation or substitution shall be in accordance with the requirements of Code Section 409A or 424; (iii) the acceleration of

 

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exercisability or vesting of all or a portion of the Awards (in full or in part) to a date prior to the effective time of such Change in Control (contingent upon the effectiveness of the Corporate Transaction) as the Board shall determine, and (iv) termination of Awards if not exercised (if applicable) at or prior to the effective time of the Change in Control, and lapse of any reacquisition or repurchase rights held by the Company with respect to such Awards (contingent upon the effectiveness of the Corporate Transaction).

(c) Reservation of Rights. Except as provided elsewhere in this Plan, a Participant has no rights by reason of (i) any subdivision or consolidation of shares of any class, (ii) the payment of any dividend or (iii) any other increase or decrease in the number of shares of any class. Any issuance by the Company of shares of Stock of any class, or securities convertible into shares of Stock of any class, will not affect the number of Shares subject to an Award or the Exercise Price or grant price of Shares subject to an Option or SAR. The grant of an Award under the Plan will not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets.

Section 13. Performance Awards

(a) Performance Rules. Subject to the terms of the Plan, the Board will have the authority to establish and administer performance-based grant and/or vesting conditions and Performance Objectives with respect to such Awards as it considers appropriate, which Performance Objectives must be satisfied, as the Board specifies, before the Participant receives or retains an Award or before the Award becomes nonforfeitable. Where such Awards are granted to Covered Employees within the meaning of Code Section 162(m), and the Company is a Publicly Held Corporation, the Board (as described in Section 3(b) of the Plan) may designate any Awards, at the time of grant as Qualified Performance Awards in which case the provisions of the Awards are intended to conform with all provisions of Code Section 162(m) to the extent necessary to allow the Company to claim a U.S. federal income tax deduction for the Awards as “qualified performance-based compensation.” However, the Board retains the discretion to grant Awards that do not so qualify and to determine the terms and conditions of such Awards including the Performance Objectives or other performance-based vesting conditions that shall apply to such Awards. Notwithstanding satisfaction of applicable Performance Objectives, to the extent specified on the date of grant of an Award, the number of Shares or other benefits received under an Award that are otherwise earned upon satisfaction of such Performance Objectives may be reduced by the Board (but not increased) on the basis of such further considerations that the Board in its sole discretion shall determine. No Qualified Performance Award shall be granted or vest, as applicable, unless and until the date that the Board has certified, in the manner prescribed by Code Section 162(m), the extent to which the Performance Objectives for the Performance Period have been attained and has made its decisions regarding the extent, if any, of a reduction of such Award.

(b) Performance Objective. Performance Objectives will be based on one or more of the following performance-based measures determined based on the Company and its Subsidiaries on a group-wide basis or on the basis of Subsidiary, business platform, or operating unit results: (i) earnings per share (on a fully diluted or other basis), (ii) pretax or after tax net

 

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income, (iii) operating income, (iv) gross revenue, (v) profit margin, (vi) stock price targets or stock price maintenance, (vi) working capital, (vii) free cash flow, (viii) cash flow, (ix) return on equity, (x) return on capital or return on invested capital, (xi) earnings before interest, taxes, depreciation, and amortization (EBITDA), (xii) strategic business criteria, consisting of one or more objectives based on meeting specified revenue, market penetration, geographic business expansion goals, cost targets, or objective goals relating to acquisitions or divestitures, or (xiv) any combination of these measures. The Board shall determine whether such Performance Objectives are attained, and such determination will be final and conclusive. Each Performance Objective may be expressed in absolute and/or relative terms, may be based on or use comparisons with internal targets, the past performance of the Company (including the performance of one or more Subsidiaries, divisions, business platforms, and/or operating units) and/or the past or current performance of other companies. In the case of earnings-based measures, Performance Objectives may use comparisons relating to capital (including, but not limited to, the cost of capital), shareholders’ equity and/or shares outstanding, or to assets or net assets. If the Board determines that a change in the business, operations, corporate structure or capital structure of the Company or the manner in which the Company or a Subsidiary conducts its business, or other vents or circumstances render performance goals to be unsuitable, the Board may modify such Performance Objectives in whole or in part, as the Committee deems appropriate. If a Participant is promoted, demoted or transferred to a different business unit or function during a Performance Period, the Board may determine that the Performance Objectives or Performance Period are no longer appropriate and may (i) adjust, change or eliminate the Performance Objectives or the applicable Performance Period as it deems appropriate to make such objectives and period comparable to the initial objectives and period, or (ii) make a cash payment to the participant in amount determined by the Board. The foregoing two sentences shall not apply with respect to Qualified Performance Awards. In respect of Qualified Performance Awards, Performance Objectives shall be established no later tan ninety (90) days after the beginning of any performance period applicable to such Awards, or at such other date as may be required or permitted for “performance-based compensation” under Code Section 162(m).

Section 14. Conditions Upon Issuance Of Shares

(a) Securities Law Requirements. Shares may not be issued under the Plan unless the issuance and delivery of these Shares comply with (or are exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated under it, state and federal securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company’s securities then may be traded.

(b) Investment Representations. As a condition to the exercise of an Option, the Board may require the person exercising the Option to represent and warrant at the time of exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute the Shares if, in the opinion of counsel for the Company, such a representation is required.

(c) Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the

 

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Company’s counsel to be necessary to the lawful issuance and sale of any Shares under this Plan, will relieve the Company of any liability in respect of the failure to issue or sell those Shares as to which the requisite authority has not been obtained.

(d) Lock-Up Period; Insider Information. By accepting any Award, the Participant shall be deemed to have agreed that, if so requested by the Company or any representative of the underwriters (the “Managing Underwriter”) in connection with any registration of the offering of any securities of the Corporation under the Securities Act of 1933 as amended (“Securities Act”) the Participant shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the “Market Standoff Period”) following the effective date of a registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration statement of the Corporation to become effective under the Securities Act that includes securities to be sold on behalf of the Corporation in an underwritten public offering under the Securities Act. The Corporation may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of the Market Standoff Period. By accepting any Award, the Participant also shall be deemed to have agreed to abide by the Company’s inside information guidelines, including any prohibitions on the sale or transfers of any Shares or other securities of the Company during “blackout periods,” as provided therein. Notwithstanding any other provision of this Plan all Awards shall be immediately forfeited at the option of the Board in the event of the Participant purchasing or selling securities of the Company without written authorization in accordance with the Company's inside information guidelines then in effect.

Section 15. Withholding Taxes

As a condition to the grant, exercise of, issuance of Stock under, or other settlement of an Award, the Participant will make such arrangements as the Board may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such grant, exercise, issuance or other settlement.

Section 16. Nontransferability of Awards and Shares

Except as the Board may otherwise determine or provide in an Award Agreement, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. If necessary to comply with Rule 16b-3 under the Exchange Act, the Participant may not transfer or pledge Shares acquired under an Award until at least six months have elapsed from (but excluding) the date of grant of the Award, unless the Board approves otherwise in advance. Any Shares issued in respect of an Award may be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Board may determine. These restrictions will be set forth in the applicable Award Agreement and will apply in addition to any restrictions that may apply to holders of Shares generally. The Company will be under no obligation to sell or deliver Shares covered by an Award under the Plan unless the Participant executes an agreement giving effect to the restrictions in the form prescribed by the Company.

 

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Section 17. No Retention Rights

Nothing in the Plan or in any Award granted under the Plan will confer on the Participant any right to continue in Service for any period of time or will interfere with or otherwise restrict in any way the rights of the Company (or any Subsidiary) or of the Participant, which rights are expressly reserved by each, to terminate his or her Service at any time and for any reason.

Section 18. Duration And Amendments

(a) Term of the Plan. Subject to the approval of the Company’s shareholders, the Plan is effective on November 2, 2007, the date of its adoption by the Board. If the shareholders fail to approve the Plan within 12 months after its adoption by the Board, any grants of Awards that already have occurred will be rescinded, and no additional grants will be made. The Plan will terminate automatically on November 1, 2017, 10 years after its adoption by the Board, and may be terminated on any earlier date pursuant to subsection (b) below.

(b) Right to Amend or Terminate the Plan. The Board may amend, suspend or terminate the Plan at any time and for any reason. However, (i) any amendment of the Plan that increases the number of Shares available for issuance under the Plan (except as provided in Section 12), or that materially changes the class of persons who are eligible for the grant of Awards, is subject to the approval of the Company’s shareholders and (ii) no amendment shall be effective unless approved by the shareholders of the Company to the extent shareholder approval is necessary to satisfy the listing requirements of any stock exchange on which the Shares are traded or applicable law. The Board, in its sole discretion, may submit any other amendment to the Plan for shareholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Code Section 162(m) and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers.

(c) Right to Amend Awards. The Board at any time, and from time to time, may amend the terms of any one or more Awards; provided, however, that the rights under any Award shall not be impaired by any such amendment without the consent of the Participant.

(d) Effect of Amendment or Termination. No Shares will be issued or sold under the Plan after its termination, except on exercise of an Option granted prior to the termination. No amendment, suspension, or termination of the Plan will, without the consent of the Participant, alter or impair any rights or obligations under any Award previously granted under the Plan.

(e) Compliance with Code Section 409A. It is intended that the Awards granted under the Plan shall be exempt from, or in compliance with Code Section 409A. In the event any of the Awards issued under the Plan are subject to Code Section 409A it is intended that no payment or entitlement pursuant to this Plan will give rise to any adverse tax

 

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consequences to a Participant under Code Section 409A and regulations and other interpretive guidance issued thereunder, including that issued after the date hereof (collectively, “Section 409A”). The Plan shall be interpreted to that end and, consistent with that objective and notwithstanding any provision herein to the contrary, the Company may unilaterally take any action it deems necessary or desirable to amend any provision herein to avoid the application of or excise tax under Section 409A. Further, no effect shall be given to any provision herein in a manner that reasonably could be expected to give rise to adverse tax consequences under that provision. Neither the Company nor its current employees, officers, directors, representatives or agents shall have any liability to any current or former Participant with respect to any accelerated taxation, additional taxes, penalties or interest for which any current or former Participant may become liable in the event that any amounts payable under the Plan are determined to violate Section 409A.

Section 19. Applicable Law

The Plan and all Options granted under it will be construed and interpreted in accordance with, and governed by, the laws of the Cayman Islands, other than its laws regarding choice of law.

Section 20. Execution

To record the adoption of the Plan by the Board, the Company has caused its authorized officer to execute it.

 

 

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Exhibit 10.3

EXECUTION COPY

XINYUAN REAL ESTATE CO., LTD.

SECURITIES PURCHASE AGREEMENT (THE “AGREEMENT”)

April 13, 2007

Merrill Lynch International

Merrill Lynch Financial Center

2 King Edward Street

London EC1A 1HQ

England

Ladies and Gentlemen:

Xinyuan Real Estate Co., Ltd., a company incorporated with limited liability in the Cayman Islands (the “Company”), Xinyuan Real Estate, Ltd., a company incorporated with limited liability in the Cayman Islands, which is a 100% owned subsidiary of the Company (the “Cayman Subsidiary”), and the other Group Companies (as defined in Section 4 hereof) and Mr. ZHANG Yong and Ms. YANG Yuyan (together with Mr. ZHANG Yong, the “Controlling Shareholders”) hereby agree with the Purchaser (as defined below) as follows:

1. Authorization and Issuance of Securities.

The Company has authorized the issuance and sale of either:

 

(a)

(x) up to 750 Units (the “Units”) each consisting of a US$100,000 principal amount Senior Floating Rate Note due 2010 (a “HY Note”) and one warrant (a “Warrant”) representing the right to purchase a certain number of the Company’s common shares, par value US$ 0.0001 (the “Common Shares”), as calculated in the Warrant Agreement (as defined below), and (y) US$25,000,000.00 aggregate principal amount of its 2% Convertible Subordinated Notes due 2012 with principal amount of US$100,000 each (the “Convertible Notes”, and together with the HY Notes, the “Notes”), convertible into Common Shares at an initial conversion rate of 38,388.48 Common Shares per US$100,000 Note; or

 

(b)

up to 1,000 Units.

Subject to the terms and conditions of this Agreement, the Company will, at the Closing provided for in Section 3 hereof, issue and sell to Merrill Lynch International (the “Purchaser”) and the Purchaser will purchase from the Company, either (i) 250 Units at the purchase price of $24,812,500.00, or (ii) US$25,000,000.00 aggregate principal amount of Convertible Notes at the purchase price of $25,000,000.00 (with the actual purchase price actually paid referred to as the “Purchase Price”). In furtherance of the foregoing, no later than two (2) Business Days prior to the Closing, Purchaser will notify the Company in writing of its intention to purchase either the Units or the Convertible Notes, and thereafter, Schedule I hereto shall be revised to reflect the actual number of Units or Convertible Notes, as the case may be, to be purchased at the Closing.

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Contemporaneously with entering into this Agreement, the Company is entering into separate Securities Purchase Agreements (the “Other Agreements”) substantially similar to this Agreement with each of the other purchasers named in Schedule I (the “Other Purchasers”), providing for (i) the sale at the “Closing Date” (as set forth in the Other Agreements) to each of the Other Purchasers of the Units specified opposite its name in Schedule I. The Purchaser’s obligation hereunder and the obligations of the Other Purchasers under the Other Agreements are several and not joint obligations and the Purchaser shall have no obligation under any Other Agreement and no liability to any Person for the performance or non-performance by any Other Purchaser thereunder.

The HY Notes are to be issued pursuant to the provisions of an indenture (the “HY Note Indenture”), to be dated as of April 13, 2007 (the “Initial Closing Date”), by and between the Company, and The Hongkong and Shanghai Banking Corporation Limited, as trustee (the “Trustee”), substantially in the form attached hereto as Exhibit A-1, and the Convertible Notes are to be issued pursuant to the provisions of an indenture (the “Convertible Note Indenture”, and together with the HY Note Indenture, the “Indentures”), to be dated as of the Initial Closing Date, by and between the Company and the Trustee, substantially in the form attached hereto as Exhibit A-2. The Warrants will be issued pursuant to the provisions of a warrant agreement (the “Warrant Agreement”), to be dated as of Initial Closing Date, by and between the Company and The Hongkong and Shanghai Banking Corporation Limited, as the warrant agent, substantially in the form attached hereto as Exhibit B. As used herein, the term “Securities” shall mean, collectively, the Notes, the Warrants, the Common Shares issuable upon the conversion of the Convertible Notes (the “Conversion Shares”), the Common Shares issuable upon the exercise of the Warrants (the “Warrant Shares”) and the Guarantees (as defined below), if any.

Capitalized terms used but not defined herein shall have the meanings given to such terms in the Indentures.

2. Terms of Offering. Pursuant to the Indentures, the Company shall cause all future direct and indirect subsidiaries of the Company (each, a “Guarantor”), but not including any subsidiaries of the Company organized in the People’s Republic of China (“PRC”) unless a change in PRC law or interpretation in PRC law permits such guarantees without government approval, to irrevocably and unconditionally guarantee to the Purchaser, the Other Purchasers and to the Trustee the payment and performance of the Company’s obligations under the HY Notes on a senior secured basis, and the Convertible Notes on a subordinated basis (collectively, the “Guarantees”).

The HY Notes will be secured by (i) a perfected first-priority Lien on all of the equity interests of the Cayman Subsidiary pursuant to a share pledge agreement to be dated as of the Initial Closing Date among The Hongkong and Shanghai Banking Corporation Limited, as the collateral agent (in such capacity, the “Offshore Collateral Agent”), the Company and the Cayman Subsidiary, substantially in the form attached hereto as Exhibit C-1 (the “Offshore Share Pledge Agreement”), (ii) subject to the approval of the requisite Governmental Authority and only to the extent permissible and reasonably practicable on or before October 30, 2007, a perfected Lien on all of the equity interests of the WFOE (as defined below) pursuant to a share pledge agreement between The Hongkong and Shanghai Banking Corporation Limited, as the collateral agent (in such capacity, the “Onshore Collateral Agent”) and the Cayman Subsidiary, substantially in the form attached hereto as Exhibit C-2 (the “Onshore Share Pledge Agreement”), and (iii) subject to the approval of the requisite Governmental Authority and only to the extent permissible and reasonably practicable and on or before June 30, 2007, a perfected Lien on the loan receivables, if any, payable by the WFOE to the Cayman Subsidiary pursuant to a Pledge and Security Agreement to be dated as of the Initial Closing Date between The Hongkong and Shanghai Banking Corporation Limited, as the collateral agent (in such capacity, the “Note Collateral Agent”, together with the Offshore Collateral Agent and the Onshore Collateral Agent, the “Collateral Agents”)

 

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and the Cayman Subsidiary, substantially in the form attached hereto as Exhibit C-3 (the “Note Pledge Agreement”, together with the Offshore Share Pledge Agreement and the Onshore Share Pledge Agreement, the “Security Documents”). The Convertible Notes will be secured by (x) a perfected second-priority Lien on all the equity interests of the Cayman Subsidiary pursuant to the Offshore Share Pledge Agreement, (y) subject to the approval of the requisite Governmental Authority and only to the extent permissible and reasonably practicable on or before October 30, 2007, a perfected Lien on all of the equity interests of the WFOE (as defined below) pursuant to the Onshore Share Pledge Agreement that will be subordinate to the rights of the holders of the HY Notes pursuant to an intercreditor agreement, substantially in the form attached hereto as Exhibit D (the “Intercreditor Agreement”), and (z) subject to the approval of the requisite Governmental Authority and only to the extent permissible and reasonably practicable and on or before June 30, 2007, a perfected Lien on the loan receivables, if any, payable by the WFOE to the Company pursuant to the Note Pledge Agreement that will be subordinate to the rights of the holders of the HY Notes pursuant to the Intercreditor Agreement.

The Units and the Convertible Notes will be offered and sold to the Purchaser pursuant to Regulation S of the U.S. Securities Act of 1933, as amended (the “Act”). Upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Act, the Units, the Convertible Notes, the Warrant Shares and the Conversion Shares shall bear the legends relating to the offer and the sale of the Notes, the Warrant Shares and the Conversion Shares as required by Regulation S under the Act or any other applicable laws or regulations relating to the issuance of the Securities.

The Company has prepared a private placement memorandum, dated April 2007 (including all annexes, exhibits and schedules thereto and any amendment or supplement thereto, the “Offering Memorandum”) relating to the offer and sale of the Units and the Convertible Notes.

Holders of the Warrant Shares and Conversion Shares will have the registration rights set forth in the equity registration rights agreement (the “Registration Rights Agreement”) to be dated the Initial Closing Date among the Company, the holders of the Units and the holders of the Convertible Notes in the form attached hereto as Exhibit E.

This Agreement, the Indentures, the Notes, the Guarantees, the Security Documents, the Warrant Agreement, the Registration Rights Agreement, and the account agreement to be entered into by and among the WFOE, Industrial and Commercial Bank of China and the Trustee dated the Initial Closing Date in the form attached hereto as Exhibit F (the “Onshore Account Agreement”) are, collectively, referred to herein as the “Documents.”

3. Purchase, Sale and Delivery. The issuance and sale of the Units or the Convertible Notes, as the case may be, to be purchased by the Purchaser pursuant to this Agreement shall occur at the Shanghai office of Weil, Gotshal & Manges LLP, at 4:00 p.m., Shanghai time, at a closing (the “Closing”) on April 20, 2007 or on such other Business Day thereafter as may be agreed upon in writing by the Company and the Purchaser (such date referred to herein as the “Closing Date”). At the Closing, the Company shall deliver to the Purchaser one or more global certificates representing each of the HY Notes and Warrants or the Convertible Notes, as the case may be, registered in such names and denominations as the Purchaser may request (on not less than two (2) Business Days prior written notice to the extent such name is different from the Purchaser), against payment by the Purchaser of the aggregate Purchase Price in the amount set forth opposite such Purchaser’s name on Schedule I by immediately available federal funds bank wire transfer to such bank account or accounts as the Company shall have theretofore designated to the Purchaser. The HY Notes, and Warrants or the Convertible Notes, as the case may be, each to be represented by one or more global certificates in book-entry form,

 

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will be deposited on the Closing Date, by or on behalf of the Company, with the Trustee as common depositary for Clearstream Banking, societe anonyme (or any successor securities agency) (“Clearstream”) and Euroclear Bank, S.A./N.V. (or any successor securities clearing agency) (“Euroclear”, together with Clearstream, the “Clearing Facilities”), or its designated custodian, and registered in the name of the Trustee for further credit to Purchaser’s account. If at the Closing the Company shall fail to tender such Securities to the Purchaser as provided above in this Section 3, or any of the conditions to be fulfilled by the Company specified in Section 7(i) hereof shall not have been fulfilled to the satisfaction of the Purchaser, the Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights the Purchaser may have by reason of such failure or such nonfulfillment. If, subject to the satisfaction (or waiver by the Purchaser) by the Company of all of the conditions specified in Section 7(i), at the Closing, the Purchaser shall fail to make payment of the Purchase Price to, or as directed by, the Company as provided above in this Section 3, or any of the other conditions to be fulfilled by the Purchaser specified in Section 7(ii) shall not have been fulfilled to the satisfaction of (or waived by) the Company, the Company shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights the Company may have by reason of such failure or such non-fulfillment.

4. Representations and Warranties of the Group Companies and the Controlling Shareholders. Each of the Company, the Cayman Subsidiary, Xinyuan (China) Real Estate Co., Ltd., a wholly-owned subsidiary of the Company, incorporated under the laws of the People’s Republic of China (the “WFOE”) and the other Group Companies listed on Schedule II attached hereto (together with the Company, the Cayman Subsidiary, the WFOE and any other Subsidiary (as defined in Section 4(b)(i) below), the “Group Companies”) and the Controlling Shareholders, jointly and severally, represents and warrants to the Purchaser that, except as set forth in the disclosure schedule (the “Disclosure Schedule”) attached hereto as Exhibit G which exceptions shall be deemed to part of the representations and warranties made hereunder, the following representations and warranties are true and correct and will on the Closing Date be true and correct. The Disclosure Schedule shall be arranged in sections corresponding to the numbered and lettered sections contained in this Section 4.

 

(a)

Intentionally Omitted.

 

(b)

Ownership of Shares of Subsidiaries.

 

(i)

Schedule 4(b)(i) of the Disclosure Schedule contains (except as noted therein) complete and correct lists of each individual partnership, limited liability company, joint venture, corporation, association, trust or any other entity or organization (collectively, a “Person”) in which the Company (i) owns, directly or indirectly, a majority of its capital stock or similar equity interests or (ii) otherwise maintains, directly or indirectly, control over management, operations and decision-making processes (each, a “Subsidiary” and collectively, the “Subsidiaries”), showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary.

 

(ii)

All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 4(b)(i) of the Disclosure Schedule as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and non-assessable and are owned by the Company or another Subsidiary free and clear of any Lien.

 

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(iii)

No Subsidiary is a party to, or otherwise subject to any legal or regulatory restriction or any agreement (other than this Agreement, the restrictions disclosed in Schedule 4(b)(iii) of the Disclosure Schedule, and limitations imposed by corporate law statutes) restricting the ability of such Subsidiary to pay dividends or make any other similar distributions to the Company or any of its Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Subsidiary.

 

(iv)

Schedule 4(b)(iv) of the Disclosure Schedule shows the correct names of the Group Companies, the jurisdictions of their respective organizations, and the percentage of shares of each class of their respective capital stock or similar equity interests outstanding owned by their respective shareholders. All of the outstanding shares of capital stock or similar equity interests of the Group Companies shown in Schedule 4(b)(iv) of the Disclosure Schedule as being owned by their respective shareholders have been validly issued, are fully paid and non-assessable and are owned by such shareholders free and clear of any Lien. Except pursuant to the Controlling Shareholders’ ownership interest in the Company or as otherwise set forth on Schedule 4(b)(iv) of the Disclosure Schedule, none of directors or executive officers of the Group Companies holds, directly or indirectly, any beneficial ownership interest in any of the Subsidiaries.

 

(v)

Except for the Company’s indirect ownership interest of forty-five percent (45%) of the total equity interest of Zhenzhou Jiantou Xinyuan Real Estate Co., Ltd. (the “JV”), the Company does not, directly or indirectly, beneficially own or control a minority interest in any other joint venture. All of the outstanding equity interests of the JV beneficially owned by the Company have been validly issued, are fully paid and non-assessable and are free and clear of any Lien.

 

(c)

Organization. Each of the Group Companies (i) has been duly organized, is validly existing and is in good standing (if applicable) under the laws of its jurisdiction of organization, (ii) has all requisite power and authority to carry on its business and to own, lease and operate its properties and assets, and (iii) is duly qualified or licensed to do business and is in good standing (if applicable) as a foreign corporation or limited liability company, as the case may be, authorized to do business in each jurisdiction in which the nature of such business or the ownership or leasing of such properties requires such qualification, except where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on (A) the properties, business, prospects, operations, earnings, assets, liabilities or condition (financial or otherwise) of the Group Companies, taken as a whole, (B) the ability of any of the Group Companies to perform their respective obligations under any Document or (C) the validity or enforceability of any of the Documents or the consummation of any of the transactions contemplated therein (each, a “Material Adverse Effect”).

 

(d)

Capitalization and Voting Rights.

 

(i)

Capital Stock. The authorized capital of the Company consists, immediately prior to the Closing, of (i) Four Hundred Fifty Million (450,000,000) Common Shares, of which Seventy Five Million Seven Hundred Four Thousand Three Hundred Seventy-Nine (75,704,379) shares are issued and outstanding immediately prior to the Closing, and (ii) Fifty Million (50,000,000) shares of preferred stock of which Thirty Million Eight Hundred Five Thousand Four Hundred (30,805,400) shares of preferred stock are issued and outstanding.

 

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(ii)

Issued Shares. As at the date hereof and immediately prior to the Closing, the aggregate number of Common Shares issued and which are issuable pursuant to any exercise, conversion, exchange, subscription or otherwise in connection with any warrants, options (including pursuant to the Company’s stock option plan), convertible securities or any agreement to sell or issue Common Shares or securities which may be exercised, converted or exchanged for Common Shares (collectively, “Fully-Diluted”) is One Hundred Fifteen Million One Hundred Sixty Five Thousand Four Hundred Forty Five (115,165,445). The Conversion Shares issuable upon conversion of the Convertible Notes and the Warrant Shares issuable upon exercise of the Warrants have been duly reserved for issuance. All of the issued and outstanding shares of each of the Group Company’s shares as of the Closing are duly authorized, validly issued, fully paid and non-assessable, were issued in accordance with the registration or qualification provisions of the Act and any relevant blue sky laws of the United States of America or pursuant to valid exemptions therefrom and were issued in compliance with other applicable laws (including, without limitation, applicable PRC laws, rules and regulations) and are not subject to any rescission right or put right on the part of the holder thereof nor does any holder thereof have the right to require the Company to repurchase such share capital.

 

(iii)

Voting and other Agreements. Except as set forth on Schedule 4(d)(iii) of the Disclosure Schedule, there are no outstanding (A) options, warrants or other rights to purchase from any Group Company, (B) agreements, contracts, arrangements or other obligations of any Group Company to issue, or (C) other rights to convert any obligation into or exchange any securities for, in the case of each of clauses (A) through (C), shares of capital stock of, or other ownership or equity interests in, any Group Company. Except as disclosed in Schedule 4(d)(iii) of the Disclosure Schedules, none of the Group Companies is a party or subject to any agreement or understanding, and, to the Company’s knowledge after due inquiry, there is no agreement or understanding with any Person that affects or relates to (i) the voting or giving of written consents with respect to any security of any of the Group Companies (including, without limitation, any voting agreements, voting trust agreements, shareholder agreements or similar agreements) or the voting by a director of any of the Group Companies or (ii) the sale, transfer or other disposition with respect to any security of the Company.

 

(e)

No Registration Rights. Except as set forth on Schedule 4(e) of the Disclosure Schedule, no holder of securities of any of the Group Companies is or will be entitled to have any registration rights with respect to such securities.

 

(f)

Authorization and Execution. Each of the Group Companies has all requisite corporate power and authority to execute, deliver and perform its obligations under each of the Documents to which it is a party and to consummate the transactions contemplated thereby. This Agreement has been duly authorized, executed and delivered by the Group Companies and the Controlling Shareholders. Each of the Documents has been duly authorized and when executed and delivered by the Group Companies and the Controlling Shareholders (to the extent it is a party thereto) shall constitute a legal, valid and binding obligation of each of the Group Companies and the Controlling Shareholders (to the extent it is a party thereto) enforceable against each of the Group Companies and the Controlling Shareholders (to the extent it is a party thereto) in accordance with its terms, except to the extent the indemnification provisions contained in Section 8 of this Agreement or in the Registration Rights Agreement may be limited by applicable securities laws.

 

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(g)

Valid Issuance of Notes. Each of the HY Notes and the Convertible Notes, when issued, sold and delivered in accordance with the terms thereof and for the consideration set forth herein, will be free of restrictions on transfer, other than restrictions on transfer under applicable securities laws. Assuming the accuracy of the Purchaser’s representations in Section 6 below, the Securities will be issued in compliance with applicable securities laws. The HY Notes, when issued, will be in the form contemplated by the HY Note Indenture, and the Convertible Notes, when issued, will be in the form contemplated by the Convertible Note Indenture. Each of the HY Notes and the Convertible Notes has been duly authorized by the Company and, when executed and delivered by the Company, authenticated by the Trustee and delivered to the Purchaser in accordance with the terms of this Agreement and its respective Indenture, such Notes will have been duly executed, issued and delivered by the Company and will constitute legal, valid and binding obligations of the Company, entitled to the benefits of its respective Indenture and, in the case of the Convertible Notes, the Registration Rights Agreement, and enforceable in each case against the Company in accordance with their terms.

 

(h)

Valid Issuance of Conversion Shares, Warrants and Warrant Shares.

 

(i)

The Conversion Shares have been duly and validly authorized for issuance by the Company, and when issued pursuant to the terms of the Convertible Note Indenture, will be validly issued, fully paid and non-assessable, not subject to any preemptive or similar rights, free from all taxes, Liens, charges and security interests with respect to the issuance thereof and free of restrictions on transfer other than as expressly contemplated by the Documents.

 

(ii)

The Warrants, when issued, will be in the form contemplated by the Warrant Agreement. The Warrants have been duly and validly authorized for issuance by the Company, and, when executed and delivered by the Company, authenticated by the Warrant Agent and delivered to the Purchaser, in accordance with the terms of this Agreement and the Warrant Agreement, the Warrants will have been duly executed, issued and delivered by the Company and will constitute legal, valid and binding obligations of the Company, entitled to the benefits of the Warrant Agreement and the Registration Rights Agreement and enforceable against the Company in accordance with their terms.

 

(iii)

The Warrant Shares have been duly and validly authorized for issuance by the Company, and when issued pursuant to the terms of the Warrants and the Warrant Agreement, will be validly issued, fully paid and non-assessable, not subject to any preemptive or similar rights, free from all taxes, Liens, charges and security interests with respect to the issuance thereof and free of restrictions on transfer other than as expressly contemplated by the Documents.

 

(i)

Compliance with Instruments. None of the Group Companies is in violation of its respective certificate of incorporation, articles of association, by-laws or other organizational documents (the “Charter Documents”). Except as disclosed in Schedule 4(i) of the Disclosure Schedule, none of the Group Companies is, nor does any condition exist (nor will exist with the passage of time or otherwise) that could reasonably be expected to cause any of the Group Companies to be, (i) in violation of any statute, rule, regulation, law or ordinance, or any

 

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judgment, decree or order applicable to any of the Group Companies or any of their properties (collectively, “Applicable Law”) of any Cayman Islands, PRC national, provincial, local or other governmental authority, governmental or regulatory agency or body, court, arbitrator or self-regulatory organization of applicable jurisdictions, domestic or foreign (each, a “Governmental Authority”), or (ii) in breach of or in default (or subject to acceleration any Debt) under any bond, debenture, note or other evidence of indebtedness, indenture, mortgage, deed of trust, lease or any other agreement or instrument to which any of them is a party or by which any of them or their respective property is bound (collectively, “Applicable Agreements”), provided further that each of the violations, breaches or defaults disclosed in Schedule 4(i) of the Disclosure Schedules do not, or would not, have a Material Adverse Effect.

 

(j)

No Conflicts. Neither the execution, delivery or performance of any of the Documents, the issuance of the Notes or the Warrants, nor the consummation of any of the transactions contemplated herein or therein will conflict with, violate, constitute a breach of or a default (nor will with the passage of time or otherwise) under, require the consent of any person or a Governmental Authority (other than consents already obtained and in full force and effect) or result in the imposition of a Lien (other than a Lien arising under the Security Documents and the transactions contemplated by this Agreement) on any assets of any of the Group Companies under or pursuant to (i) the Charter Documents, (ii) any Applicable Agreement, or (iii) any Applicable Law, other than in each of clause (ii) and (iii) such violations, breaches or defaults that would not, individually or in aggregate, have a Material Adverse Effect. After consummation of the transactions contemplated in the Documents, no Default or Event of Default will exist under either Indenture.

 

(k)

Security Interest/Security Documents.

 

(i)

When executed and delivered, the Offshore Share Pledge Agreement will create valid and enforceable first-priority (in the case of the HY Notes) and second-priority (in the case of the Convertible Notes) security interests in favor of the Offshore Collateral Agent in all of the “Pledged Collateral” (as defined therein)), which security interests will secure the repayment of the HY Notes and the Convertible Notes, respectively, and the other obligations purported to be secured thereby. As of the Closing Date, the pledgors under the Offshore Share Pledge Agreement will own the Pledged Collateral free and clear of all Liens (except for Liens arising by operation of law and Liens arising under the Offshore Share Pledge Agreement).

 

(ii)

When executed and delivered, and subject to the approval by relevant Governmental Authority as contemplated under Section 5(j) hereof, (x) the Onshore Share Pledge Agreement will create valid and enforceable security interests in favor of the Onshore Collateral Agent in all the equity interests in the WFOE and (y) the Note Pledge Agreement will create valid and enforceable security interests in favor of the Note Collateral Agent in all the “Collateral” as defined therein, in each case, which security interests will secure the repayment of the HY Notes and the Convertible Notes, respectively, and the other obligations purported to be secured thereby. When each of the Onshore Share Pledge Agreement and the Note Pledge Agreement is filed with, and approved by, the relevant Governmental Authority pursuant to Section 5(j) hereof, the security interests represented thereby will be perfected.

 

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(l)

Governmental Consents. No filing with, consent, approval, authorization or order of, any Governmental Authority is required for (i) the valid execution, delivery and performance by any of the Group Companies of the Transaction Documents, (ii) the offer, sale, issuance or delivery of the HY Notes, the Warrants, the Warrant Shares, the Convertible Notes, the Conversion Shares, or the Guarantees or (iii) the consummation of the transactions contemplated by the Documents, except (x) as have been obtained or will have been obtained on or before the Closing Date, or (y) as may be necessary to perfect security interests granted pursuant to the Security Documents, and (z) as may be required under the Act or applicable securities laws.

 

(m)

Proceedings. There is no action, claim, suit, demand, hearing, notice of violation or deficiency, or proceeding, domestic or foreign (collectively, “Proceedings”), pending or, to the knowledge of the Company, threatened, that (X) seeks to restrain, enjoin, prevent the consummation of, or otherwise challenges any of the Documents or any of the transactions contemplated therein. None of the Group Companies is subject to any judgment, order or decree or (Y) would otherwise have or could be reasonably expected to have a Material Adverse Effect.

 

(n)

Permits. Each of the Group Companies possesses all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and has made all declarations and filings with, all Governmental Authorities, presently required or necessary to own or lease, as the case may be, and to operate their respective properties and to carry on their respective businesses as now conducted (“Permits”). All of the Permits are valid and in full force and effect. Each of the Group Companies has fulfilled and performed all of its respective obligations with respect to such Permits and no event has occurred which allows, or after notice or lapse of time could allow, revocation or termination thereof or result in any other material impairment of the rights of the holder of any such Permit. None of the Group Companies has received notice of any Proceeding relating to revocation or modification of any such Permit.

 

(o)

Title to Property. Each of the Group Companies has good and marketable title to all real property and personal property owned by it, in each case free and clear of any Liens, except such Liens as permitted under the Documents. For the real property not owned by any of the Group Companies and currently used or planned to be used for the business operations of the Group Companies, each of such Group Companies has good and marketable title to all leasehold estates in real and personal property being leased by it and, in each case free and clear of all Liens as of the Closing Date. Except as would not have a Material Adverse Effect on the Group Companies as a whole, (i) no default (or event which with notice or lapse of time, or both, would constitute such a default) by any of the Group Companies has occurred and is continuing under any of such leases, tenancies, licenses, concessions or agreements, (ii) there are no grounds for rescission, avoidance or repudiation of any of such leases, tenancies, licenses, concessions or agreements, and (iii) no notice of termination or of intention to terminate has been received in respect of any thereof, with such exceptions as are not material and do not materially interfere with the uses made or proposed to be made by such real property and buildings by the Group Companies. None of the Group Companies has received any written or actual notice of any claim of any nature that has been asserted by anyone adverse to the rights of a Group Company under any leases, tenancies, licenses, concessions or agreements or affecting the rights of a Group Company to the continued possession of such property or material assets, with such exceptions as are not material and

 

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do not materially interfere with the uses made or proposed to be made by such real property or assets by the Group Companies. The ownership of and the right to use the land and buildings owned or used by the Group Companies are not subject to any materially adverse, unusual or onerous terms or conditions. The properties and other material assets presently owned, leased or licensed by the Group Companies are structurally sound, are in good operating condition and repair and have been maintained in accordance with good business practice and are adequate for the uses to which they are being and intended by any of the Group Companies to be put, and none of such properties or other material assets is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost and taking into account the age and length of the use of the same, ordinary wear and tear excepted. To the knowledge of the Company, there are no facts or conditions affecting any of such properties or other material assets which could, individually or in the aggregate, interfere in any material respect with the occupancy or use thereof as currently occupied or used.

 

(p)

Insurance. Each of the Group Companies maintains reasonable adequate insurance covering its material properties, operations, personnel and business, and is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which it is engaged. All policies of insurance insuring the Group Companies and their respective businesses, assets, employees, officers and directors are in full force and effect. Each of the Group Companies is in compliance with the terms of such policies and instruments in all material respects, and there are no claims by any of the Group Companies under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause. None of the Group Companies has been refused any insurance coverage sought or applied for, and none of the Group Companies has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that could not, individually or in the aggregate, have a Material Adverse Effect.

 

(q)

Taxes. All Tax returns required to be filed by each of the Group Companies have been filed, and all such returns are true, complete and correct in all material respects. All material Taxes that are due from each of the Group Companies have been paid other than those (i) currently payable without penalty or interest or (ii) being diligently contested in good faith and by appropriate proceedings and for which adequate reserves have been established in accordance with United States generally accepted accounting principles (“GAAP”). To the knowledge of the Company after due inquiry, there are no proposed Tax assessments against any of the Group Companies. The accruals and reserves on the books and records of each of the Group Companies in respect of any Tax liability for any Taxable period not finally determined are adequate to meet any assessments of Tax for any such period. For purposes of this Agreement, the term “Tax” and “Taxes” shall mean (a) all Cayman Islands, PRC national, provincial, local and foreign taxes, charges, fees, imposts, levies or other assessments of a similar nature (whether imposed directly or through withholding), and (b) any interest, fines, additions to tax, or penalties or additional amounts imposed by any Governmental Authority in connection with any item described in clause (a).

 

(r)

Intellectual Property.

 

(i)

The Group Companies, collectively, own, or are validly licensed under, or have the right to use, all patents, patent rights, licenses, inventions, copyrights, know-how (including

 

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trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, “Intellectual Property”) used in the conduct of its businesses, free and clear of all Liens, except where the failure to own, possess, or have the right to use such Intellectual Property could not reasonably expected to have a Material Adverse Effect. To the Company’s knowledge, no claims or notices of any potential claim have been asserted by any person challenging the use of any such Intellectual Property by any of the Group Companies or questioning the validity or effectiveness of the Intellectual Property or any license or agreement related thereto, and, to the Company’s knowledge, there are no facts which would form a valid basis for any such claim. The use of such Intellectual Property by any of the Group Companies does not and will not infringe on the Intellectual Property rights of any other person.

 

(ii)

Schedule 4(r)(ii) of the Disclosure Schedule sets forth a complete list of (i) the Registered IP owned by or licensed to any of the Group Companies and (ii) all other material Intellectual Property licensed to any of the Group Companies. “Registered IP” means Intellectual Property that is registered, filed, or issued under the authority of any Governmental Authority, including all patents, registered copyrights, and registered trademarks and all applications for any of the foregoing. All Intellectual Properties owned by each of the Group Companies are valid and enforceable and are in compliance with formal legal requirements.

 

(iii)

Each of the Group Companies has taken reasonable steps and measures to establish and preserve ownership of or right to use all Intellectual Property material to the operation of its business. Each of the Group Companies has taken reasonable steps to register, protect, maintain, and safeguard the Intellectual Property material to its business, including any Intellectual Property that is jointly developed with any third-parties, or any Intellectual Property for which improper or unauthorized disclosure would impair its value or validity, and has had executed appropriate nondisclosure and confidentiality agreements and made all appropriate filings, registrations and payments of fees in connection with the foregoing. There is no infringement or misappropriation by any other Person of any Intellectual Property of any of the Group Companies. No proceedings or claims in which any of the Group Companies alleges that any Person is infringing upon, or otherwise violating, any Intellectual Property of any of the Group Companies are pending, and none has been served, instituted or asserted by any of the Group Companies.

 

(iv)

Each of the Group Companies owns all rights in and to any and all Intellectual Property used or planned to be used by the Group Companies, or covering or embodied in any past, current or planned activity or service of the Group Companies, which Intellectual Property was made, developed, conceived, created or written by any consultant retained, or any employee employed, by the Group Companies. No former or current employee, no former or current consultant, and no third-party joint developer of any of the Group Companies has any rights in any Intellectual Property made, developed, conceived, created or written by the aforesaid employee or consultant during the period of his or her retention by the Group Companies which can be asserted against any Group Company.

 

(v)

No Intellectual Property owned by any Group Company is the subject of any security interest, Lien, license or other contract granting rights therein to any other Person. Each of the Group Companies has not (a) transferred or assigned, (b) granted an exclusive

 

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license to or (c) provided or licensed, any Intellectual Property owned by the Group Companies to any Person who is the subject of any security interest, Lien, license or other contract granting rights therein to any other Person.

 

(s)

Internal Controls. Each of the Group Companies maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at quarterly intervals and appropriate action is taken with respect to any material differences.

 

(t)

Financial Statements; Independent Auditors.

 

(i)

The Cayman Subsidiary has delivered to the Purchaser its audited consolidated financial statements as of December 31, 2006 and for the fiscal year ended December 31, 2006 and its unaudited consolidated financial statements (including balance sheet, income statement and statement of cash flows) as of February 28, 2007 and for the two-month period ended February 28, 2007 (collectively, the “Financial Statements”). The Financial Statements have been prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated, except that the unaudited Financial Statements may not contain all footnotes required by GAAP. The Financial Statements fairly present the financial condition and operating results of the Group Companies as of the dates, and for the periods, indicated therein, subject in the case of the unaudited Financial Statements to normal year-end audit adjustments. Except as set forth in the Financial Statements, none of the Group Companies has any liabilities or obligations of any level whatsoever, whether accrued, absolute, determined, determinable, or contingent or otherwise, other than liabilities incurred in the ordinary course of business.

 

(ii)

Ernst & Young Hua Ming, who have certified the audited Financial Statements of the Cayman Subsidiary in 2005 and 2006 and delivered their report with respect thereto, are independent public accountants with respect to the Group Companies in accordance with applicable local accounting rules.

 

(u)

Absence of Changes. Except as related to the reorganization of the Company whereby it became the parent of the Cayman Subsidiary through a share exchange transaction consummated on April 9, 2007, none of the Group Companies has, since December 31, 2006, (A) entered into any material transactions, (B) entered into or assumed any material contract, (C) incurred, assumed or acquired any material liability (including contingent liability) or other obligation, (D) acquired or disposed of, or agreed to acquire or dispose of, any business or any other asset material to the Company and its subsidiaries, taken as a whole, (E) cancelled, waived, released or discounted in whole or in part any material debts or claims, (F) taken on or become subject to any material contingent liability, (G) declared, paid or made any dividend or distribution of any kind on any class of capital stock, or (H) entered into a letter of intent or memorandum of understanding (or announced an intention to do so) relating to any matters identified in clauses (A) through (G) above. Since December 31, 2006, there has not been any event or condition of any type that has had or reasonably could be expected to have a Material Adverse Effect.

 

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(v)

Indebtedness. All Debt represented by the Notes is being incurred for proper purposes and in good faith. Based on the financial condition of the Company as of the Closing Date after giving effect to the receipt by the Company of the proceeds from the sale of the Securities hereunder, (i) the fair saleable value of the Group Companies’ assets exceeds the amount that will be required to be paid on or in respect of the Group Companies’ existing debts and other liabilities (including contingent liabilities) as they mature; (ii) the present fair saleable value of the assets of the Group Companies is greater than the amount that will be required to pay the probable liabilities of the Group Companies on their respective debt as they become absolute and mature, and (iii) the Group Companies are able to realize upon their assets and pay their debt and other liabilities (including contingent obligations) as they mature; (iv) the Group Companies’ assets do not constitute unreasonably small capital to carry on their respective businesses as now conducted and as proposed to be conducted including their respective capital needs taking into account the particular capital requirements of the business conducted by the Group Companies, and projected capital requirements and capital availability thereof; and (v) the current cash flow of each of the Group Companies, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its liabilities when such amounts are required to be paid. None of the Group Companies intends to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). The Company has no knowledge of any facts or circumstances which lead it to believe that it or any other Group Companies will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction. None of the Group Companies is, or is reasonably likely to be, in default with respect to any Debt and no waiver of default is currently in effect. None of the Group Companies has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien. None of the Group Companies is a party to, or otherwise subject to any provision contained in, any instrument evidencing Debt of any of the Group Companies, any agreement relating thereto or any other agreement (including, but not limited to, its Charter Document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company.

 

(w)

Material Contracts. All of the contracts and agreements of the Group Companies listed in Schedule 4(w) of the Disclosure Schedule, which are all of the agreements of the Group Companies that (A) have a contractual value exceeding US$1 million individually or (ii) are otherwise critical to the business or operations of the Group Companies, are in full force and effect and none of the Group Companies is, and to the knowledge of the Company, no counterparty to such contracts or agreements is, in breach or violation of any of the terms and conditions thereof in any material respect.

 

(x)

No Sale to the U.S. None of the Group Companies, their respective Affiliates, or any person acting on its or their behalf has, directly or indirectly, made offers or sales of any security, or solicited offers to buy, sell or offer to sell or otherwise negotiated in respect of any security which is or would be integrated with the sale of the Securities in a manner or under circumstances that would require the registration of the Securities under the Act.

 

(y)

No Directed Selling Efforts. None of the Group Companies, their respective Affiliates, or any person acting on its or their behalf (other than the Purchaser, its Affiliates or persons acting on its behalf, as to whom the Company makes no representation) has engaged in any

 

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directed selling efforts (within the meaning of Regulation S) with respect to the Securities; and each of the Company, its Subsidiaries, their respective Affiliates and each person acting on its or their behalf has complied with the offering restrictions requirement of Regulation S.

 

(z)

No Registration. Assuming the accuracy of the Purchaser’s representations and warranties set forth in Section 6 hereof, no registration under the Act of the Securities is required for the offer, sale and delivery of the Securities in the manner contemplated herein nor is it necessary to qualify any Indenture under the Trust Indenture Act of 1939.

 

(aa)

Regulation S. The Company is a “foreign issuer” (within the meaning of Rule 902 under the 1933 Act) that reasonably believes that there is no “substantial U.S. market interest” (as such term is defined in Regulation S under the 1933 Act) with respect to any securities of the Company.

 

(bb)

Labor Matters. None of the Group Companies is bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Group Companies. There is no strike or other labor dispute involving any of the Group Companies pending or threatened, which could have a Material Adverse Effect. There is no employment related charge, complaint, grievance, investigation, unfair labor practice claim or inquiry of any kind, pending or threatened against any of the Group Companies that could, individually or in the aggregate, have a Material Adverse Effect.

 

(cc)

Brokers and Finders. The Company has not engaged any broker, finder, commission agent or other similar person (other than Merrill Lynch Far East Limited) in connection with the transactions contemplated under the Documents, and the Company is not under any obligation to pay any broker’s fee or commission in connection with such transactions (other than commissions or fees to Merrill Lynch Far East Limited), which is the sole liability of, and will be paid by, the Company.

 

(dd)

Environmental Matters. Each of the Group Companies (i) is in compliance with any and all applicable PRC national, provincial, and local laws and regulations relating to the protection of the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) has received and is in compliance with all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business, (iii) has not received notice of any actual or potential liability for the investigation or remediation of any disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants, (iv) has no knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as would not result in a Material Adverse Effect; and (v) has stored no hazardous materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any hazardous materials in a manner contrary to any Environmental Laws; except where such non-compliance with Environmental Laws, failure to receive required permits, licenses or other approvals, or liability would not, individually or in the aggregate, have a Material Adverse Effect.

 

(ee)

Encumbrances. There are no encumbrances, foreign exchange restrictions or contractual restrictions on the ability of any of the Group Companies to pay dividends or make other distributions on such parties’ capital stock or to make loans or advances or pay any indebtedness to, or investments in, any of the Group Companies.

 

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(ff)

Payment of Dividends. All dividends and other distributions that may be declared and payable on the share capital of the Company will not be subject to withholding or other taxes under the current laws and regulations of the Cayman Islands and are otherwise free and clear of any other tax, withholding or deduction in the Cayman Islands and may be so paid without the necessity of obtaining any governmental authorization in the Cayman Islands.

 

(gg)

Winding up; Dissolution. None of the Group Companies has taken any action nor, to the Company’s knowledge after due inquiry, have any steps been taken by any third party or legal, legislative or administrative proceedings been started or, to the Company’s knowledge after due inquiry, threatened to (i) wind up, dissolve, make dormant, or eliminate any of the Group Companies or (ii) to withdraw, revoke or cancel any material approvals to conduct the business of any of the Group Companies, if applicable.

 

(hh)

Sovereign Immunity. Under the laws of their respective jurisdiction of incorporation and the PRC, none of the Group Companies nor any of their properties, assets or revenues are entitled to any right of immunity on the grounds of sovereignty from any legal action, suit or proceeding, from set-off or counterclaim, from the jurisdiction of any court, from service of process, from attachment prior to or in aid of execution of judgment, or from other legal process or proceeding for the giving of any relief or for the enforcement of any judgment.

 

(ii)

Stamp Duties. No stamp, issue, registration, transfer tax or duty or other similar tax or duty is payable by or on behalf of the Purchaser in the Cayman Islands (other than nominal stamp duty if the Agreement is signed of brought into the Cayman Islands) or any political subdivision or taxing authority thereof or therein in connection with: (A) the issue, offer and delivery by the Company of the Notes to or for the respective accounts of such Purchaser; (B) the execution and delivery of the Documents; or (C) the consummation of the transactions contemplated by the Documents.

 

(jj)

Purchaser Liability. No holders of any of the Notes or Warrants or Warrant Shares will be subject to liability in respect of any liability of the Company by virtue only of the holding of any such Notes or Warrants.

 

(kk)

Certificate. Each certificate signed by any officer of any of the Group Companies and delivered to the Purchaser shall be deemed a representation and warranty by such company (and not individually by such officer) to the Purchaser with respect to the matters covered thereby.

 

(ll)

Foreign Corrupt Practices Act. None of the Group Companies, nor to the knowledge of the Company, any agent or other person acting on behalf of any of the Group Companies, directly or indirectly, (i) has used any funds or will use such funds or any proceeds from the sale of the Notes for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Group Companies (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated or taken any other action which violates or would result in a violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended and the rules and regulations thereunder (the “FCPA”).

 

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(mm)

Related Party Transactions. Except as otherwise disclosed in Schedule 4(mm) of the Disclosure Schedule, no material transactions, direct or indirect, exists between or among any Group Company or its Subsidiaries or any Affiliate of the Group Companies or its subsidiaries, on the one hand, and any former or current director, officer, stockholder, customer or supplier of any of them (including his or her spouse, child, sibling, any company or undertaking in which he or she holds any equity interest, or any person related by marriage or consanguinity), on the other hand; provided further that each of the material transactions disclosed in Schedule 4(mm) of the Disclosure Schedule was negotiated in good-faith and on an arms-length basis.

 

(nn)

Investment Company. None of the Group Companies is, and as a result of the offer and sale of the Securities contemplated herein will not be, required to register as an “investment company” under, and as such term is defined in, the U.S. Investment Company Act of 1940, as amended, in connection with or as a result of the offer and sale of the Securities.

 

(oo)

PFIC. None of the Group Companies is or intends to become a “passive foreign investment company” (a “PFIC”) within the meaning of Section 1297 of the U.S. Internal Revenue Code.

 

(pp)

OFAC. Neither the Company nor, to the knowledge of the Company, any director, officer, agent, employee, Affiliate or Person acting on behalf of the Company is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Company will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or other Person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC. None of the Group Companies does any business, or in the case of sale of residential properties by the Group Companies in the ordinary course of business, none of the Group Companies knowingly does any business, with governments, entities or persons subject to any U.S. sanctions administered by the OFAC or any enabling legislation or executive order relating thereto, or, to the best of the knowledge of the Company, any person or entity in those countries or with those persons, or perform contracts in support of projects in or for the benefit of those countries or those persons.

 

(qq)

Money Laundering Laws. The operations of each of the Group Companies are and have been conducted at all times in compliance with the money laundering statutes of applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any applicable governmental agency (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving any of the Group Companies with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

 

(rr)

Margin Rules. Neither the issuance, sale and delivery of the Securities nor the application of the proceeds thereof by the Company will violate Regulation T, U or X of the Board of Governors of the U.S. Federal Reserve System or any other regulation of such Board of Governors.

 

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(ss)

Other Representations and Warranties Relating to PRC Group Companies.

 

(i)

The constitutional documents and certificates and related material contracts of each of the Group Companies other than the Company and the Cayman Subsidiary (the “PRC Group Companies”) are valid and have been duly approved or registered (as applicable) by competent PRC Governmental Authorities.

 

(ii)

All material consents, approvals, authorizations or licenses requisite under PRC law for the due and proper establishment and operation of each of the PRC Group Companies have been duly obtained from the relevant PRC Governmental Authorities and are in full force and effect.

 

(iii)

All filings and registrations with the PRC Governmental Authorities required in respect of each of the Group Companies and its operations including, without limitation, the registrations with the Ministry of Commerce, the State Administration of Industry and Commerce, the State Administration for Foreign Exchange, tax bureau and customs authorities have been duly completed in accordance with the relevant PRC rules and regulations.

 

(iv)

Each of the PRC Group Companies has complied with all relevant PRC laws and regulations regarding the contribution and payment of its registered share capital, the payment schedule of which has been approved by the relevant PRC Government Authorities. There are no outstanding rights of, or commitments made by the Company or any Subsidiary to sell any equity interest in the WFOE, or by any of the other PRC Group Companies’ shareholders to sell any equity interest in such other PRC Group Companies.

 

(v)

None of the PRC Group Companies is in receipt of any letter or notice from any relevant PRC Governmental Authority notifying it of revocation of any licenses or qualifications issued to it or any subsidy granted to it by any PRC Governmental Authority for non-compliance with the terms thereof or with applicable PRC laws, or the need for compliance or remedial actions in respect of the activities carried out by such PRC Group Company.

 

(vi)

Each of the PRC Group Companies has conducted its business activities within the permitted scope of business or has otherwise operated its business in compliance with all relevant legal requirements and with all requisite licenses and approvals granted by competent PRC Governmental Authorities.

 

(vii)

As to licenses, approvals and government grants and concessions requisite or useful for the conduct of any part of any of the PRC Group Companies’ business which are subject to periodic renewal, the Company has no knowledge of any grounds on which such requisite renewals will not be granted by the relevant PRC Governmental Authorities.

 

(viii)

With regard to employment and staff or labor, each of the PRC Group Companies has complied with all applicable PRC laws and regulations in all material respects, including without limitation, laws and regulations pertaining to welfare funds, social benefits, medical benefits, insurance, retirement benefits, pensions or the like.

 

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(ix)

The assets of the PRC Group Companies constitute all of the assets used in or held for use by the PRC Group Companies in the operation of the real property development and services businesses described in the “Business” section of the Offering Memorandum.

 

(tt)

Full Disclosure. The Group Companies have provided the Purchaser with all information in their possession, custody or control that is or could be material to investment in the Securities and which was requested by Purchaser in the course of its due diligence investigation. All disclosure furnished by or on behalf of the Company to the Purchaser regarding any of the Group Companies, their respective businesses and the transactions contemplated under the Documents, including the Disclosure Schedule to this Agreement and the Offering Memorandum, are true and correct in all material respects and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Company acknowledges and agrees that the Purchaser does not make any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 6 hereof.

5. Covenants of the Group Companies. Each of the Group Companies, jointly and severally, hereby agrees:

 

(a)

To (i) advise the Purchaser promptly after obtaining knowledge (and, if requested by the Purchaser, confirm such advice in writing) of the issuance by any applicable securities commission of any stop order suspending the qualification or exemption from qualification of the Securities for offer or sale in any jurisdiction, or the initiation of any proceeding for such purpose by any applicable securities commission or other regulatory authority, (ii) use its best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption from qualification of the Securities under any applicable securities or Blue Sky laws, and (iii) if at any time any applicable securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Securities under any such laws, use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time.

 

(b)

Whether or not any of the transactions contemplated under the Documents are consummated or this Agreement is terminated, to pay (i) all costs, expenses, fees and taxes incident to and in connection with: (A) the printing, processing and distribution (including, without limitation, word processing and duplication costs) and delivery of, each of the Documents, and (B) the preparation, issuance and delivery of the Securities, (ii) all fees and expenses of the PRC, US, Cayman Islands and other counsel, accountants and any other experts or advisors retained by the Group Companies, (iii) all expenses in connection with qualifying the Securities for settlement in the Clearing Facilities, (iv) all fees and expenses (including fees and expenses of counsel) of the Company in connection with approval of the Securities for “book-entry” transfer, (v) all fees and expenses (including any filing, regulatory and registration fees) relating to the perfection of Liens, and (vi) all fees and expenses (including fees and expenses of counsel) of the Trustee, the Calculation Agent, the Warrant Agent, Merrill Lynch Far East, as Placement Agent, and the Collateral Agents; provided that such payment under this subsection (vi) together with all such payments pursuant to the Other Agreements, shall not exceed US$80,000 to the extent the transactions contemplated under the Documents are not consummated or this Agreement is terminated.

 

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(c)

To do and perform all things and comply with all covenants and agreements required to be done and performed or complied with under the Documents prior to and after the Closing Date.

 

(d)

Prior to making any public disclosure or filings as may be required by applicable law with respect to this Agreement and the transactions contemplated hereby, (i) to provide the Purchaser and its counsel with the reasonable opportunity to review and comment on such public disclosure documents and consider in good faith any comments received by the Purchaser or its counsel, and (ii) if any such required public disclosure or filing expressly references the Purchaser or its Affiliates, to obtain the prior consent of the Purchaser (which consent shall not be unreasonably withheld) prior to the making of any such public disclosure.

 

(e)

Subject to the requirements of applicable laws and regulations and for so long as the Purchaser owns any of the Securities, the Company will furnish copies of (i) all reports and other communications (financial or otherwise) and all written certifications required to be furnished by the Company (A) to the Trustee under the Indentures or (B) to the Warrant Agent under the Warrant Agreement, and (ii) such other information as may be reasonably requested by the Purchasers.

 

(f)

During the two-year period after the Closing Date (or such shorter period as may be provided for in Rule 144(k) under the Act, as the same may be in effect from time to time), not to, and not to permit any current or future Subsidiaries of the Company or any other affiliates (as defined in Rule 144(a) under the Act) controlled by the Company to, resell any of the Securities which constitute “restricted securities” under Rule 144 that have been reacquired by the Company, any current or future Subsidiaries of the Company or any other affiliates (as defined in Rule 144(a) under the Act) controlled by the Company, except pursuant to an effective registration statement under the Act.

 

(g)

To pay all stamp, documentary and transfer taxes and other duties, if any, which may be imposed by any Governmental Authorities or any political subdivision thereof or taxing authority thereof or therein with respect to the issuance of the Notes or Warrants or the sale thereof to the Purchaser.

 

(h)

The Company will use reasonable best efforts not to become, and cause its Subsidiaries not to become, a PFIC. If the Company determines that it or any of its Subsidiaries has become a PFIC, the Company will promptly notify the Purchaser and provide all information requested by the Purchaser that is necessary for the Purchaser to make a qualified electing fund (QEF) election.

 

(i)

The Company agrees that it will not register any transfer of the Securities that is not (i) made in accordance with the provisions of Regulation S under the Act, (ii) made pursuant to registration under the Act, or (iii) made pursuant to an available exemption under the Act.

 

(j)

The Company shall, as soon as reasonably practicable, use its reasonable best efforts to (i) procure a collateral agent acceptable to the Purchaser and the PRC Governmental Authorities to serve as a collateral agent under the Onshore Share Pledge Agreement, which agreement shall be in the form acceptable to the Purchaser and the PRC Governmental Authorities, (ii) obtain approvals from, and complete filing procedures with, relevant Governmental Authorities in order (x) to create valid and enforceable security interests over all of the equity

 

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interests of the WFOE, and (y) to create valid and enforceable security interests over the “Collateral” as defined in the Note Pledge Agreement, including the approval from the State Administration for Foreign Exchange and its local branches, Henan Provincial Commerce Department and the registration with the Henan Industrial and Commercial Administration Bureau, as applicable, and (iii) procure Zhengzhou Industry & Commercial Service Co. (or another Person who is reasonably acceptable to Purchaser) as sponsor to act on behalf of the Company in making the foregoing filings and completing such procedures which sponsor shall act at the instruction of the Trustee. If the PRC Governmental Authorities require any amendments, modifications or changes to the Onshore Share Pledge Agreement or the Note Pledge Agreement, as the case may be, as a condition to their approval of such agreements, then the Company shall use its reasonable best efforts to effect such amendments, modifications or changes to such agreements, as the case may be, to obtain such approvals from the relevant Governmental Authorities.

 

(k)

The Company shall, contemporaneously with Closing, make an entry in its Register of Mortgages and Charges and other Encumbrances in respect of the applicable Security Documents in order to comply the legal requirements set forth in Section 54 of the Companies Law (2004 Revision) of the Cayman Islands and deliver to the Security Agent a certified copy thereof.

 

(l)

The Company will use the proceeds from the offer and sale of the Notes for (i) acquiring land use right in Suzhou, Hefei, Jinan, Zhengzhou and other cities in the PRC consistent with the Company’s development strategy and (ii) repayment of certain existing indebtedness of the Company in the aggregate principal amount of US$35 million advanced by Blue Ridge China Partners, L.P. and El Fund III China, LLC and the interest accrued thereon. The balance of the proceeds will be used by the Group Companies for working capital and general corporate purposes.

 

(m)

The Company (i) shall at all times keep reserved for issuance and delivery (x) upon conversion of the Convertible Notes such number of Conversion Shares or other shares of the Company as are from time to time issuable upon conversion of any Convertible Note, and (y) such number of Warrant Shares issuable upon exercise of any Warrant and (ii) shall, from time to time, take all necessary steps to amend its memorandum and articles of incorporation to provide a sufficient reserve of (x) Conversion Shares for issuance upon conversion of the Convertible Notes and (y) Warrant Shares for issuance upon exercise of the Warrants.

 

(n)

In connection with the conversion of the Convertible Notes into Conversion Shares or the exercise of the Warrants, neither the Company nor any Person acting on its behalf will take any action which would result in (i) the Conversion Shares being exchanged by the Company other than with the then existing holders of the Convertible Notes exclusively or (ii) the Warrant Shares being issued by the Company other than to the then existing holders of the Warrants exclusively, in each case where no commission or other remuneration is paid or given directly or indirectly for soliciting the exchange in compliance with Section 3(a)(9) of the Act.

 

(o)

Each of the Group Companies undertakes that (i) they will comply with the FCPA, including, without limitation, not making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of value to any “foreign official” (as the term is defined in the FCPA) or any foreign

 

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political party or official thereof or any candidate for foreign political office, in contravention of the FCPA, (ii) it will conduct its business in compliance with the FCPA, and (iii) it will institute and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.

 

(p)

The Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. As long as the Conversion Shares or the Warrant Shares are “restricted securities” as defined in Rule 144(a)(3), if the Company is not required to file reports pursuant to the Exchange Act, it will prepare and make publicly available in accordance with Rule 144(c) (and, if the Purchaser owns any Conversion Shares or Warrant Shares, furnish to the Purchaser) such information as is required to sell such Conversion Shares or Warrant Shares under Rule 144. The Company further covenants that it will take such further action as any holder of the Conversion Shares or Warrant Shares may reasonably request, to the extent required from time to time to enable such person to sell such Conversion Shares or Warrant Shares, as applicable, without registration under the Securities Act within the requirements of the exemption provided by Rule 144.

 

(q)

The Company and the Purchaser shall consult with each other in issuing any press releases or making any other public statement with respect to the transactions contemplated hereby, and neither the Company nor the Purchaser shall issue any such press release or otherwise make any such public statement (i) without the prior consent of the Company, with respect to any press release of the Purchaser, or (ii) without the prior consent of the Purchaser, with respect to any press release of the Company, in either case of (i) and (ii), which consent shall not unreasonably be withheld or delayed, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication. Notwithstanding the foregoing, the Company shall not publicly or otherwise disclose the name of the Purchaser, or include the name of the Purchaser in any filing with the United States Securities and Exchange Commission (the “Commission”) or any regulatory agency or any securities exchange or trading market (a “Trading Market”), without the prior written consent of the Purchaser, which consent may be withheld in its sole discretion, except (x) as required by federal securities law in connection with the filing of the Documents (including signature pages thereto) with the Commission or similar authority in a jurisdiction under which laws the Company is subject and (y) to the extent such disclosure is required by law or any Trading Market regulations, in which case the Company shall provide the Purchaser with reasonable prior notice of such disclosure permitted hereunder.

 

(r)

Each of the Group Companies covenants to take any and all actions, including the filing of any and all documents, that may be necessary to continue the appointment of the Authorized Agent by it under Section 12(d) hereof in full force and effect for so long as the Purchaser holds any Notes or Warrants.

 

(s)

To qualify the Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Purchaser and Other Purchasers shall reasonably request and will continue such qualifications in effect so long as required for the offering and resale of the Securities; provided that the Company shall not be required to (i) qualify as a foreign corporation or other entity or as a dealer in securities in any such jurisdiction where it would not otherwise be required to so qualify, (ii) file any general consent to service of process in any such jurisdiction or (iii) subject itself to taxation in any such jurisdiction if it is not otherwise so subject.

 

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(t)

Each of the Group Companies will not directly or indirectly use the proceeds of the offering of the Securities hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Person, for the purpose of financing the activities of any Person currently subject to any U.S. sanctions administered by OFAC.

 

(u)

None of the Group Companies, their respective Affiliates, or any person acting on its or their behalf (other than the Purchaser, its Affiliates or persons acting on its behalf, as to whom the Company makes no representation) will engage in any directed selling efforts (within the meaning of Regulation S) with respect to the Securities; and each of the Company, its Subsidiaries, their respective Affiliates and each person acting on its or their behalf will comply with the offering restrictions requirement of Regulation S.

 

(v)

So long as any of the HY Notes or Warrants purchased hereunder remain outstanding, (i) the Company shall promptly disclose to the Purchaser the contents and deliver copies of any side letter or similar agreement (as the same may be amended and supplemented and in effect from time to time, a “Side Letter”) between any Group Company and any Other Purchaser (or its Affiliates), whether such Side Letters is executed prior to, simultaneously or after the Closing Date, that alters or supplements the terms of any of the Documents and has the effect of conferring rights to, or benefits for, such Other Purchaser that are more favorable in any respect than the rights and benefits established in favor of Purchaser under the Documents (“Preferred Rights”), and (ii) the Company shall, or shall cause the applicable Group Company to, automatically, and without any need for further action, grant the Preferred Rights to the Purchaser unless and until such Preferred Rights have been revoked or modified by written agreement between the applicable Group Company and such Other Purchaser (or its Affiliate); provided, however, that notwithstanding the foregoing, the performance by any Group Company of its obligations under this Agreement, the Other Agreements (which are identical to this Agreement except in the case of the Other Agreement relating to the Subsequent Sale) or other Documents (which are substantially identical to the forms contained in Exhibits to this Agreement), including without limitation, (x) the execution, delivery and performance by the Company of that certain Voting Agreement with Drawbridge Global Macro Master Fund Ltd, (y) the proposed Subsequent Sale to Merrill Lynch International under one of the Other Agreement and (z) the exercise by any Group Company of its rights under the Documents, shall not be deemed to create or confer any Preferred Rights and shall not create any obligation on the part of any Group Company hereunder.

6. Purchaser’s Representations, Warranties and Agreements.

The Purchaser represents and warrants to the Company that:

 

(a)

The Purchaser understands that the purchase of the Units and Convertible Notes involves substantial risk and that its financial condition and investments are such that it is in a financial position to hold the Units and Convertible Notes for an indefinite period of time and to bear the economic risk of, and withstand a complete loss of its investment in, the Units and Convertible Notes. In addition, the Purchaser confirms that it has experience in financial and business matters, investments, securities and private placements and the capability to evaluate the merits and risks of the transactions contemplated by this Agreement.

 

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(b)

The Purchaser is not a “U.S. Person” (as defined in Rule 902 of Regulation S under the Act) and is not acquiring the securities for the account or benefit of any U.S. Person, such Purchaser (i) agrees not to resell the Securities except in accordance with the provisions of Regulation S under the Act, pursuant to registration under the Act, or pursuant to an available exemption from registration, and agrees not to engage in hedging transactions with regard to such securities unless in compliance with the Act, (ii) agrees that any certificates representing the Securities issued to the Purchaser shall contain a legend to the effect that transfer is prohibited except in accordance with the provisions of Regulation S, pursuant to registration under the Act or pursuant to an available exemption from registration and that hedging transactions with regard to such securities may not be conducted unless in compliance with the Act, (iii) agrees that the Company is hereby required to refuse to register any transfer of any securities issued to the Purchaser not made in accordance with the provisions of Regulation S, pursuant to registration under the Act, or pursuant to an available exemption from registration, and (iv) represents that its subscription and payment for and continued beneficial ownership of the Securities does not violate any applicable securities laws or other laws of the jurisdiction of its organization.

 

(c)

The Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Units and Convertible Notes and the business, management, properties, prospects and financial condition of the Company.

 

(d)

The Purchaser acknowledges that the Units, the Warrant Shares, the Convertible Notes and the Conversion Shares are “restricted securities” as defined in Rule 144 under the Act and subject to resale restrictions during the period set forth in Rule 144. The Purchaser further understands that no public market now exists for any of the Securities issued by the Company and the Company has given no assurances that a public market will ever exist for the Company’s Securities.

7. Conditions to Purchase Securities at Closing. (i) The Purchaser’s obligation to purchase the Securities under this Agreement is subject to the satisfaction or waiver of each of the following conditions:

 

(a)

All the representations and warranties of each of the Group Companies and the Controlling Shareholders contained in this Agreement and in each of the Documents shall have been true and correct (disregarding all qualification and exceptions contained therein relating to materiality or Material Adverse Effect) in all material respects as of the date hereof and shall be true and correct in all material respects at the Closing Date. On or prior to the Closing Date, the Group Companies, the Controlling Shareholders and each other party to the Documents (other than the Purchaser) shall have performed or complied with all of the agreements and satisfied all conditions on their respective parts to be performed, complied with or satisfied pursuant to the Documents to the satisfaction of the Purchaser.

 

(b)

No injunction, restraining order or order of any nature by a Governmental Authority shall have been issued as of the Closing Date that could prevent or materially interfere with the consummation of the transactions contemplated under the Documents; and no stop order suspending the qualification or exemption from qualification of any of the Securities in any jurisdiction shall have been issued and no Proceeding for that purpose shall have been commenced or, to the knowledge of the Company after due inquiry, be pending or threatened as of the Closing Date.

 

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(c)

No action shall have been taken and no Applicable Law shall have been enacted, adopted or issued that could, as of the Closing Date, reasonably be expected to prevent the consummation of the transactions contemplated under the Documents. No Proceeding shall be pending or, to the knowledge of the Company after due inquiry, threatened other than Proceedings that (A) are disclosed in the Disclosure Schedule, (B) if adversely determined could not, individually or in the aggregate, adversely affect the issuance or marketability of the Units or the Convertible Notes, or (C) could not, individually or in the aggregate, have a Material Adverse Effect.

 

(d)

The Company shall have obtained any and all approvals, consents and waivers necessary for consummation of the transactions contemplated by this Agreement, including, but not limited to, all authorizations, approvals or consents of any Governmental Authority.

 

(e)

The Purchaser shall have received on the Closing Date:

 

(i)

certificates dated the Closing Date, signed by (1) the Chief Executive Officer and (2) the principal financial or accounting officer(s) of each of the Group Companies, on behalf of each of such Group Companies, respectively, to the effect that (a) the representations and warranties set forth in Section 4 hereof are true and correct with the same force and effect as though expressly made at and as of the Closing Date, (b) such Group Company has complied with all Documents in all material respects and satisfied all conditions set forth in such Documents on its part to be performed or satisfied hereunder (to the extent it is a party to such Documents) at or prior to the Closing Date, (c) at the Closing Date, since the date hereof or December 31, 2006, no event or events have occurred, no information has become known nor does any condition exist that could, individually or in the aggregate, have a Material Adverse Effect, (d) since December 31, 2006, none of the Group Companies has incurred any liabilities or obligations, direct or contingent, not in the ordinary course of business, or that are material to the business, condition (financial or otherwise), results of operations, prospects or regulatory status of the Group Companies, taken as a whole, and there has not been any change in the capital stock or long-term indebtedness of any of the Group Companies that is material to the business, condition (financial or otherwise) or results of operations, prospects or regulatory status of the Group Companies, taken as a whole, and (e) the sale of any of the Securities has not been enjoined (temporarily or permanently);

 

(ii)

certificates dated the Closing Date, executed by the Secretary or authorized officer of each of the Group Companies, certifying such matters as the Purchaser may reasonably request;

 

(iii)

certificates dated the Closing Date, executed by officers of the Company, certifying such matters as the Purchaser may reasonably request;

 

(iv)

the opinion of Baker & McKenzie LLP, U.S. counsel to the Company, dated the Closing Date, in the form attached hereto as Exhibit H-1;

 

(v)

the opinion of Maples & Calder, Cayman counsel to the Company, dated the Closing Date, in the form attached hereto as Exhibit H-2; and

 

(vi)

the opinion of TransAsia Lawyers, PRC counsel to the Company, dated the Closing Date, in the form attached hereto as Exhibit H-3.

 

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(f)

Each of the Documents shall have been executed and delivered by all parties thereto to the satisfaction of the Purchaser, and the Purchaser shall have received a fully executed original (or clearly legible facsimile copy) of each Document.

 

(g)

The Purchaser shall have received copies of all opinions, certificates, letters and other documents delivered under or in connection with the transactions contemplated in the Documents that are required to be delivered at or prior to the Closing Date.

 

(h)

None of the Group Companies who are parties to any of the Documents shall be in breach or default under their respective obligations thereunder.

 

(i)

The Offshore Collateral Agent shall have received on the Closing Date:

 

(i)

the certificate representing the Pledged Stock (as defined in the Offshore Share Pledge Agreement), accompanied by undated stock powers duly executed in blank by the Pledgor pursuant to the Offshore Share Pledge Agreement;

 

(ii)

any appropriately completed copies, which have been duly authorized for filing by the appropriate Person, of any instruments as may be necessary or desirable to perfect the security interests of the Offshore Collateral Agent pursuant to the Indentures;

 

(iii)

a copy of the Company’s register of charges and mortgages, dated a date reasonably near to the Closing Date, listing all effective financing statements which name the Company as the debtor, together with copies of such financing statements (none of which shall cover any collateral described in the Indentures);

 

(iv)

such other approvals, opinions, or documents as the Offshore Collateral Agent may reasonably request in form and substance reasonably satisfactory to the Offshore Collateral Agent; and

 

(v)

the Offshore Collateral Agent and its counsel shall be satisfied that (i) the Lien granted to the Offshore Collateral Agent, for the benefit of the “Secured Parties” (as defined in the Security Documents) in the collateral described above is a first-priority Lien in favor of the holders of HY Notes and a second-priority Lien in favor of the holders of the Convertible Notes in the case of previously unencumbered property identified on Schedule 4(k); and (ii) no Lien exists on any of the collateral described above other than the Lien created in favor of the Offshore Collateral Agent, for the benefit of the Secured Parties, pursuant to the Indentures and the Offshore Share Pledge Agreement.

 

(j)

Each of Mr. ZHANG Yong and Mr. ZHANG Longgen shall have entered into the Non-Competition Agreement in the form attached hereto as Exhibit I.

 

(k)

The Company shall have entered into the Information Rights and Inspection Agreement in the form attached hereto as Exhibit J.

 

(l)

The respective Boards of Directors and, to the extent legally required, the respective shareholders of the Group Companies shall have approved and authorized by all necessary corporate action (i) the execution and delivery of the Documents, (ii) all actions to be performed or satisfied under the Documents (including, without limitation, (x) the reserve for issuance of the Conversion Shares issuable upon conversion of the Convertible Notes and (y)

 

25

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the reserve for issuance of the Warrant Shares issuable upon exercise of the Warrants), (iii) the consummation of the transactions contemplated by the Documents, (iv) the pricing terms of the Units and the Convertible Notes and (v) all other actions necessary in connection with the transactions contemplated by the Documents and the offering of the Units and the Convertible Notes, and shall have provided the Purchaser with a copy of such authorizations.

 

(m)

The Purchaser shall have received all necessary internal approval for the transactions contemplated hereunder or under the Documents.

 

(n)

The Purchaser shall have received evidence that the Authorized Agent (as defined in Section 12(d) hereof) has accepted the appointments under Section 12(d) by each of the Group Companies and the Controlling Shareholders.

 

(o)

The Company shall have previously consummated the sale and issuance of 750 Units to the Other Purchasers pursuant to the Other Agreements.

 

(p)

The Company shall have obtained a long-term Certificate of Approval pursuant to Opinions on Regulating the Access to and Administration of Foreign Investment in the Real Estate Market (2006) or obtained from the appropriate PRC Governmental Authorities a waiver thereof until a date not earlier than August 1, 2007.

 

(q)

The closing conditions set forth in Section 7 of the Other Agreements shall have been satisfied or waived by the applicable Other Purchasers.

(ii) The Company’s obligations to issue and sell (x) US$25,000,000 principal amount of Convertible Notes or (y) HY Notes and Warrants constituting 250 Units under this Agreement shall be subject to the satisfaction or waiver of the following conditions:

 

(a)	Prior to the Closing Date, the Company shall have previously consummated the sale and issuance of 750 Units to the Other Purchasers pursuant to the Other Purchase Agreements.

 

(b)	On the Closing Date, the Purchaser shall have paid the Purchase Price in consideration for the issuance and sale of such Convertible Notes or Units, as the case may be, in accordance with Section 3 hereof.

8. Indemnification.

 

(a)

Each of the Group Companies, jointly and severally, agrees to indemnify and hold harmless the Purchaser, each of its affiliates (including any person who controls the Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) and their respective officers, directors, partners, shareholders, counsel, employees and agents (the Purchaser and each such other person being referred to as an “Indemnified Person”), to the fullest extent lawful, from and against any losses, claims, damages, liabilities and reasonable expenses (or actions in respect thereof), as incurred, related to or arising out of or in connection with:

 

(i)

actions taken or omitted to be taken by any of the Group Companies or their respective affiliates, officers, directors, employees or agents in breach or violation of their respective representations, warranties, covenants and agreements set forth in this Agreement or any of the other Documents;

 

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(ii)

any breach by any of the Group Companies of their respective representations, warranties, covenants and agreements set forth in this Agreement or in any of the other Documents;

 

(iii)

any untrue statement or alleged untrue statement of a material fact, or the omission or alleged omission to state in (x) the Offering Memorandum or (y) the Disclosure Schedule, a material fact required to be stated therein, or necessary to make the statements therein in light of the circumstances under which they were made, not misleading.

and, subject to the provisions hereof, will reimburse the Indemnified Persons for all reasonable expenses (including, without limitation, fees and expenses of counsel) as they are incurred in connection with investigating, preparing, defending or settling any such action or claim, whether or not in connection with litigation in which any Indemnified Person is a named party. If any of the Indemnified Persons’ personnel appears as witnesses, are deposed or are otherwise involved in the defense of any action against an Indemnified Person, any of the Group Companies or their respective officers or directors, the Group Companies will reimburse the Purchaser for all reasonable expenses incurred by the Purchaser by reason of any of the Indemnified Persons being involved in any such action; provided, however, any of the Group Companies shall not be liable for indemnification hereunder with regard to any grossly negligent act or omission or willful misconduct by the Purchaser or any other Indemnified Person which is the sole cause of, and results in, the unavailability to the Company (or any of its affiliates) or to the offering of the Units or the Convertible Notes of the exemption from the registration requirements of the Act provided by Regulation S or Regulation D thereunder. This indemnity will be in addition to any liability that any of the Group Companies may otherwise have to the Indemnified Persons.

 

(b)

As promptly as reasonably practical after receipt by an Indemnified Person under this Section 8 of notice of the commencement of any action for which such Indemnified Person is entitled to indemnification under this Section 8, such Indemnified Person will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement thereof in writing; but the omission to so notify the indemnifying party (i) will not relieve such indemnifying party from any liability under paragraph (a) above unless and only to the extent it is materially prejudiced as a result thereof and (ii) will not, in any event, relieve the indemnifying party from any obligations to any Indemnified Person other than the indemnification obligation provided in paragraph (a) above. In case any such action is brought against any Indemnified Person, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may determine, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such Indemnified Person (who shall not, except with the written consent of such Indemnified Person, be counsel to the indemnifying party) at the expense of the indemnifying party; provided, however, that if (i) the use of counsel chosen by the indemnifying party to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or are targets of, any such action include both the Indemnified Person and the indemnifying party, and the Indemnified Person shall have been advised by counsel that there may be one or more legal defenses available to it and/or any other Indemnified Person that are different from or additional to those available to the indemnifying party, or (iii) the indemnifying party shall not have employed counsel satisfactory to the Indemnified Person to represent the Indemnified Person within a

 

27

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reasonable time after notice of the institution of such action, then, in each such case, the indemnifying party shall not have the right to direct the defense of such action on behalf of such Indemnified Person or Persons and such Indemnified Person or Persons shall have the right to select separate counsel (including an additional local counsel) to defend such action on behalf of such Indemnified Person or Persons at the expense of the indemnifying party. After notice from the indemnifying party to such Indemnified Person of its election so to assume the defense thereof and approval by such Indemnified Person of counsel appointed to defend such action, the indemnifying party will not be liable to such Indemnified Person under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such Indemnified Person in connection with the defense thereof, unless (i) the Indemnified Person shall have employed separate counsel in accordance with the proviso to the immediately preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, representing the Indemnified Persons who are parties to such action or actions) or (ii) the indemnifying party has authorized in writing the employment of counsel for the Indemnified Person at the expense of the indemnifying party. After such notice from the indemnifying party to such Indemnified Person, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such Indemnified Person without the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld or delayed).

 

(c)

No indemnifying party shall, without the prior written consent of any Indemnified Person, effect any settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action, claim, suit or proceeding in respect of which the Indemnified Person is or could have been a party, or indemnity could have been sought hereunder by any Indemnified Person (whether or not the Indemnified Person is an actual or potential party to such action or claim), unless such settlement (A) includes an unconditional express written release of any Indemnified Person in form and substance reasonably satisfactory to such Indemnified Person, from all losses, claims, damages or liabilities arising out of such action, claim, suit or proceeding and (B) does not include any statement as to an admission of fault, culpability or failure to act by or on behalf of such Indemnified Person. If a claim or action is settled, or if there be a final judgment for the plaintiff with respect to any such claim or action, each indemnifying party jointly and severally agrees, subject to the exceptions and limitations set forth above, to indemnify and hold harmless each Indemnified Person from and against any and all losses, claims, damages or liabilities (and legal and other expenses as set forth above) incurred by reason of such settlement or judgment.

 

(d)

To provide for just and equitable contribution to joint liability in any case in which either (i) any party otherwise entitled to indemnification hereunder makes a claim for indemnification pursuant to this Section 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that this Section 8 provides for indemnification in such case, or (ii) contribution may be required on the part of any party hereto for which indemnification is provided under this Section 8, then, and in each such case, such parties will contribute to the aggregate losses, claims, damages, liabilities, or expenses to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of

 

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each of the indemnifying party and the indemnified party in connection with the statements, omissions, or other actions that resulted in such loss, claim, damage, liability, or expense, as well as to reflect any other relevant equitable considerations; provided, however, that, in any such case, no Indemnified Person will be required to contribute any amount in excess of the price paid by such Indemnified Person (or its Affiliate) for the Securities.

 

(e)

The indemnity and expense reimbursement obligations set forth herein (i) shall be in addition to any liability any of the Group Companies or the Controlling Shareholders may have to any Indemnified Person at common law or otherwise, (ii) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Purchaser or any other Indemnified Person and (iii) shall be binding on any successor or assignee of any of the Group Companies and successors or assignees of any of the Group Companies’ business and assets.

 

(f)

If any of the Group Companies enters into any agreement or arrangement with respect to, or effects, any proposed sale, exchange, dividend or other distribution or liquidation of all or a significant portion of its assets in one or a series of transactions or any significant recapitalization or reclassification of its outstanding securities, such Group Company shall provide for the assumption of their obligations under this Agreement by another party reasonably satisfactory to the Purchaser.

9. Termination. (i) The Purchaser may terminate this Agreement at any time prior to the Closing Date by written notice to the Company if any of the following has occurred:

 

(a)

since the date hereof, any Material Adverse Effect or development involving or reasonably expected to result in a prospective Material Adverse Effect that could, in the Purchaser’s reasonable judgment, be expected to (i) make it impracticable or inadvisable to proceed with the purchase of the Securities on the terms and in the manner contemplated in this Agreement and the Indentures, or (ii) materially impair the investment quality of any of the Securities;

 

(b)

the failure of any of the Group Companies to satisfy any of the conditions contained in Section 7(i) hereof on or prior to May 15, 2007;

 

(c)

any outbreak or escalation of hostilities or other national or international calamity or crisis, including acts of terrorism, or material adverse change or disruption in economic conditions in, or in the financial markets of, the United States, the European Union, PRC or Hong Kong (it being understood that any such change or disruption shall be relative to such conditions and markets as in effect on the date hereof), if the effect of such outbreak, escalation, calamity, crisis, act or material adverse change in the economic conditions in, or in the financial markets of, the United States, the European Union or Hong Kong could be expected to make it, in the Purchaser’s sole judgment, impracticable or inadvisable to proceed with the consummation of the transactions on the terms and in the manner contemplated in this Agreement or the Indentures;

 

(d)

the enactment, publication, decree or other promulgation after the date hereof of any Applicable Law that could be reasonably expected to have a Material Adverse Effect;

 

(e)

the declaration of a banking moratorium by any federal or New York state Governmental Authority; or the taking of any action by any Governmental Authority after the date hereof in respect of its monetary or fiscal affairs that could reasonably be expected to have a material adverse effect on the financial markets in the United States, European Union, Hong Kong or elsewhere; or

 

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(f)

any of the Other Agreements has been terminated pursuant to the terms thereof.

(ii) Subject to the satisfaction (or waiver by the Purchaser) by the Company of all of the conditions specified in Section 7(i), at the Closing, the Company may terminate this Agreement by written notice to the Purchaser on the Closing Date in the event that the conditions contained in Section 7(ii) hereof have not been satisfied (or otherwise waived by the Company) on the Closing Date.

10. Survival of Representations and Indemnities. The representations and warranties, covenants, indemnities and contribution and expense reimbursement provisions and other agreements of any of the Group Companies, the Controlling Shareholders and the Purchaser set forth in this Agreement shall remain operative and in full force and effect, and will survive, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of the Purchaser, any of the Group Companies or the Controlling Shareholders, and (ii) acceptance of the Units and Convertible Notes, and payment for them hereunder.

11. Substitution of Purchaser. The Purchaser shall have the right to substitute any one of its Affiliates as the purchaser of the Units or Convertible Notes, by written notice to the Company, which notice shall be signed by the Purchaser and such Affiliate, shall contain such Affiliate’s agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6 hereof. Upon receipt of such notice, wherever the word “Purchaser” is used in this Agreement (other than in this Section 11), such word shall be deemed to refer to such Affiliate in lieu of the original purchaser. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to the original purchaser all of the Units or Convertible Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word “Purchaser” is used in this Agreement (other than in this Section 11), such word shall no longer be deemed to refer to such Affiliate, but shall refer to the original purchaser, and the original purchaser shall have all the rights of an original holder of the United or Convertible Notes under this Agreement.

12. Miscellaneous.

 

(a)

Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company and/or the other Group Companies, to: No. 129, 5th Avenue, Zhengzhou Economic and Technology Development Zone, Henan Province, People’s Republic of China, Fax: +86 371 6565 1168, Attention: Chief Financial Officer, and (ii) if to the Purchaser, to the address as indicated in Schedule I.

 

(b)

This Agreement has been and is made solely for the benefit of and shall be binding upon each of the Group Companies, the Controlling Shareholders and the Purchaser and, to the extent provided in Section 8 hereof, the affiliates and their respective agents, employees, officers, directors, partners, counsel, and shareholders expressly referred to in Section 8, and their respective heirs, executors, administrators, successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement; provided, however, that Merrill Lynch Far East Limited may rely on the representations and warranties herein contained as an intended third-party beneficiary thereof.

 

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(c)

THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

 

(d)

Subject to Section 12(f) below, each of the Group Companies and the Controlling Shareholders agrees that any suit, action or proceeding against any of the Group Companies and the Controlling Shareholders arising out of or based upon this Agreement or the transactions contemplated hereby may be instituted in any State or U.S. federal court in The City of New York and County of New York, and waives any objection which it may now or hereafter have to the laying of venue of any such proceeding, and irrevocably submits to the non-exclusive jurisdiction of such courts in any suit, action or proceeding. Each of the Group Companies and the Controlling Shareholders hereby appoints Law Debenture Corporate Services Inc., 400 Madison Avenue, Suite 4D, New York, NY 10017, Facsimile No. +1 212 750 1361, as its authorized agent (the “Authorized Agent”) upon whom process may be served in any suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated herein.

 

(e)

Subject to Section 12(f) below, the parties hereto each hereby waive any right to trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement.

 

(f)

All disputes arising out of or in connection with this Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by three arbitrators appointed as follows: one arbitrator shall be appointed by the Purchaser, one arbitrator shall be appointed by the Company, and the third arbitrator shall be appointed jointly by the two arbitrators appointed by the parties. The place of arbitration shall be in Singapore. The arbitration shall be conducted in English. The arbitration awards shall be final and binding upon the parties.

 

(g)

No failure to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy.

 

(h)

This Agreement may be signed in various counterparts which together shall constitute one and the same instrument.

 

(i)

The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of any provision of this Agreement.

 

(j)

If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, in each case, to the extent permitted by applicable law, and the parties hereto shall use their reasonable best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable, to the extent permitted by applicable law.

 

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(k)

This Agreement may be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may be given; provided that the same are in writing and signed by all of the signatories hereto.

 

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Please confirm that the foregoing correctly sets forth the agreement among the Group Companies and the Purchaser.

 

[SIGNATURE PAGE TO PURCHASE AGREEMENT]

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[SIGNATURE PAGE TO PURCHASE AGREEMENT]

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[SIGNATURE PAGE TO PURCHASE AGREEMENT]

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[SIGNATURE PAGE TO PURCHASE AGREEMENT]

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Accepted and Agreed to:

 

MERRILL LYNCH INTERNATIONAL
By:
By:
Name:
Title:		Authorized Signatory

[SIGNATURE PAGE TO PURCHASE AGREEMENT]

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Schedule I. Purchasers Name, Address and Amounts to be Purchased

Schedule II. Group Companies

Exhibit A-1. Form of High Yield Indenture

Exhibit A-2. Form of Convertible Bond Indenture

Exhibit B. Form of Warrant Agreement

Exhibit C-1. Form of Offshore Share Pledge Agreement

Exhibit C-2. Form of Onshore Share Pledge Agreement

Exhibit C-3. Form of Note Pledge Agreement

Exhibit D. Form of Intercreditor Agreement

Exhibit E. Form of Registration Rights Agreement

Exhibit F. Form of Onshore Account Agreement

Exhibit G. Disclosure Schedules

Exhibit H-1. Form of US Legal Opinion

Exhibit H-2. Form of Cayman Legal Opinion

Exhibit H-3. Form of PRC Legal Opinion

Exhibit I. Form of Non-Competition Agreement

Exhibit J. Form of Information Rights and Inspection Agreement

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SCHEDULE I

Schedule of Purchasers

 

I.	Closing of the Sale and Issuance of 750 Units

Initial Closing Date: April 13, 2006

 

Name and Address		Number of HY Notes		Number of Warrants		Purchase Price
Drawbridge Global Macro Master Fund Ltd Address: [to be inserted]		100		100		US$	9,925,000
Polygon Global Opportunities Master Fund Address: [to be inserted]		150		150		US$	14,887,500
Merrill Lynch International Address: Merrill Lynch Financial Center 2 King Edward Street London EC1A 1HQ England		100		100		US$	9,925,000
Forum Partners Asian Realty II , LP Address: [to be inserted]		300		300		US$	29,775,000
Dillon Read Finance LP Address: [to be inserted]		54		54		US$	5,359,500
Dillon Read Financial Trading Products Ltd. Address: [to be inserted]		46		46		US$	4,565,500
TOTAL		750		750		US$	74,437,500

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SCHEDULE I (CONTINUED)

Schedule of Purchasers (the Subsequent Sale)

 

II.	Closing of the Sale and Issuance of either (i) 250 Units or (ii) US$25,000,000 of Convertible Notes.

(to be revised upon the consummation of the Subsequent Sale)

Anticipated Closing Date: April 20, 2006

If sale and issuance of 250 Units in the Subsequent Sale

 

Name and Address		Number of HY Notes		Number of Warrants		Purchase Price
Merrill Lynch International Address: Merrill Lynch Financial Center 2 King Edward Street London EC1A 1HQ England		250		250		US$	24,812,500

OR

If sale and issuance of Convertible Notes in the Subsequent Sale

 

Name and Address		Number of Convertible Notes		Purchase Price
Merrill Lynch International Address: Merrill Lynch Financial Center 2 King Edward Street London EC1A 1HQ England		250		US$	25,000,000

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SCHEDULE II GROUP COMPANIES

Xinyuan Real Estate, Ltd.

Xinyuan (China) Real Estate Co., Ltd.

Henan Xinyuan Real Estate Co., Ltd.

Suzhou Xinyuan Real Estate Development Co., Ltd.

Henan Xinyuan Real Estate Agency Co., Ltd.

Xinyuan Property Management Co., Ltd.

Zhengzhou Mingyuan Landscape Engineering Co., Ltd.

Zhengzhou Xinyuan Computer Network Engineering Co., Ltd.

Henan Wanzhong Real Estate Co., Ltd.

Shandong Xinyuan Real Estate Co., Ltd.

Anhui Xinyuan Real Estate Development Co., Ltd.

Qingdao Xinyuan Xiangrui Real Estate Co., Ltd.

Exhibit 10.4

EXECUTION COPY

 

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XINYUAN REAL ESTATE CO., LTD.

GUARANTEED SENIOR SECURED

FLOATING RATE NOTES DUE 2010

 

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INDENTURE

Dated April 13, 2007

 

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The Hongkong and Shanghai Banking Corporation Limited

as Trustee

 

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This INDENTURE dated April 13, 2007 is by and among XINYUAN REAL ESTATE CO., LTD., a company incorporated with limited liability in the Cayman Islands (the “Company”), the Guarantor (as defined below) and The Hongkong and Shanghai Banking Corporation Limited, as trustee (the “Trustee”).

The Company has duly authorized the creation of an issue of Guaranteed Senior Secured Floating Rate Notes due 2010 (the “Notes”) of the amount and substantially the tenor hereinafter set forth and, to provide therefor, the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Notes, when duly issued and executed by the Company, and authenticated and delivered hereunder, the valid obligations of the Company, and to make this Indenture a valid and binding agreement, in accordance with its terms, of the Company, have been done. The Company, the Guarantor and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Notes issued under this Indenture:

ARTICLE 1.

DEFINITIONS AND INCORPORATION BY REFERENCE

Section 1.01. Definitions.

For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:

“Account Agreement” means the onshore account agreement dated as of the Issue Date by and among the WFOE and Industrial and Commercial Bank of China, Zhengzhou Branch, as account bank.

“Additional Amounts” means such additional amounts as required to be paid by the Company in accordance with Section 4.31.

“Additional Assets” means:

(a) any Property (other than cash, Cash Equivalents and securities) to be owned by the Company or any of its Subsidiaries and used in a Related Business; or

(b) Capital Stock of a Person that becomes a Subsidiary of the Company as a result of the acquisition of such Capital Stock by the Company or another Subsidiary of the Company from any Person other than the Company or an Affiliate of the Company; provided, however, that, in the case of clause (b), such Subsidiary is primarily engaged in a Related Business.

“Additional Interest” means an annual rate of interest equal to 0.5% payable on the outstanding Notes if the Company fails to deliver to the Collateral Agent an Officers’ Certificate with the required written evidence pursuant to Section 4.32, such interest accruing from and including the relevant date in Section 4.32 (or, if Interest has been paid since such date, from and including the most recent Interest Payment Date thereafter) to but excluding each date of payment thereof until the earlier of (x) the filing of WFOE Share Pledge with the MOFCOM (or, if approved by the MOFCOM, all subsequent filings with the SAFE, the SAIC and any other PRC Governmental Authorities (to the extent required by law to perfect a security interest)) and (y) the repayment in full of the Notes.

“Affiliate” of any specified Person means:

(a) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person, or

(b) any other Person who is a director or officer of:

(1) such specified Person,

(2) any Subsidiary of such specified Person,

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(3) any Person described in clause (a) above, or

(c) any spouse, parent, child, brother or sister of any Person described in clauses (a) or (b) above.

For the purposes of this definition, “control,” when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing. For purposes of Section 4.12 and Section 4.14 and the definition of “Additional Assets” only, “Affiliate” shall also mean any Beneficial Owner of shares representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such Beneficial Owner pursuant to the first sentence hereof.

“Agent” means any Registrar, co-registrar, Paying Agent or additional paying agent, Calculation Agent or the Collateral Agent, and collectively they are referred to herein as “Agents”.

“Applicable Procedures” means, with respect to any transfer, redemption or exchange of or for beneficial interests in any Global Note, the rules and procedures of Euroclear and Clearstream that apply to such transfer, redemption or exchange.

“Asset Sale” means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by the Company or any of its Subsidiaries, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a “disposition”), of

(a) any shares of Capital Stock of a Subsidiary of the Company (other than directors’ qualifying shares), or

(b) any other Property of the Company or any of its Subsidiaries outside of the ordinary course of business of the Company or such Subsidiary,

other than, in the case of clause (a) or (b) above,

(1) any disposition by a Subsidiary of the Company to the Company or by the Company or one of its Subsidiaries to a Wholly Owned Subsidiary,

(2) any disposition that constitutes a Permitted Investment or Restricted Payment permitted by Section 4.10,

(3) any disposition effected in compliance with the first paragraph of Section 5.01,

(4) any disposition of inventory (including, without limitation, residential units held for sale in the ordinary course of business), receivables and other current assets of the Company or any of its Subsidiaries (including properties under development for sale and completed properties for sale) in the ordinary course of business, or inventory or other property that in the reasonable judgment of the Company have become uneconomic, obsolete or worn out,

(5) the sale or discount of accounts receivable in connection with the compromise or collection thereof in the ordinary course of business, and

(6) any disposition in a single transaction or a series of related transactions of assets for aggregate consideration and with a Fair Market Value of less than $1.0 million.

 

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“Attributable Debt” in respect of a Sale and Leaseback Transaction means, at any date of determination,

(a) if such Sale and Leaseback Transaction is a Capital Lease Obligation, the amount of Debt represented thereby according to the definition of “Capital Lease Obligations,” and

(b) in all other instances, the present value (discounted at the weighted average interest rate implicit in the Sale and Leaseback Transaction, compounded annually in the most recently completed twelve months) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended).

“Average Life” means, as of any date of determination, with respect to any Debt or Preferred Stock, the quotient obtained by dividing:

(a) the sum of the product of the numbers of years (rounded to the nearest one-twelfth of one year) from the date of determination to the dates of each successive scheduled principal payment of such Debt or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by

(b) the sum of all such payments.

“Bankruptcy Law” means Title 11, U.S. Code or any similar federal or state law for the relief of debtors, or the law of any other jurisdiction relating to bankruptcy, insolvency, winding up, liquidation, reorganization or relief of debtors.

“Beneficial Owner” has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular “person” (as such term is used in Section 13(d)(3) of the Exchange Act), such “person” shall be deemed to have beneficial ownership of all securities that such “person” has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition or passage of time. The terms “Beneficially Owns” and “Beneficially Owned” have a corresponding meaning.

“Board of Directors” means (1) except as set out in clause (3), in respect of a corporation, the board of directors of the corporation, or (except if used in the definition of “Change of Control”) any duly authorized committee thereof; (2) except as set out in clause (3), in respect of any other Person, the board or committee of that Person serving an equivalent function; and (3) in the case of each PRC Subsidiary other than the WFOE, one executive director.

“Board Resolution” of a Person means a copy of a resolution (in form and substance satisfactory to the Trustee) certified by the secretary (or individual performing comparable duties) of the applicable Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee.

“Business Day” means any day other than a Legal Holiday.

“Calculation Agent” means initially The Hongkong and Shanghai Banking Corporation Limited until a successor replaces The Hongkong and Shanghai Banking Corporation Limited in accordance with Section 2.03 hereof and thereafter means the successor serving hereunder.

“Capital Expenditures” means expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Lease Obligations which is capitalized on the consolidated balance sheet of the Company and its Subsidiaries) by the Company and its Subsidiaries that, in conformity with GAAP, are included in “additions to property, plant and equipment” or as capitalized internally developed software or comparable items reflected in the consolidated balance sheet of the Company and its Subsidiaries, excluding, however, (i) the application of insurance loss proceeds and (ii) the purchase, development, construction or improvement of real estate or land-use rights used in a Related Business.

 

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“Capital Lease Obligations” means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by such obligation shall be the capitalized amount of such obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. For purposes of Section 4.11 a Capital Lease Obligation shall be deemed secured by a Lien on the Property being leased.

“Capital Stock” means, with respect to any Person, any shares or other equivalents (however designated) of any class of corporate stock or partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in such Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest.

“Capital Stock Sale Proceeds” means the aggregate cash proceeds received by the Company from the issuance or sale (other than to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any such Subsidiary for the benefit of their employees) by the Company of its Capital Stock (other than Disqualified Stock) after the Issue Date, net of attorneys’ fees, accountants’ fees, underwriters’ or placement agents’ fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof.

“Cash Balance” means cash and Cash Equivalents in hand or at a bank or financial institution and credited to an account in the name of the Company or any Subsidiary of the Company and to which the Company or such Subsidiary is alone beneficially entitled and has sole control.

“Cash Equivalents” means any of the following:

(a) Investments in U.S. Government Securities maturing within 180 days of the date of acquisition thereof;

(b) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 90 days of the date of acquisition thereof issued by a bank or trust company organized under the laws of the United States of America or any state thereof having capital, surplus and undivided profits aggregating in excess of $500 million and whose long-term debt is rated “A” or higher according to Moody’s or S&P (or such similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act));

(c) repurchase obligations with a term of not more than 7 days for underlying securities of the types described in clause (a) entered into with:

(1) a bank meeting the qualifications described in clause (b) above, or

(2) any primary government securities dealer reporting to the Market Reports Division of the Federal Reserve Bank of New York;

(d) Investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America with a rating at the time as of which any Investment therein is made of “P-1” (or higher) according to Moody’s or “A-1” (or higher) according to S&P (or such similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act));

 

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(e) direct obligations (or certificates representing an ownership interest in such obligations) of any state of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such state are pledged and which are not callable or redeemable at the issuer’s option, provided that:

(1) the long-term debt of such state is rated “A-3” or “A-” or higher according to Moody’s or S&P (or such similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act)), and

(2) such obligations mature within 180 days of the date of acquisition thereof; and

(f) time deposit accounts, certificates of deposit and money market deposits with (i) Bank of China, Industrial and Commercial Bank of China, China Construction Bank and China Merchants Bank or (ii) any other bank or trust company organized under the laws of the PRC whose long-term debt is rated as high or higher than any of those banks.

“Change of Control” means the occurrence of any of the following events:

(a) the Permitted Holders cease to be the Beneficial Owners directly or indirectly, of at least 27.5% of the total voting power of the Voting Stock of the Company or are no longer the Beneficial Owners of the largest percentage of voting power of the Voting Stock of the Company, or if Mr. Zhang does not otherwise have the ability to control the Company, whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, any direct or indirect transfer of securities by the Permitted Holders or otherwise (for purposes of this clause (a), the Permitted Holders will be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation so long as the Permitted Holders beneficially own, directly or indirectly, in the aggregate a majority of the total voting power of the Voting Stock of such parent corporation and “control” means the ability, directly or indirectly, to influence any decision of, or to direct or cause the direction of, the management and policies of the Company, including, without limitation, decisions pertaining to operations and maintenance); or

(b) whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, persons holding a majority of the Voting Stock of the Company prior to such transaction hold less than a majority of the Surviving Person’s Voting Stock after such transaction; or

(c) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all of the Property of the Company and its Subsidiaries, considered as a whole (other than a disposition of such Property as an entirety or virtually as an entirety to a Wholly Owned Subsidiary or one or more Permitted Holders), shall have occurred, or the Company merges, consolidates or amalgamates with or into any other Person (other than one or more Permitted Holders) or any other Person (other than one or more Permitted Holders) merges, consolidates or amalgamates with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where:

(1) the outstanding Voting Stock of the Company is reclassified into or exchanged for other Voting Stock of the Company or for Voting Stock of the Surviving Person, and

(2) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the Company or the Surviving Person immediately after such transaction and in substantially the same proportion as before the transaction; or

 

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(d) Continuing Directors cease for any reason to constitute a majority of the Board of Directors then in office; or

(e) the shareholders of the Company shall have approved any plan of liquidation or dissolution of the Company.

“Clearstream” means Clearstream Banking, société anonyme, and any successor thereto.

“Code” means the U.S. Internal Revenue Code of 1986, as amended.

“Collateral” means all the collateral described in the Security Documents.

“Collateral Agent” means The Hongkong and Shanghai Banking Corporation Limited, and any successor collateral agent appointed pursuant to the terms of this Indenture.

“Commission” means the U.S. Securities and Exchange Commission.

“Common Depositary” means, with respect to the Notes issuable or issued in global form, the Person specified in Section 2.03(b) hereof as the Common Depositary to Euroclear and Clearstream with respect to the Notes, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provisions of this Indenture.

“Common Shares” means any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company.

“Company” is defined in the preamble.

“Consolidated Current Assets” means, at any time, the consolidated current assets of the Company and its consolidated Subsidiaries as of such time.

“Consolidated Current Liabilities” means, at any time, (a) the consolidated current liabilities of the Company and its consolidated Subsidiaries plus (b) the current liabilities of any Person (other than the Company or a consolidated Subsidiary of the Company) that are guaranteed by the Company or any of its consolidated Subsidiaries, all as of such time.

“Consolidated Interest Expense” means, for any period, the total interest expense (excluding tax) of the Company and its consolidated Subsidiaries (whether paid or accrued), plus, to the extent not included in such total interest expense, and to the extent Incurred by the Company or its Subsidiaries, without duplication,

(a) interest expense attributable to leases constituting part of a Sale and Leaseback Transaction and to Capital Lease Obligations,

(b) amortization of debt discount and debt issuance cost, including commitment fees, but excluding debt issuance costs attributable solely to the warrants issued contemporaneously with the Notes,

(c) capitalized interest,

(d) non-cash interest expense,

(e) commissions, discounts and other fees and charges owed with respect to letters of credit and banker’s acceptance financing,

(f) net costs associated with Hedging Obligations (including amortization of fees),

 

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(g) Disqualified Stock Dividends (other than dividends payable in Capital Stock other than Disqualified Stock),

(h) Preferred Stock Dividends (other than dividends payable in Capital Stock other than Disqualified Stock) of Subsidiaries,

(i) interest accruing on (x) any Debt of any other Person to the extent such Debt is guaranteed by the Company or any of its Subsidiaries (other than Pre-Registration Mortgage Guarantees), and (y) any Debt of any other Person secured by assets or property of the Company or any of its Subsidiaries, and

(j) the cash contributions to any employee stock ownership plan or similar trust, if any and to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Debt Incurred by such plan or trust.

“Consolidated Interest Expense Coverage Ratio” means, as of any date of determination, the ratio of:

(a) the aggregate amount of EBITDA for the most recent four consecutive Fiscal Quarters ending at least 45 days prior to such determination date to

(b) Consolidated Interest Expense for such four Fiscal Quarters;

provided, however, that:

(1) if

(A) since the beginning of such period the Company or any of its Subsidiaries has Incurred any Debt that remains outstanding or Repaid any Debt, or

(B) the transaction giving rise to the need to calculate the Consolidated Interest Expense Coverage Ratio is an Incurrence or Repayment of Debt,

Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Incurrence or Repayment as if such Debt was Incurred or Repaid on the first day of such period, provided that, in the event of any such Repayment of Debt, EBITDA for such period shall be calculated as if the Company or such Subsidiary had not earned any interest income actually earned during such period in respect of the funds used to Repay such Debt, and provided further that the amount of Debt Incurred under revolving credit facilities shall be deemed to be the average daily balance of such Debt during such period (or any shorter period in which such facilities are in effect) and

(2) if

(A) since the beginning of such period the Company or any of its Subsidiaries shall have made any Asset Sale or an Investment (by merger or otherwise) in any Subsidiary of the Company (or any Person which becomes a Subsidiary of the Company) or an acquisition of Property which constitutes all or a substantial part of an operating unit of a business,

(B) the transaction giving rise to the need to calculate the Consolidated Interest Expense Coverage Ratio is such an Asset Sale, Investment or acquisition, or

(C) since the beginning of such period any Person (that subsequently became a Subsidiary of the Company or was merged with or into the Company or any Subsidiary of the Company since the beginning of such period) shall have made such an Asset Sale, Investment or acquisition,

 

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then EBITDA for such period shall be calculated after giving pro forma effect to such Asset Sale, Investment or acquisition as if such Asset Sale, Investment or acquisition had occurred on the first day of such period.

If any Debt bears a floating rate of interest and is being given pro forma effect, the interest expense on such Debt shall be calculated as if the base interest rate in effect for such floating rate of interest on the date of determination had been the applicable base interest rate for the entire period (taking into account any Interest Rate Agreement applicable to such Debt if such Interest Rate Agreement has a remaining term in excess of 12 months). In the event the Capital Stock of any Subsidiary of the Company is sold during the period, the Company shall be deemed, for purposes of clause (1) above, to have Repaid during such period the Debt of such Subsidiary to the extent the Company and its continuing Subsidiaries are no longer liable (whether directly or indirectly, contingently or otherwise) for such Debt after such sale and have not provided any security or pledged any assets with respect thereto.

“Consolidated Net Income” means, for any period, the net income (loss) of the Company and its consolidated Subsidiaries; provided, however, that there shall not be included in such Consolidated Net Income:

(a) any net income (loss) of any Person (other than the Company) if such Person is not a Subsidiary of the Company, except that:

(1) subject to the exclusions contained in clauses (c), (d) and (e) below, equity of the Company and its consolidated Subsidiaries in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Person during such period to the Company or any of its Subsidiaries as a dividend or other distribution (subject, in the case of a dividend or other distribution to such Subsidiary, to the limitations contained in clause (b) below), and

(2) the equity of the Company and its consolidated Subsidiaries in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income,

(b) any net income (loss) of any Subsidiary of the Company if such Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions, directly or indirectly, to the Company, except that:

(1) subject to the exclusions contained in clauses (c), (d) and (e) below, the equity of the Company and its consolidated Subsidiaries in the net income of any such Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Subsidiary during such period to the Company or another of its Subsidiaries as a dividend or other distribution (subject, in the case of a dividend or other distribution to another Subsidiary of the Company, to the limitation contained in this clause (b)), and

(2) the equity of the Company and its consolidated Subsidiaries in a net loss of any such Subsidiary for such period shall be included in determining such Consolidated Net Income,

(c) any gain (but not loss) realized upon the sale or other disposition of any Property of the Company or any of its consolidated Subsidiaries (including pursuant to any Sale and Leaseback Transaction) that is not sold or otherwise disposed of in the ordinary course of business,

(d) any extraordinary or non-recurring gain or loss,

(e) the cumulative effect of a change in accounting principles, and

 

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(f) any non-cash compensation expense realized for grants of performance shares, stock options or other rights to officers, directors and employees of the Company or any Subsidiary, provided that such shares, options or other rights can be redeemed at the option of the holder only for Capital Stock of the Company (other than Disqualified Stock).

“Consolidated Net Worth” means the total of the amounts shown on the consolidated balance sheet of the Company and its Subsidiaries as of (i) the end of the most recent Fiscal Quarter of the Company in the case of Section 4.16 and (ii) in all other cases, the end of the most recent Fiscal Quarter of the Company ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as:

(a) the par or stated value of all outstanding Capital Stock of the Company, plus

(b) paid-in capital or capital surplus relating to such Capital Stock, plus

(c) any retained earnings or earned surplus, less:

(1) any accumulated deficit, and

(2) any amounts attributable to Disqualified Stock (other than the Company’s Series A Preference Shares as constituted on the Issue Date) or any equity security convertible into or exchangeable for Debt, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of Capital Stock of the Company or any of its Subsidiaries, each item to be determined in conformity with GAAP.

“Consolidated Subsidiary Debt to Consolidated Total Tangible Asset Ratio” means the ratio of (a) the aggregate amount of outstanding Debt of the Company’s consolidated Subsidiaries (other than any Debt owed by a Subsidiary of the Company to the Company or any Wholly Owned Subsidiary) to (b) the sum of the consolidated Total Tangible Assets of the Company (as reflected in the Company’s consolidated balance sheet) as of the end of the Fiscal Quarter.

“Consolidated Tangible Net Worth” means, as of any date of determination, the Consolidated Net Worth less the Intangible Assets.

“Continuing Directors” means, as of any date of determination, any member of the Board of Directors who (a) was a member of the Board of Directors on the date of this Indenture or (b) was nominated for election to the Board of Directors by, or whose election was ratified with the approval of, a majority of the Continuing Directors who were members of the Board of Directors at the time of such nomination or election.

“Contractor Guarantees” means Guarantees by the Company or any Subsidiary of Debt of any contractor, builder or other similar Person engaged by the Company or such Subsidiary in connection with the development, construction or improvement of real property, which Debt was Incurred by such contractor, builder or other similar Person solely to finance the cost of such development, construction or improvement.

“Convertible Note Guarantees” means the guarantee by one or more of the Company’s Subsidiaries of the Convertible Notes pursuant to the terms of the indenture governing the terms of the Convertible Notes.

“Convertible Notes” means the Company’s 2.0% Convertible Subordinated Notes due 2012 issued pursuant to that certain indenture dated             , 2007 by and among the Company, the Guarantor and The Hongkong and Shanghai Banking Corporation Limited as Trustee.

“Corporate Trust Office of the Trustee” shall be at the address of the Trustee specified in Section 12.01 hereof, or such other address as to which the Trustee may give notice to the Company.

 

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“Credit Facilities” means, with respect to any PRC Subsidiary, one or more debt or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, notes, receivables or inventory financing (including through the sale of receivables or inventory to such lenders or to special purpose, bankruptcy remote entities formed to borrow from such lenders against such receivables or inventory) or trade letters of credit, in each case together with any Refinancings thereof by any lender or syndicate of lenders.

“Currency Exchange Protection Agreement” means, in respect of a Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect such Person against fluctuations in currency exchange rates.

“Custodian” means, with respect to the Notes issuable or issued in global form, the Person specified in Section 2.03(c) as Custodian with respect to the Notes, and any and all successors thereto appointed as custodian hereunder and having become such pursuant to the applicable provisions of this Indenture.

“Debt” means, with respect to any Person on any date of determination (without duplication):

(a) the principal of and premium (if any) in respect of:

(1) debt of such Person for money borrowed, and

(2) debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable;

(b) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by such Person;

(c) all obligations of such Person representing the deferred purchase price of Property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business);

(d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (a) through (c) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit);

(e) the amount of all obligations of such Person with respect to the Repayment of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends);

(f) all obligations of the type referred to in clauses (a) through (e) above of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any guarantee;

(g) all obligations of the type referred to in clauses (a) through (f) above of other Persons secured by any Lien on any Property of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the Fair Market Value of such Property and the amount of the obligation so secured; and

 

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(h) to the extent not otherwise included in this definition, Hedging Obligations of such Person.

Debt shall not include any capital commitments or similar obligations Incurred in the ordinary course of business in connection with the acquisition, development, construction or improvement of real or personal property (including land use rights) to be used in a Related Business; provided that such Debt is not reflected and is not required under GAAP to be reflected on the balance sheet of the Company or any Subsidiary (contingent obligations and commitments referred to in a note to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet).

The amount of Debt of any Person at any date shall be the outstanding balance, or the accreted value of such Debt in the case of Debt issued with original issue discount, at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. The amount of Debt represented by a Hedging Obligation shall be equal to the net amount payable by such Person if such Hedging Obligation terminated at that time due to default by such Person.

“Default” means any event which is, or after notice or passage of time or both would be, an Event of Default.

“Definitive Note” means a certificated Note registered in the name of the Holder thereof and issued in accordance with Section 2.06 or 2.10 hereof, in substantially the form of Exhibit A hereto except that such Note shall not bear the Global Note Legend and shall not have the “Schedule of Exchanges of Interests in the Global Note” attached thereto.

“Determination Date” means, with respect to any Interest Period, the second London Banking Day preceding the first day of the Interest Period.

“Disqualified Stock” means any Capital Stock of the Company or any of its Subsidiaries that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise:

(a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,

(b) is or may become redeemable or repurchaseable at the option of the holder thereof (except that any Capital Stock that would constitute Disqualified Stock solely because the holders of such Capital Stock have the right to require the Company to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with Section 4.10 hereof and such repurchase rights are no more favorable to holders of such Capital Stock than rights under Section 4.12 and Section 4.17 granted to Holders hereunder), in whole or in part, or

(c) is convertible or exchangeable at the option of the holder thereof for Debt or Disqualified Stock,

on or prior to, in the case of clause (a), (b) or (c), the first anniversary of the Stated Maturity of the Notes.

“Disqualified Stock Dividends” means all dividends or the distributions with respect to Disqualified Stock of the Company held by Persons other than a Wholly Owned Subsidiary.

 

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“Distribution Compliance Expiration Date” means the 41st day after the after the later of (i) the day on which the Notes were first offered to persons other than distributors (as defined in Regulation S under the Securities Act) and (ii) the Issue Date.

“EBITDA” means, for any period, an amount equal to, for the Company and its consolidated Subsidiaries:

(a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period:

(1) the provision for taxes based on income or profits or utilized in computing net loss,

(2) Consolidated Interest Expense,

(3) depreciation,

(4) amortization of intangibles, and

(5) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of, or reserve for, cash expenditures in any future period or amortization of a prepaid cash expense paid in a period prior to the period that is subject to calculation), minus

(b) all non-cash items increasing Consolidated Net Income for such period.

Notwithstanding the foregoing clause (a), the provision for taxes and the depreciation, amortization and non-cash items of a Subsidiary of the Company shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Subsidiary or its shareholders.

“Euroclear” means Euroclear Bank, S.A./N.V., and any successor thereto.

“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time.

“Fair Market Value” means, with respect to any Property at the time of determination, the price that could be negotiated in an arm’s-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value shall be determined, except as otherwise provided,

(a) if such Property has a Fair Market Value equal to or less than $5.0 million, by any Officer of the Company,

(b) if such Property has a Fair Market Value in excess of $5.0 million, by a majority of the Board of Directors and evidenced by a Board Resolution delivered to the Trustee, or

(c) if such Property has a Fair Market Value in excess of $10.0 million, by an Independent Financial Advisor and evidenced by a written opinion from such Independent Financial Advisor dated within 30 days of the relevant transaction delivered to the Trustee.

“Fiscal Quarter” means each of the three month periods ending on March 31, June 30, September 30 and December 31.

 

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“GAAP” means United States generally accepted accounting principles as in effect on the Issue Date, including those set forth in:

(a) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants,

(b) the statements and pronouncements of the Financial Accounting Standards Board,

(c) such other statements by such other entity as approved by a significant segment of the accounting profession, and

(d) the rules and regulations of the Commission governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the Commission.

All ratios and computations based on GAAP contained in this Indenture will be computed in conformity with GAAP.

“Governmental Approval” means any authorization of or by, consent of, approval of, license from, ruling of, permit from, tariff by, rate of, certification by, exemption from, filing with (except any filing relating to the perfection of security interests), variance from, claim of, order from, judgment from, decree of, publication to or by, notice to, declaration of or with or registration by or with any Governmental Authority, whether tacit or express.

“Governmental Authority” means any federal, state, national, provincial, municipal, local, territorial or other government department, ministry (including local counterparts thereof), commission, board, agency, regulatory authority, instrumentality, judicial or administrative body, domestic or foreign.

“guarantee” means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person:

(a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise), or

(b) entered into for the purpose of assuring in any other manner the obligee against loss in respect thereof (in whole or in part);

provided, however, that the term “guarantee” shall not include:

(1) endorsements for collection or deposit in the ordinary course of business, or

(2) a contractual commitment by one Person to invest in another Person for so long as such Investment is reasonably expected to constitute a Permitted Investment under clause (a), (b) or (c) of the definition of “Permitted Investment.”

The term “guarantee” used as a verb has a corresponding meaning. The term “guarantor” shall mean any Person Guaranteeing any obligation.

“Guarantee” means the Guarantee of the Notes by each of the Guarantors pursuant to Article 9 and in the form of the Guarantee attached as Exhibit B and any additional Guarantee of the Notes to be executed by any Subsidiary of the Company pursuant to Section 4.18.

 

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“Guarantor” means Xinyuan Real Estate and any Subsidiary of the Company that becomes a Guarantor pursuant to Section 4.18 or who otherwise executes and delivers a supplemental indenture (in form satisfactory to the Trustee) to the Trustee providing for a Guarantee; provided that any Person constituting a Guarantor as described above shall cease to constitute a Guarantor when its respective Guarantee is released in accordance with the terms of this Indenture.

“Hedging Obligation” of any Person means any obligation of such Person pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement or any other similar agreement or arrangement.

“Holder” or “holder” means a Person in whose name a Note is registered in the Security Register.

“Incur” means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, guarantee or become liable in respect of such Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Debt or obligation on the balance sheet of such Person (and “Incurrence” and “Incurred” shall have meanings correlative to the foregoing); provided, however, that a change in GAAP that results in an obligation of such Person that exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of such Debt; provided further, however, that any Debt or other obligations of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary; and provided further, however, that solely for purposes of determining compliance with Section 4.09, amortization of debt discount shall not be deemed to be the Incurrence of Debt, provided that in the case of Debt sold at a discount, the amount of such Debt Incurred shall at all times be the aggregate principal amount at Stated Maturity.

“Indenture” means this instrument, as originally executed or as it may from time to time be supplemented or amended in accordance with Article 8 hereof.

“Independent Financial Advisor” means an investment banking firm of international standing or any third party appraiser of international standing, provided that such firm or appraiser is not an Affiliate of the Company.

“Intangible Assets” shall mean as of the date of any determination thereof the total amount of all assets of the Company and its Subsidiaries classified as goodwill, patents, trade names, trademarks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, deferred assets other than prepaid insurance and prepaid taxes, the excess of cost of shares acquired over book value of related assets and such other assets as are properly classified as “intangible assets” in accordance with GAAP.

“Interest”, when used with reference to the Notes, means any interest payable under the terms of the Notes, including initially a rate of interest equal to LIBOR (as determined by the Calculation Agent from the Issue Date) plus the Margin, and including Additional Interest, if any.

“Interest Payment Dates” shall have the meaning set forth in paragraph 1 of each Note.

“Interest Period” means the period commencing on and including an Interest Payment Date and ending on and excluding the next succeeding Interest Payment Date, with the exception that the first Interest Period shall commence on and include the Issue Date and end on and exclude October 15, 2007.

“Interest Rate Agreement” means, for any Person, any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement designed to protect against fluctuations in interest rates.

“Investment” by any Person means any direct or indirect loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of such Person), advance or other extension of credit or capital contribution (by means of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person.

 

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In determining the amount of any Investment made by transfer of any Property other than cash, such Property shall be valued at its Fair Market Value at the time of such Investment.

“Issue Date” means April 13, 2007.

“Legal Holiday” means a Saturday, a Sunday or a day on which banking institutions in the PRC, Hong Kong, the city in which the Corporate Trust Office of the Trustee is located or any other place of payment on the Notes are authorized by law, regulation or executive order to remain closed.

“LIBOR” means, with respect to an Interest Period, the rate (expressed as a percentage per annum) for deposits in United States dollars for a six-month period beginning on the second London Banking Day after the Determination Date that is the average of the rates that appear on display page designated as page “LIBOR01” on the Reuter Monitor Money Rates Service and Bloomberg page BBAM 1 as of 11:00 a.m., London time, on the Determination Date, or if only one such rate is available, such rate. If display page designated as page “LIBOR01” on the Reuter Monitor Money Rates Service and Bloomberg page BBAM 1 do not include such a rate or are unavailable on a Determination Date, the Calculation Agent will request the principal London office of each of four major banks in the London interbank market, as selected by the Calculation Agent (after consultation with the Company), to provide such bank’s offered quotation (expressed as a percentage per annum), as of approximately 11:00 a.m., London time, on such Determination Date, to prime banks in the London interbank market for deposits in a Representative Amount in United States dollars for a six-month period beginning on the second London Banking Day after the Determination Date. If at least two such offered quotations are so provided, LIBOR for the Interest Period will be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, the Calculation Agent will request each of three major banks in New York City, as selected by the Calculation Agent (after consultation with the Company), to provide such bank’s rate (expressed as a percentage per annum), as of approximately 11:00 a.m., New York City time, on such Determination Date, for loans in a Representative Amount in United States dollars to leading European banks for a six-month period beginning on the second London Banking Day after the Determination Date. If at least two such rates are so provided, LIBOR for the Interest Period will be the arithmetic mean of such rates. If fewer than two such rates are so provided, then LIBOR for the Interest Period will be LIBOR in effect with respect to the immediately preceding Interest Period.

“Lien” means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction).

“London Banking Day” means any day in which dealings in United States dollars are transacted or, with respect to any future date, are expected to be transacted in the London interbank market.

“Margin” means an annual rate of interest initially equal to 6.80%.

“Material Adverse Effect” means a material adverse effect on (a) the property, business, operations, financial condition, liabilities, capitalization or prospects of the Company and its Subsidiaries taken as a whole, (b) the ability of any Person to perform its payment obligations or any of its material obligations under any of the Security Documents to which such Person is a party, (c) the validity or enforceability of any of the Security Documents, (d) the material rights and remedies of the Trustee or the Collateral Agent under any of the Security Documents or (e) the timely payment of any principal or premium or Additional Amounts of, or interest on, or performance or compliance with any of the obligations under, any of the Notes or this Indenture.

“Minimum Consolidated Interest Expense Coverage Ratio” means a Consolidated Interest Coverage Ratio greater than 4.0 to 1.00.

 

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“MOFCOM” means the Ministry of Commerce of the PRC.

“Moody’s” means Moody’s Investors Service, Inc. or any successor to the rating agency business thereof.

“Mr. Zhang” means Mr. ZHANG Yong, a resident of Zhengzhou in Henan Province, PRC.

“Net Available Cash” from any Asset Sale means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of such Asset Sale or received in any other non-cash form), in each case net of:

(a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Cayman Islands national, provincial, foreign and local taxes required to be accrued as a liability under the GAAP, as a consequence of such Asset Sale,

(b) all payments made on or in respect of any Debt that is secured by any Property subject to such Asset Sale, in accordance with the terms of any Lien upon such Property, or which must by its terms, or in order to obtain a necessary consent to such Asset Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale,

(c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Sale, and

(d) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with the GAAP, against any liabilities directly arising from the disposal of the Property in such Asset Sale and retained by the Company or any of its Subsidiaries after such Asset Sale.

“Notes” is defined in the preamble.

“Obligations” means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Debt.

“Officer” means, with respect to the Company, its Chief Executive Officer or President.

“Officers’ Certificate” means a certificate, in form and substance satisfactory to the Trustee, signed by two Officers (the list of Officers and the specimen signatures of whom shall be provided to the Trustee from time to time) of the Company and which certificate meets the requirements of Section 12.04 hereof and is delivered to the Trustee.

“Opinion of Counsel” means a written opinion, in form and substance satisfactory to the Trustee, from legal counsel who is acceptable to the Trustee and which meets the requirements of Section 12.04 hereof.

“Participant” means, with respect to Euroclear or Clearstream, a Person who has an account with Euroclear or Clearstream, respectively.

“Permitted Debt” means:

(a) (i) Debt of the Company evidenced by the Notes and Debt of the Guarantors evidenced by Guarantees and (ii) Debt of the Company evidenced by the Convertible Notes and Debt of the Guarantors evidenced by the Convertible Note Guarantees, in the aggregate pursuant to this clause (a) up to $100.0 million;

 

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(b) Debt of any PRC Subsidiary under Credit Facilities;

(c) Debt of the Company owing to and held by any Wholly Owned Subsidiary and Debt of any Subsidiary of the Company owing to and held by the Company or any Wholly Owned Subsidiary; provided, however, that any subsequent issue or transfer of Capital Stock or other event that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Debt (except to the Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Debt by the issuer thereof;

(d) Debt of any PRC Subsidiary of the Company outstanding on the date on which such Subsidiary is acquired by the Company or otherwise becomes a Subsidiary of the Company (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of transactions pursuant to which such Subsidiary became a Subsidiary of the Company or was otherwise acquired by the Company), provided that at the time such Subsidiary is acquired by the Company or otherwise becomes a Subsidiary of the Company and after giving effect to the Incurrence of such Debt, the Minimum Consolidated Interest Expense Coverage Ratio would have been complied with.

(e) Debt under Interest Rate Agreements entered into by the Company or a Guarantor for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company or such Guarantor and not for speculative purposes, provided that the obligations under such agreements are directly related to and do not exceed payment obligations on Debt otherwise permitted by the terms of this Section;

(f) Debt under Currency Exchange Protection Agreements entered into by the Company or any of its Subsidiaries for the purpose of limiting currency exchange rate risks directly related to transactions entered into by the Company or such Subsidiary in the ordinary course of business and not for speculative purposes;

(g) Debt in connection with one or more standby letters of credit, performance bonds, return of money bonds or surety bonds issued by the Company or a Guarantor in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances or credit not exceeding $1.0 million in the aggregate at any time;

(h) Debt of any of the Company’s Subsidiaries outstanding on the Issue Date not otherwise described in clauses (a) through (g) above;

(i) Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clauses (a), (d) and (h) above (which shall not include the Shareholders’ Loan);

(j) Debt Incurred by any PRC Subsidiary for the purpose of financing (i) all or any part of the purchase price of assets, real or personal property (including the lease purchase price of land-use rights) or equipment to be used in the ordinary course of business by a Subsidiary of the Company in the Related Business, including such purchase through the acquisition of Capital Stock of any Person all or substantially all of the assets of which consist of real or personal property or equipment which will, upon such acquisition, become a Subsidiary of the Company or (ii) all or any part of the purchase price or the cost of development, construction or improvement of real or personal property (including the lease purchase price of the land-use rights) or equipment to be used in the ordinary course of business by a Subsidiary of the Company in the Related Business; provided, however that (A) the aggregate principal amount of such Debt shall not exceed such purchase price or cost and (B) such Debt shall be Incurred no later than 75 days after the acquisition of such property or completion of such development, construction or improvement;

 

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(k) Pre-Registration Mortgage Guarantees by the Company or any Subsidiary that do not exceed 25% of the Total Tangible Assets of the Company in the aggregate at any one time outstanding;

(l) Debt Incurred by any Subsidiary constituting reimbursement obligations with respect to workers’ compensation claims or self-insurance obligations or bid, performance or surety bonds (in each case other than for an obligation for borrowed money) and in any such case Incurred in the ordinary course of business;

(m) Debt arising from the honoring by a bank or other financial institution of a check, draft or similar instrument drawn against insufficient funds in the ordinary course of business, provided, however, that such Debt is extinguished within five Business Days of Incurrence; and

(n) (i) guarantees by the WFOE or any PRC Subsidiary of Debt of any PRC Subsidiary that was permitted to be Incurred by any provision of Section 4.09 or (ii) guarantees by any Subsidiary of the Company of Debt of another Subsidiary of the Company that was permitted to be incurred under clause (e) or (f) of this definition.

“Permitted Holders” means Mr. Zhang and Ms. YANG Yuyan, a resident of Zhengzhou in Henan Province, PRC, and their respective estates, ancestors and lineal descendants, the legal representatives of any of the foregoing and the trustees of any bona fide trusts of which the foregoing are the sole beneficiaries or the grantors, or any Person of which the foregoing “beneficially owns” (as defined in Rule 13d-3 under the Exchange Act), individually or collectively with any of the foregoing, at least 80% of the total voting power of the Voting Stock of such Person.

“Permitted Investment” means any Investment by the Company or any of its Subsidiaries in:

(a) the Company or any of its Subsidiaries engaged in a Related Business;

(b) any Person that will, upon the making of such Investment, become a Subsidiary of the Company, provided that the primary business of such Subsidiary is a Related Business;

(c) any Person if as a result of such Investment such Person is merged or consolidated with or into, or transfers or conveys all or substantially all its Property to, the Company or a Subsidiary of the Company, provided that such Person’s primary business is a Related Business;

(d) Cash Equivalents;

(e) receivables owing to the Company or any of its Subsidiaries, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or such Subsidiary deems reasonable under the circumstances;

(f) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business not exceeding $100,000 in the aggregate at any time;

(g) loan and advances to employees made in the ordinary course of business consistent with past practices of the Company or such Subsidiary, as the case may be, provided that such loans and advances do not exceed $100,000 in the aggregate at any one time outstanding;

(h) stock, obligations or other securities received in settlement of debts created in the ordinary course of business and owing to the Company or one of its Subsidiaries or in satisfaction of judgments;

 

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(i) any Person to the extent such Investment represents the non-cash portion of the consideration received in connection with (A) an Asset Sale consummated in compliance with Section 4.12 or (B) any disposition of Property not constituting an Asset Sale;

(j) Hedging Obligations by the Company or any Guarantor that are otherwise permitted to be incurred under this Indenture, and which were entered into for financial management of interest rates, foreign currency exchange rates and are directly related to transactions entered into by such Person in the ordinary course of its business, and not for speculative purposes;

(k) any Investment pursuant to Pre-Registration Mortgage Guarantees or Contractor Guarantees (other than to any Affiliate of the Company that is not a Wholly Owned Subsidiary) by the Company or any Subsidiary that do not exceed 25% of the Total Tangible Assets of the Company in the aggregate at any one time outstanding;

(l) advances to contractors or suppliers (other than any Affiliate of the Company) for the acquisition of assets or consumables or services in ordinary course of business that are recorded as deposits or prepaid expenses on the Company’s consolidated balance sheet not exceeding $100,000 in the aggregate at any time;

(m) deposits of pre-sale proceeds made in order to secure the completion and delivery of pre-sold properties and issuance of the related land use title in ordinary course of business;

(n) deposits made in order to secure the performance of the Company or any of its Subsidiaries in connection with the acquisition, construction, development or improvement of real property or land-use rights by the Company or any Subsidiaries in the ordinary course of business; and

(o) other Investments made for Fair Market Value that do not exceed $1.0 million in the aggregate outstanding at any one time.

“Permitted Liens” means:

(a) Liens in favor of the Company, any Guarantor or any Wholly Owned Subsidiary;

(b) Liens securing, or created for the benefit of securing, the Notes, the Guarantees, the Convertible Notes and the Convertible Note Guarantees (provided, however, that any such Liens securing the Convertible Notes or Convertible Note Guarantees are provided subsequent and junior to Liens securing the Notes and the Guarantees);

(c) Liens to secure Debt permitted to be Incurred under clause (b) of the definition of “Permitted Debt” and other obligations thereunder, provided that any such Lien is limited to the accounts receivable and inventory of the PRC Subsidiary;

(d) Liens for taxes, assessments or governmental charges or levies on the Property of the Company or any of its Subsidiaries if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision that shall be required in conformity with GAAP shall have been made therefor;

(e) Liens imposed by law, such as carriers’, warehousemen’s and mechanics’ Liens and other similar Liens, on the Property of the Company or any of its Subsidiaries arising in the ordinary course of business and securing payment of obligations that are not more than 60 days past due or are being contested in good faith and by appropriate proceedings, provided that any reserve or other appropriate provision that shall be required in conformity with GAAP shall have been made therefor;

 

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(f) Liens on the Property of the Company or any of its Subsidiaries Incurred in the ordinary course of business to secure performance of obligations with respect to statutory or regulatory requirements, performance or return-of-money bonds, surety bonds or other obligations of a like nature and Incurred in a manner consistent with industry practice, in each case which are not Incurred in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of Property or any other Debt and which do not in the aggregate impair in any material respect the use of Property in the operation of the business of the Company or any of its Subsidiaries;

(g) Liens on Property at the time the Company or any of its Subsidiaries acquired such Property, including any acquisition by means of a merger or consolidation with or into the Company or any of its Subsidiaries; provided, however, that any such Lien may not extend to any other Property of the Company or any of its Subsidiaries; provided further, that such Liens shall not have been Incurred in anticipation of or in connection with the transaction or series of transactions pursuant to which such Property was acquired by the Company or any of its Subsidiaries;

(h) Liens on the Property of a Person at the time such Person becomes a Subsidiary of the Company; provided, however, that any such Lien may not extend to any other Property of the Company or any other Subsidiary of the Company that is not a direct Subsidiary of such Person; provided further, that any such Lien was not Incurred in anticipation of or in connection with the transaction or series of transactions pursuant to which such Person became a Subsidiary of the Company;

(i) pledges or deposits by the Company or any of its Subsidiaries under workers’ compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of Property or any other Debt or for the payment of Debt) or leases to which the Company or any of its Subsidiaries is party, or deposits to secure public or statutory obligations of the Company, or deposits for the payment of rent, in each case Incurred in the ordinary course of business;

(j) utility easements, building restrictions and such other encumbrances or charges against real Property as are of a nature generally existing with respect to properties of a similar character;

(k) Liens existing on the Issue Date not otherwise described in clauses (a) through (j) above;

(l) Liens on the Property of the Company or any of its Subsidiaries to secure any Refinancing, in whole or in part, of any Debt secured by Liens referred to in clause (g), (h) or (k) above; provided, however, that any such Lien shall be limited to all or part of the same Property that secured the original Lien (together with improvements and accessions to such Property), and the aggregate principal amount of Debt (and other obligations thereunder) that is secured by such Lien shall not be increased to an amount greater than the sum of:

 

(1)

the outstanding principal amount, or, if greater, the committed amount, of the Debt (and other obligations thereunder) secured by Liens described under clause (g), (h) or (k) above, as the case may be, at the time the original Lien became a Permitted Lien under this Indenture, and

 

(2)

an amount necessary to pay any fees and expenses, including premiums and defeasance costs, incurred by the Company or such Subsidiary in connection with such Refinancing;

 

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(m) Liens encumbering property or assets under construction in the ordinary course of business arising from progress or partial payments by a customer of the Company or its Subsidiary relating to such property or assets;

(n) Liens (including extensions and renewals thereof) upon real property acquired after the Issue Date; provided that (i) such Lien is created solely for the purpose of securing Debt Incurred under clause (j) of the definition of “Permitted Debt” and such Lien is created prior to, at the time of or within 60 days after the later of the acquisition or the completion of construction, (ii) the principal amount of the Debt secured by such Lien shall not exceed 100% of such cost and (iii) such Lien shall not extend to or cover any property or assets other than such item of property and any improvements on such item;

(o) Liens on deposits of pre-sale proceeds made in order to secure the completion and delivery of pre-sold properties and issuance of the related land use title in ordinary course of business and not securing Debt of the Company or any Subsidiary;

(p) Liens on deposits made in order to secure the performance of the Company or any of its Subsidiary in connection with the acquisition of real property or land-use rights by the Company or any Subsidiary in the ordinary course of business and not securing Debt of the Company or any Subsidiary;

(q) Liens to secure cash collateral in respect of Hedging Obligations pursuant to which Merrill Lynch Capital Services, Inc. or any of its Affiliates is the counterparty; provided that such Liens in the aggregate shall not initially exceed $10.0 million;

(r) Liens arising from the rendering of a final judgment or order against the Company or any of its Subsidiaries that does not give rise to an Event of Default; and

(s) easements, rights-of-way, municipal and zoning ordinances or other restrictions as to the use of properties in favor of governmental agencies or utility companies that do not materially adversely affect the value of such properties or materially impair the use for the purposes of which such properties are held by the Company or any of its Subsidiaries.

“Permitted Refinancing Debt” means any Debt that Refinances any other Debt, including any successive Refinancings, so long as:

(i) such refinancing Debt is used to refinance the entire outstanding principal amount of the Notes, or

(ii)(a) such Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of:

(1) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced, and

(2) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing,

(b) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being Refinanced,

(c) the Stated Maturity of such Debt is no earlier than the Stated Maturity of the Debt being Refinanced,

 

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(d) the new Debt shall not be senior in right of payment to the Debt that is being Refinanced, and

(e) the new Debt, the proceeds of which are used to Refinance the Notes or any Debt that is pari passu with or subordinate to the Notes or a Guarantee, shall only be permitted if (A) in case the Notes are refinanced in part or the Debt to be Refinanced is pari passu with the Notes or a Guarantee, such new Debt, by its terms or by terms of any agreement or instrument pursuant to which such new Debt is outstanding, is expressly made pari passu with, or subordinate in right of payment to, the remaining Notes or such Guarantee, or (B) in case the Debt to be Refinanced is subordinated in right of payment to the Notes or a Guarantee, such new Debt, by its terms or by the terms of any agreement or instrument to which such new Debt is issued or remains outstanding, is expressly made subordinate in right of payment to the Notes or such Guarantee at least to the extent that the Debt to be Refinanced is subordinated to the Notes or the Guarantee;

provided, however, that Permitted Refinancing Debt shall not include the Debt of any Subsidiary that is not a Guarantor, if such Debt is used to Refinance Debt of the Company or a Subsidiary.

“Person” means a corporation, an association, a partnership, a limited liability company, an individual, a joint venture, a joint stock company, a trust, an unincorporated organization or a government or an agency or a political subdivision thereof.

“PRC” means the People’s Republic of China, exclusive of Taiwan, Macau and Hong Kong.

“PRC Subsidiary” means any Subsidiary of the Company incorporated in the PRC.

“Pre-Registration Mortgage Guarantees” means any Guarantee by the Company or any Subsidiary in the ordinary course of business of secured loans of purchasers of properties from the Company or any Subsidiary; provided that any such Guarantee shall be released in full on or before the perfection of security interest in such properties under applicable law in favor of the relevant lender.

“Predecessor Note” of any particular Note means every previous Note evidencing all or a portion of the same Debt as that evidenced by such particular Note; and any Note authenticated and delivered under Section 2.07 in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same Debt as the lost, destroyed or stolen Note.

“Preferred Stock” means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of any other class of Capital Stock issued by such Person.

“Preferred Stock Dividends” means all dividends or other distributions with respect to Preferred Stock of the Company’s Subsidiaries held by Persons other than the Company or any of its Wholly Owned Subsidiaries.

“pro forma” means, with respect to any calculation made or required to be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of Regulation S-X promulgated under the Securities Act, as interpreted in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, or otherwise a calculation made in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, as the case may be.

“Property” means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including intellectual property rights and Capital Stock in, and other securities of, any other Person. For purposes of any calculation required pursuant to this Indenture, the value of any Property shall be its Fair Market Value.

 

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“Qualifying IPO” means a public offering of Common Shares of the Company that results in (i) at least 15% of the Company’s issued and outstanding share capital being publicly held by Persons other than any Affiliate of the Company, the Permitted Holders or other Persons who, prior to the date of such public offering, held Common Shares of the Company, (ii) the gross proceeds of which are not less than $80.0 million and (iii) listing of the Common Shares on Nasdaq’s Capital Market, Global Market or Global Select Market or any other internationally recognized market outside the PRC other than in the Republic of Singapore.

“Refinance” means, in respect of any Debt, to refinance, extend, renew, refund or Repay (in whole or in part), or to issue other Debt, in exchange or replacement for (in whole or in part), such Debt. “Refinanced” and “Refinancing” shall have correlative meanings.

“Regular Record Date” for the interest payable on any Interest Payment Date means the applicable date specified as a “Record Date” on the face of the Note.

“Related Business” means real estate acquisition, development, sales, leasing and management, landscaping, brokerage and other services related to the aforementioned businesses, in each case commensurate with the activities of the PRC Subsidiaries on the Issue Date.

“Repay” means, in respect of any Debt, to repay, prepay, repurchase, redeem, legally defease or otherwise retire such Debt. “Repayment” and “Repaid” shall have correlative meanings. For purposes of Section 4.12 and the definitions of “Consolidated Interest Expense Coverage Ratio,” Debt shall be considered to have been Repaid only to the extent the related loan commitment, if any, shall have been permanently reduced in connection therewith.

“Representative Amount” means a principal amount of not less than $1,000,000 for a single transaction in the relevant market at the relevant time.

“Responsible Officer,” when used with respect to the Trustee, means any officer within the Corporate Trust Department of the Trustee (or any successor group of the Trustee).

“Restricted Payment” means:

(a) any dividend or distribution (whether made in cash, securities or other Property) declared or paid on or with respect to any shares of Capital Stock of the Company or any of its Subsidiaries (including any payment in connection with any merger or consolidation with or into the Company or any of its Subsidiaries), except for any dividend or distribution that is made solely to the Company or any of its Subsidiaries (and, if such Subsidiary is not a Wholly Owned Subsidiary, to the other shareholders of such Subsidiary on a pro rata basis or on a basis that results in the receipt by the Company or any of its Subsidiaries of dividends or distributions of greater value than it would receive on a pro rata basis) or any dividend or distribution payable solely in shares of Capital Stock (other than Disqualified Stock) of the Company;

(b) the purchase, repurchase, redemption, acquisition or retirement for value of any Capital Stock of the Company or any of its Subsidiaries (other than from the Company or any of its Wholly-Owned Subsidiaries) or any securities exchangeable for or convertible into any such Capital Stock, including the exercise of any option to exchange any Capital Stock (other than for or into Capital Stock of the Company that is not Disqualified Stock);

(c) the purchase, repurchase, redemption, acquisition or retirement for value, prior to the date for any scheduled maturity, sinking fund or amortization or other installment payment, of any Subordinated Obligation (other than the purchase, repurchase or other acquisition of any Subordinated Obligation purchased in anticipation of satisfying a scheduled maturity, sinking fund or amortization or other installment obligation, in each case due within one year of the date of acquisition); or

 

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(d) any Investment (other than Permitted Investments) in any Person.

“RMB” means the lawful currency of the PRC.

“SAFE” means the State Administration of Foreign Exchange of the PRC.

“SAIC” means the PRC State Administration for Industry and Commerce.

“S&P” means Standard & Poor’s Ratings Services, a division of McGraw Hill, Inc., or any successor to the rating agency business thereof.

“Sale and Leaseback Transaction” means any direct or indirect arrangement relating to Property now owned or hereafter acquired whereby the Company or any of its Subsidiaries transfers such Property to another Person and the Company or any of its Subsidiaries leases it from such Person.

“Securities Act” means the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time.

“Security Documents” means each of the following instruments and documents in favor of the Collateral Agent for the benefit of the holders of the Notes, the Guarantees and all other obligations of any obligor under this Indenture, the Notes, the Guarantees and the Security Documents, whenever incurred, and also for the benefit of the present and future holders of all other Obligations and any document perfecting such security interests pursuant to the terms of Article 10 hereof: (i) a first equitable mortgage in respect of shares in Xinyuan Real Estate (ii) a second equitable mortgage in respect of shares in Xinyuan Real Estate, (iii) the WFOE Share Pledge, (iv) a pledge agreement of rights in a loan from Xinyuan Real Estate to the WFOE, and (v) any one or more security agreements, pledge agreements, collateral assignments, mortgages, deeds of trust or other grants or transfers for security executed and delivered by the Company, any Person beneficially owning Capital Stock issued by the Company, or any other Obligor creating a Lien upon Capital Stock issued by the Company or upon property owned or to be acquired by the Company or such other Obligor.

“Senior Debt” of the Company means:

(a) all obligations consisting of the principal, premium, if any, and accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not such post-filing interest is allowed in such proceeding) in respect of:

(1) Debt of the Company for borrowed money, and

(2) Debt of the Company evidenced by notes, debentures, bonds or other similar instruments permitted under this Indenture for the payment of which the Company is responsible or liable;

(b) all Capital Lease Obligations of the Company and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by the Company;

(c) all obligations of the Company

(1) for the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction,

(2) under Hedging Obligations, or

 

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(3) issued or assumed as the deferred purchase price of Property and all conditional sale obligations of the Company and all obligations under any title retention agreement permitted under this Indenture; and

(d) all obligations of other Persons of the type referred to in clauses (a), (b) and (c) for the payment of which the Company is responsible or liable as Guarantor;

provided, however, that Senior Debt shall not include:

(A) Debt of the Company that is by its terms subordinate in right of payment to the Notes, including any Subordinated Obligations;

(B) any Debt Incurred in violation of the provisions of this Indenture;

(C) accounts payable or any other obligations of the Company to trade creditors created or assumed by the Company in the ordinary course of business in connection with the obtaining of materials or services (including Guarantees thereof or instruments evidencing such liabilities);

(D) any liability any state, national, provincial, local or other taxes owed or owing by the Company;

(E) any obligation of the Company to any of its Subsidiaries; or

(F) any obligations with respect to any Capital Stock of the Company.

To the extent that any payment of Senior Debt (whether by or on behalf of the Company as proceeds of security or enforcement or any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to a trustee, receiver or other similar party under any bankruptcy, insolvency, receivership or similar law, then if such payment is recovered by, or paid over to, such trustee, receiver or other similar party, the Senior Debt or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payment had not occurred.

“Senior Debt” of any Guarantor has a correlative meaning.

“Shareholders’ Loan” means an aggregate of $35 million of indebtedness owed by the Company to Blue Ridge China Partners, L.P. and EI Fund II China, LLC.

“Significant Subsidiary” means any Subsidiary that would be a “significant subsidiary” of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the Commission.

“Stated Maturity” means, with respect to any installment of interest or principal on any series of Debt (including, without limitation, a scheduled repayment or a scheduled sinking fund payment), the date on which the payment of interest or principal was scheduled to be paid in the original documentation governing such Debt, and will not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment hereof.

“Subordinated Obligation” means any Debt of the Company or any Guarantor (whether outstanding on the Issue Date or thereafter Incurred) that is subordinate or junior in right of payment to the Notes or the applicable Guarantee pursuant to a written agreement to that effect, including all obligations consisting of the principal, premium, if any, Additional Amounts and accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not such post-filing interest is allowed in such proceeding) in respect of the Convertible Notes.

“Subsidiary,” with respect to any Person, means (i) any corporation of which the outstanding Capital Stock having a majority of the votes entitled to be cast in the election of directors under ordinary

 

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circumstances shall at the time be owned, directly or indirectly, through one or more intermediaries, by such Person or (ii) any other Person of which a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, through one or more intermediaries, owned by such Person.

“Surviving Person” means the surviving Person formed by a merger, consolidation or amalgamation and, for purposes of Section 5.01, a Person to whom all or substantially all of the Property of the Company or a Guarantor is sold, transferred, assigned, leased, conveyed or otherwise disposed.

“Taxes” means any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the Governmental Authorities.

“Total Tangible Assets” means, as of any date, the total consolidated assets of the Company and its Subsidiaries, minus (a) any minority interest in any Person that is not a Wholly Owned Subsidiary of the Company, if such minority interest would be reflected at such date on a consolidated balance sheet of the Company and its Subsidiaries and (b) any securities issued by the Company held as treasury securities, and (c) all Intangible Assets, measured in accordance with GAAP for the most recent quarterly or semi-annually period for which consolidated financial statements of the Company (which the Company shall use its best efforts to compile in a timely manner) are available (which may be internal consolidated financial statements). Total Tangible Assets shall be calculated after giving pro forma effect to include the cumulative value of all of the real property the acquisition, development, construction or improvement of which requires or required the Incurrence of Debt and calculation of Total Tangible Assets thereunder, as measured by the purchase price or cost providing such Debt.

“Trustee” means the Person named as the “Trustee” in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Trustee” shall mean such successor Trustee.

“U.S. Government Securities” means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America are pledged and which are not callable or redeemable at the issuer’s option.

“Voting Stock” of any Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof.

“WFOE” means Xinyuan (China) Real Estate Co., Ltd., a wholly foreign-owned limited liability company organized and existing under the laws of the PRC.

“WFOE Share Pledge” means that certain Share Pledge to be entered into by the Guarantor relating to the equity interests owned by the Guarantor in the WFOE.

“Wholly Owned Subsidiary” means, at any time, a Subsidiary all the Voting Stock of which (except directors’ qualifying shares) is at such time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries.

“Working Capital Ratio” means, the ratio of (a) the sum of current assets of the Company and its Subsidiaries on a consolidated basis to (b) the sum of the current liabilities of the Company and its Subsidiaries on a consolidated basis.

“Xinyuan Real Estate” means Xinyuan Real Estate, Ltd., a company incorporated with limited liability in the Cayman Islands all of whose Capital Stock is owned by the Company as of the Issue Date.

 

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Section 1.02. Other Definitions.

 

Term		Defined in Section
“Acceleration Notice”		6.02
“Additional Amount”		4.31
“Affiliate Transaction”		4.14
“Allocable Excess Proceeds”		4.12
“Asset Sale Offer”		4.12
“Authentication Order”		2.02
“Benefited Party”		9.01
“Change of Control Offer”		4.17
“Event of Default”		6.01
“Excess Proceeds”		4.12
“Future Guarantor”		9.03
“Future Guarantor Pledgor”		10.02
“Guarantor Pledgor”		10.02
“losses”		7.07
“Offer Amount”		3.09
“Offer Period”		3.09
“Offer to Purchase”		3.09
“Paying Agent”		2.03
“Purchase Date”		3.09
“Purchase Price”		3.09
“Registrar”		2.03
“Secured Party”		10.01

Section 1.03. Rules of Construction.

(a) Unless the context otherwise requires:

(i) a term has the meaning assigned to it;

(ii) an accounting term not otherwise defined herein has the meaning assigned to it in accordance with GAAP;

(iii) “or” is not exclusive;

(iv) words in the singular include the plural, and in the plural include the singular;

(v) all references in this instrument to “Articles,” “Sections” and other subdivisions are to the designated Articles, Sections and subdivisions of this instrument as originally executed;

(vi) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.

(vii) “including” means “including without limitation;”

(viii) provisions apply to successive events and transactions;

(ix) “$” means the lawful currency of the United States of America; and

(x) references to sections of or rules under the Securities Act or the Exchange Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the Commission from time to time thereunder.

 

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ARTICLE 2.

THE NOTES

Section 2.01. Form and Denomination.

(a) General. The Notes and the Trustee’s certificate of authentication shall be substantially in the form included in Exhibit A hereto, which is hereby incorporated in and expressly made part of this Indenture. The Notes may have notations, legends or endorsements required by law, exchange rule or usage not inconsistent with this Indenture in addition to those set forth on Exhibit A. Each Note shall be dated the date of its authentication. The Notes shall be in denominations of $100,000 and integral multiples thereof. The terms and provisions contained in the Notes shall constitute a part of this Indenture and the Company, the Guarantor and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. To the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling.

(b) Form of Notes. Notes shall be issued initially in global form and shall be substantially in the form of Exhibit A attached hereto (including the Global Note Legend thereon and the “Schedule of Exchanges of Interests in the Global Note” attached thereto). Notes issued in definitive form shall be substantially in the form of Exhibit A attached hereto (but without the Global Note Legend thereon and without the “Schedule of Exchanges of Interests in the Global Note” attached thereto). Each Global Note shall represent such aggregate principal amount of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions and transfers of interests therein. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Notes represented thereby shall be made by the Trustee or the Registrar, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof.

(c) Book-Entry Provisions. This Section 2.01(c) shall apply only to Global Notes deposited with the Common Depositary. Participants shall have no rights under this Indenture or any Global Note with respect to any Global Note held on their behalf by the Common Depositary, and the Common Depositary shall be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Common Depositary or impair, as between the Common Depositary and its Participants, the Applicable Procedures or the operation of customary practices of the Common Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Note.

(d) Certificated Securities. The Company shall exchange Global Notes for Definitive Notes if: (1) at any time either Euroclear or Clearstream or any alternative clearing agency on behalf of which the Notes evidenced by the Global Note may be held is closed for business for a continuous period of 14 days (other than reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so, and, in either case, the Company shall not have appointed a successor Common Depositary within 90 days after the Company receives such notice or becomes aware of such ineligibility, or (2) upon written request of a Holder or the Trustee (acting on the instruction of the Holders in accordance with Section 6.02) if a Default or Event of Default shall have occurred and be continuing.

Upon the occurrence of any of the events set forth in clauses (1) or (2) above, the Company shall execute, and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate and deliver, Definitive Notes, in authorized denominations, in an aggregate principal amount equal to the principal amount of the Global Notes in exchange for such Global Notes.

Upon the exchange of a Global Note for Definitive Notes, such Global Note shall be cancelled by the Trustee or an agent of the Company or the Trustee. Definitive Notes issued in exchange for a Global Note

 

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pursuant to this Section 2.01 shall be registered in such names and in such authorized denominations as the Common Depositary, pursuant to instructions from its Participants or its Applicable Procedures, shall instruct the Trustee or an agent of the Company or the Trustee in writing. The Trustee or such agent shall deliver such Definitive Notes to or as directed by the Persons in whose names such Definitive Notes are so registered or to the Common Depositary.

Section 2.02. Execution and Authentication.

(a) The Officer of the Company shall execute the Notes on behalf of the Company by manual signature.

(b) If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated by the Trustee, the Note shall nevertheless be valid.

(c) A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture.

(d) The Trustee shall, upon a written order of the Company signed by an Officer (an “Authentication Order”), authenticate (i) one Global Note evidencing Notes for issuance on the Issue Date in the aggregate principal amount not to exceed $75,000,000, (ii) any other Notes that have been executed by the Company in order to effect any registration of transfer or exchange in accordance with the provisions of Section 2.06, and (iii) any additional Notes issued by the Company after the Issue Date pursuant to the next sentence of this paragraph. The Notes need not be issued at one time and, unless otherwise provided, the Notes may also be issued by the Company and authenticated and delivered under this Indenture after the Issue Date on the same terms and conditions (other than the Issue Date) and with the same ISIN number as the Notes issued on the Issue Date and in an aggregate principal amount, together with the Notes and the Convertible Notes issued on and after the Issue Date, not to exceed $100,000,000.

(e) The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. Unless otherwise provided in such appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent shall have the same rights as the Trustee to deal with Holders, the Company or an Affiliate of the Company.

Section 2.03. Registrar, Paying Agent and Calculation Agent.

(a) The Company shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange (“Registrar”) and an office or agency where Notes may be presented for payment (“Paying Agent”). The Registrar shall keep a register (the “Security Register”) of the Notes and of their transfer and exchange. The Company will appoint a Calculation Agent for the purpose of calculating the rate of interest from time to time applicable to the Notes. The Calculation Agent shall in this regard perform the duties expressed to be performed by it in paragraph (1) of the Notes. The Company may appoint one or more co-registrars, one or more additional paying agents and one or more calculation agents. The term “Registrar” includes any co-registrar, the term “Paying Agent” includes any additional paying agent and the term “Calculation Agent” includes any additional calculation agent. The Company may change any Paying Agent, Registrar or Calculation Agent without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar, Paying Agent or Calculation Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar.

(b) The Company initially appoints The Hongkong and Shanghai Banking Corporation Limited to act as Common Depositary with respect to the Global Notes.

(c) The Company initially appoints the Trustee to act as Registrar and Paying Agent with respect to the Global Notes, and the Trustee hereby agrees so to initially act.

 

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(d) The Company initially appoints the Trustee to act as Calculation Agent with respect to the Notes. For the purposes of Section 2.03, the Calculation Agent shall:

(i) as soon as practicable after determining the rate of interest applicable to the Notes (and of any adjustment thereto in accordance with paragraph (1) thereof), notify the Company, the Trustee and, upon request, the Holders thereof;

(ii) maintain a record of the quotations contained by it and all rates determined and all other action taken by it for the purposes of Section 2.03 and shall from time to time on request deliver to the Company a copy of such record;

(iii) if it does not for any reason at any material time determine any applicable rate of interest payable in respect of the Notes, forthwith notify the Company and the Trustee that such determination has not been made; and

(iv) act solely as bankers for and agents of the Company and will not thereby assume any obligations towards or relationship of agency or trust for any Holder and need only perform the duties set out specifically under this Section 2.03 and paragraph (1) of the Notes, and any duties necessarily incidental to them.

(e) The Agents shall be obliged to perform such duties and only such duties as are set out in this Indenture and no implied duties or obligations shall be read into this Indenture against any of the Agents.

(f) The Agents may rely upon and shall not be liable for acting or refraining from acting upon any written notice, instruction or request furnished to it hereunder and believed by it to be genuine and to have been signed or presented by the proper party or parties. The Agents shall be under no duty to inquire into or investigate the validity, accuracy or content of any such document.

(g) In the event that any Agent shall be uncertain as to its duties or rights hereunder or shall receive instructions, claims or demands from the Company, in its opinion, conflict with any of the provisions of this Indenture, it shall be entitled to refrain from taking any action until it is directed in writing by a final order or judgment of a court of competent jurisdictions.

(h) Notwithstanding anything to the contrary contained in this Indenture, none of the Agents shall be obliged to act or omit to act in accordance with any instruction, direction or request delivered to them by the Company unless such instruction, direction or request is delivered to such Agents in writing. Each of the Agents may, in connection with its services hereunder rely upon the terms of any notice, communication or other document believed by it to be genuine.

(i) If the Paying Agent shall make payment in respect of any of the Notes before it has received or has been made available to its order the amount so paid, the Company shall from time to time on demand pay to the Paying Agent, in addition to the amount which should have been paid hereunder, interest on such shortfall calculated on a 360 day year basis and the actual number of days elapsed and at the rate per annum which is the aggregate of two per cent per annum and the rate per annum specified by the Paying Agent as reflecting its cost of funds for the time being in relation to the unpaid amount.

(j) No Agent shall be under any liability for interest on any moneys at any time received by it pursuant to any of the provisions of this Indenture and applied by it in accordance with the provisions hereof, except as otherwise provided hereunder or agreed in writing.

(k) The Company hereby unconditionally and irrevocably covenants and undertakes to indemnify and hold harmless each Agent, its directors, officers, employees and agents (each an “indemnified party”) in full at all times against all losses, liabilities, actions, proceedings, claims, demands, penalties, damages, costs, expenses disbursements, and other liabilities whatsoever (the “Losses”), including without limitation the costs and expenses of legal advisors and other experts, which may be incurred, suffered or brought

 

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against such indemnified party as a result or in connection with (a) their appointment or involvement hereunder or the exercise of any of their powers or duties hereunder or the taking of any acts in accordance with the terms of this Indenture or its usual practice; (b) this Indenture and any other documents in connection with the sale of the Notes or pursuant to this Indenture, or (c) any instruction or other direction upon which any Agent may rely under this Indenture, as well as the costs and expenses incurred by an indemnified party of defending itself against or investigating any claim or liability with respect of the foregoing provided that this indemnity shall not apply in respect of an indemnified party to the extent but only to the extent that any such Losses incurred or suffered by or brought against such indemnified party arises directly from the fraud, willful misconduct or gross negligence of such indemnified party. The parties hereto acknowledge that the foregoing indemnities shall survive the resignation or removal of any Agent or the termination of this Indenture.

(l) Notwithstanding any other term or provision of this Indenture to the contrary, no Agent shall be liable for special, punitive, indirect or consequential loss or damage of any kind whatsoever including but not limited to loss of profits, whether or not foreseeable, and regardless of whether the claim for such loss or damage is made in negligence, for breach of contract, breach of trust, breach of fiduciary obligation or otherwise. The provisions of this Section shall survive the termination or expiry of this Indenture or the resignation or removal of such Agent.

(m) Each Agent may execute any of its powers and perform any of its duties hereunder directly or through delegates or attorneys and may consult with counsel, accountants and other skilled persons to be reasonably selected and retained by it. Each Agent shall not be liable for the acts of such delegates or attorneys, or for anything done, suffered or omitted by it in accordance with the advice or opinion of any such counsel, accountants or other skilled persons.

(n) Each Agent may engage and consult, at the expense of the Company with any legal adviser and professional adviser selected by it and rely upon any advice so obtained and each of the Agents and each of their respective directors, officers, employees and duly appointed agents shall be protected and shall not be liable in respect of any action taken, or omitted to be done or suffered to be taken, in accordance with such advice.

(o) Each Agent shall not be liable for any action taken or omitted by it except to the extent that a court of competent jurisdiction determines that such Agent’s gross negligence or willful misconduct was the primary cause of any loss to the Company.

(p) At the request of the Agents, the parties to this Indenture may from time to time during the continuance of this Indenture review the commissions agreed initially with a view to determining whether the parties can mutually agree upon any changes to the commissions.

(q) Any corporation into which any Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Agent shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of any Agent, shall be the successor to such Agent hereunder without the execution or filing of any papers or any further act on the part of any of the parties hereto.

(r) Any Agent may resign at any time on giving not less than 45 days prior written notice to the Company without assigning any reason and without being responsible for any costs, charges and expenses occasioned by such retirement. The Company hereby covenants that in the event of any Agent giving notice under this Section it shall use its best endeavors to procure a new Agent to be appointed and if the Company has not procured the appointment of a new Agent within 15 days after the expiration of such written notice, such Agent shall petition any court of competent jurisdiction for its resignation provided that it has notified the Company prior to it doing so. If such petition is granted, such Agent shall notify all transaction parties in writing of its resignation.

(s) Each Agent may take and instruct any delegate to take any action which it in its sole discretion considers appropriate so as to comply with any applicable law, regulation, request of a public or regulatory authority or any HSBC Group policy which relates to the prevention of fraud, money laundering,

 

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terrorism or other criminal activities or the provision of financial and other services to sanctioned persons or entities. Such action may include but is not limited to the interception and investigation of transactions on the depositor’s accounts (particularly those involving the international transfer of funds) including the source of the intended recipient of fund paid into or out of the depositor’s accounts. In certain circumstances, such action may delay or prevent the processing of the depositor’s instructions, the settlement of transactions over the depositor’s accounts or such Agent’s performance of its obligations under this Indenture. Where possible, such Agent will endeavor to notify the depositor of the existence of such circumstances. Neither the Agent nor any delegate will be liable for any loss (whether direct or consequential and including, without limitation, loss of profit or interest) caused in whole or in part by any actions which are taken by such Agent or any delegate pursuant to this Section. For the purposes of this Section, the “HSBC Group” means HSBC Holdings plc its subsidiaries and associated companies.

Section 2.04. Paying Agent to Hold Money in Trust.

The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium, if any, Additional Amounts or interest on the Notes, and shall notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all funds held by it relating to the Notes to the Trustee. The Company at any time may require a Paying Agent to pay all funds held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for such funds. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all funds held by it as Paying Agent. Upon any Event of Default under Sections 6.01(h) and (i) hereof relating to the Company, the Trustee shall serve as Paying Agent for the Notes.

Section 2.05. Holder Lists.

The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders. If the Trustee is not the Registrar, the Company shall furnish or cause to be furnished to the Trustee at least seven Business Days before each Interest Payment Date and at such other times as the Trustee may request in writing, a list in such form and as of such date or such shorter time as the Trustee may allow, as the Trustee may reasonably require of the names and addresses of the Holders.

Section 2.06. Transfer and Exchange.

(a) As provided herein, interests in a Global Note will be exchanged, upon 45 days’ notice by a holder of an interest in such Global Note for Definitive Notes. Each Global Note shall be deposited with the Common Depositary, which shall hold such Global Note in safe custody for the account of Euroclear and/or Clearstream and instruct Euroclear or Clearstream or both of them, as the case may be, to credit the principal amounts of the Notes represented by such Global Note to the holder’s distribution account with Euroclear or Clearstream. Each relevant Global Note shall be exchangeable for an interest, equal to the principal amount of such Global Note being exchanged, for Definitive Notes in the same principal amount, upon request of Euroclear or Clearstream to the Registrar, but only upon delivery by Euroclear or Clearstream, acting on behalf of the beneficial owners of such interests, to the Registrar at its principal office in Hong Kong, of certificates substantially in the form of Exhibit C hereto. The delivery to the Registrar of any certificate in the form referred to above may be relied upon by the Company, the Trustee and the Registrar as conclusive evidence that related certificates have been delivered to Euroclear or Clearstream as contemplated by the terms of this Section 2.06.

(b) In accordance with the terms of a Global Note and this Indenture, the Registrar shall deliver at the cost of the Company, upon not less than 45 days’ notice to the Registrar by Euroclear or Clearstream, the relevant Definitive Notes in exchange for interests in such Global Note. For this purpose, the Registrar is authorized and it shall (A) authenticate each such Definitive Note and (B) deliver each such Definitive Note to or to the order of Euroclear or Clearstream, in exchange for interests in such Global Note. The Registrar shall promptly notify the Company upon receipt of a request for issue of Definitive Notes the aggregate principal amount of the relevant Global Note to be exchanged in connection therewith. The Company undertakes to deliver to, or to the order of, the Registrar sufficient numbers of duly executed Definitive Notes to

 

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enable the Registrar to comply with its obligations under this Section 2.06(b). Such exchange shall be made free of charge to the holder and the beneficial owners of the relevant Global Note and to the holders of the Definitive Notes issued in exchange as provided above, except that a Person receiving Definitive Notes must bear the cost of insurance, postage, transportation and the like in the event that such Person does not receive such Definitive Notes in person at the offices of a Registrar. Notwithstanding the above, interests in a Global Note shall be exchangeable in whole (but not in part) at the cost of the Company for Definitive Notes under the conditions described in Section 2.01(e).

(c) Upon any exchange of an interest in a Global Note for Definitive Notes, the relevant Global Note shall be endorsed by the Trustee or the Registrar to reflect the reduction of its principal amount by the aggregate principal amount so exchanged. Until exchanged in full, the holder of any interest in any Global Note shall in all respects be entitled to the same benefits under this Indenture as Definitive Notes authenticated and delivered hereunder. Once exchanged in full, a Global Note shall be canceled and disposed of by the Trustee in accordance with its customary procedures and a certificate of disposition will be sent to the Company.

(d) The Trustee or the Registrar shall cause all Global Notes and Definitive Notes delivered to it and held by it hereunder to be maintained in safe custody in accordance with this Section 2.06.

(e) The Security Register shall be in written form in the English language and shall include a record of the certificate number of each Note that has been issued, and shall show the amount of such Notes, the date of issue, all subsequent transfers and changes in ownership in respect thereof and the names, tax identifying numbers (if relevant to a specific holder), addresses of the holders of the Notes and any payment instructions with respect thereto (if different from a holder’s registered address).

(f) The Registrar shall at all reasonable times during office hours make the Security Register available to the Trustee, the Paying Agent, the Company and the holders of such Notes or any person authorized by the Company in writing for inspection and for taking of copies thereof or extracts therefrom, and at the expense of the Company, the Registrar shall deliver to such persons all lists of holders of such Notes, their addresses, amounts of such holdings and other details as they may request.

(g) the Registrar shall handle all requests for the registration of transfer of Notes and receive certificates for the Notes deposited with the transfer agent for transfer or exchange, and in doing so, shall ensure that every Note presented or surrendered for registration of transfer or exchange (if so required by the Company, the Trustee, the Paying Agent or the Registrar) be duly endorsed by, or be accompanied by a written instrument of transfer (in form satisfactory to the Company and the Registrar) duly executed by the holder thereof or by such holder’s attorney duly authorized in writing.

(h) Prior to the Distribution Compliance Expiration Date, no beneficial interest in a Global Note may be transferred to any U.S. person (as defined in Regulation S under the Securities Act) or inside the United States as evidenced by a certification in the form of Exhibit C hereto received by the Registrar. Unless determined otherwise by the Company in accordance with applicable law, in the event prior to the Distribution Compliance Expiration Date a Definitive Note is issued in exchange for a beneficial interest in a Global Note, such Definitive Note shall bear the Regulation S Legend shown on the form of Note attached hereto as Exhibit A. On and after the Distribution Compliance Expiration Date, no such certification shall be required with respect to such transfers and the Trustee is hereby authorized to remove such Regulation S Legend from the applicable Notes.

(i) The Trustee and the Registrar shall be entitled to treat a telephone (only for communication and not instruction) or facsimile communication from a person purporting to be (and who the Trustee or the Registrar believe in good faith to be) the authorized representative of the Company, named in a list furnished to the Trustee and the Registrar from time to time, as sufficient instructions and authority of the Company for the Trustee and the Registrar to act in accordance with this Section 2.06.

(j) Title to the Notes shall pass by delivery. However, title to Notes issued in the form of Global Notes held through Euroclear and Clearstream shall be transferable only in accordance with the rules and procedures of Euroclear and Clearstream, as appropriate.

 

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Section 2.07. Replacement Notes.

If any mutilated Note is surrendered to the Trustee or the Company or if the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Note, the Company shall issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate a replacement Note. If required by the Trustee or the Company, the Holder of such Note shall provide indemnity that is sufficient, in the judgment of the Trustee or the Company, to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer in connection with such replacement. If required by the Company, such Holder shall reimburse the Company or the Trustee, as the case may be, for its reasonable expenses in connection with such replacement.

If, after the delivery of such replacement Note, a protected purchaser of the original Note in lieu of which such replacement Note was issued presents for payment or registration such original Note, the Trustee shall be entitled to recover such replacement Note from the Person to whom it was delivered or any Person taking therefrom, except a protected purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expense incurred by the Company, the Trustee, any Agent and any authenticating agent in connection therewith.

Every replacement Note issued in accordance with this Section shall be the valid obligation of the Company, evidencing the same debt as the mutilated, destroyed, lost or stolen Note, and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder.

Section 2.08. Outstanding Notes.

(a) The Notes outstanding at any time shall be the entire principal amount of Notes represented by all of the Global Notes and Definitive Notes authenticated by the Trustee or the Registrar, as the case may be, except for those cancelled by it, those delivered to it for cancellation, those subject to reductions in beneficial interests effected by the Trustee in accordance with Section 2.06 hereof, and those described in this Section as not outstanding. Except as set forth in Section 2.09 hereof, a Note shall not cease to be outstanding because the Company or an Affiliate of the Company holds the Note.

(b) If a Note is replaced pursuant to Section 2.07 hereof, it shall cease to be outstanding unless the Trustee receives proof satisfactory to it that the replaced note is held by a protected purchaser in whose hands such Note is a legal, valid and binding obligation of the Company.

(c) If the principal amount of any Note is considered paid under Section 4.01 hereof, it shall cease to be outstanding and interest on it shall cease to accrue.

(d) If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date, a Purchase Date, or a maturity date, funds sufficient to pay Notes payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest.

Section 2.09. Treasury Notes.

In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company, or by any Affiliate of the Company, shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that the Trustee knows are so owned shall be so disregarded.

Section 2.10. Temporary Notes.

Until certificates representing Notes are ready for delivery, the Company may prepare and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate temporary

 

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Notes. Such temporary Notes shall be substantially in the form of Definitive Notes but may have variations that the Company considers appropriate for temporary Notes and as shall be reasonably acceptable to the Trustee. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate Global Notes or Definitive Notes in exchange for temporary Notes, as applicable. After preparation of Definitive Notes, the temporary Note will be exchangeable for Definitive Notes upon surrender of the temporary Notes.

Holders of temporary Notes shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder.

Section 2.11. Cancellation.

The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. Upon sole direction of the Company, the Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy cancelled Notes (subject to the record retention requirements of the Exchange Act or other applicable laws) unless by written order, signed by an Officer of the Company, the Company directs them to be returned to it. Certification of the destruction of all cancelled Notes shall be delivered to the Company from time to time upon request. The Company may not issue new Notes to replace Notes that it has paid or that have been delivered to the Trustee for cancellation.

Section 2.12. Payment of Interest; Defaulted Interest.

If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, in each case at the rate provided in the Notes and in Section 4.01 hereof. The Company shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Note and the date of the proposed payment. The Company shall fix or cause to be fixed each such special record date and payment date; provided that no such special record date shall be less than 10 days prior to the related Interest Payment Date for such defaulted interest. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related Interest Payment Date and the amount of such interest to be paid.

Section 2.13. ISIN Numbers.

The Company in issuing the Notes may use “ISIN” numbers (if then generally in use), and, if so, the Trustee shall use “ISIN” numbers in notices of redemption or Offers to Purchase as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption or notice of an Offer to Purchase and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption or Offer to Purchase shall not be affected by any defect in or omission of such numbers. The Company shall promptly notify the Trustee in writing of any change in the “ISIN” numbers.

Section 2.14. Record Date.

The record date for purposes of determining the identity of Holders of Notes entitled to vote or consent to any action by vote or consent or permitted under this Indenture shall be 15 days prior to the date of such vote, consent or action.

 

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ARTICLE 3.

REDEMPTION AND PREPAYMENT

Section 3.01. Notices to Trustee.

If the Company elects to redeem Notes pursuant to the optional redemption provisions of Section 3.06 hereof, it shall furnish to the Trustee, at least 45 days but not more than 60 days before a redemption date (or such shorter period as allowed by the Trustee), an Officers’ Certificate setting forth (a) the applicable Section of this Indenture pursuant to which the redemption shall occur, (b) the redemption date, (c) the principal amount of Notes to be redeemed and (d) the redemption price.

Section 3.02. Notice of Redemption.

Upon prior written notice to the Trustee, at least 30 days but not more than 60 days prior to a redemption date, the Company shall mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed at such Holder’s registered address appearing in the Security Register, except that redemption notices may be mailed more than 60 days prior to a redemption date if the notice is issued in connection with a satisfaction and discharge pursuant to Article 11 hereof.

The notice shall identify the Notes to be redeemed and shall state:

(a) the redemption date;

(b) the redemption price;

(c) if any Note is being redeemed in part, the portion of the principal amount of such Note to be redeemed and that, after redemption date upon surrender of such Note, if applicable, a new Note or Notes in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original Note;

(d) the name and address of the Company for purposes of tendering Notes for redemption;

(e) that Notes called for redemption must be surrendered to the Company to collect the redemption price;

(f) that, unless the Company defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date;

(g) the applicable Section of this Indenture pursuant to which the Notes called for redemption are being redeemed; and

(h) that no representation is made as to the correctness of the ISIN numbers, if any, listed in such notice or printed on the Notes.

At the Company’s request, the Trustee shall give the notice of redemption in the Company’s name and at the Company’s expense; provided, however, that the Company shall have delivered to the Trustee, at least 45 days (or such shorter period allowed by the Trustee), prior to the redemption date, an Officers’ Certificate requesting that the Trustee give such notice (in the name and at the expense of the Company) and setting forth the information to be stated in such notice as provided in this Section 3.02.

Section 3.03. Effect of Notice of Redemption.

Once notice of redemption is mailed in accordance with Section 3.02 hereof, Notes called for redemption shall become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional.

 

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Section 3.04. Deposit of Redemption Price.

Prior to 11:00 a.m. Hong Kong time at least one Business Day prior to any redemption date and subject to Section 3.09(c) hereof, the Company shall deliver to the Trustee or the Agent, as the case may be, on behalf of each tendering Holder, the redemption price of and, if applicable, accrued and unpaid interest on the Notes to the redemption date.

If the Company complies with the provisions of the preceding paragraph, on and after the redemption date, interest shall cease to accrue on the Notes called for purchase or redemption in accordance with Section 2.08(d) hereof, whether or not such Notes are presented for payment. If a Note is redeemed on or after a Regular Record Date but on or prior to the related Interest Payment Date, then any accrued and unpaid interest, if any, shall be paid to the Person in whose name such Note was registered at the close of business on such Regular Record Date. If any Note called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal from the redemption date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Notes and in Section 4.01 hereof.

Section 3.05. Notes Redeemed in Part.

Upon surrender of a Note that is redeemed in part, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.02 hereof, the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed portion of the Note surrendered.

Section 3.06. Optional Redemption.

(a) At any time and from time to time, the Company may redeem up to 100% of the aggregate principal amount of the Notes issued under this Indenture at a redemption price (expressed as a percentage of principal amount) equal to 112% of the principal amount thereof, plus accrued and unpaid interest to the redemption date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on the relevant Interest Payment Date) with the proceeds of Debt Incurred by the Company or any of its Subsidiaries for the bona fide intention of refinancing all, but not less than all, the Notes, or with the net cash proceeds of a Qualifying IPO by the Company or any Person in which the Company owns, directly or indirectly, 100% of the Voting Stock ; provided, however, that any such redemption shall be made contemporaneously with incurrence of such Debt or within 60 days of receipt of proceeds from such Qualifying IPO, as the case may be.

Unless the Company defaults in the payment of the redemption price, interest will cease to accrue on the Notes or portions thereof called for redemption on the applicable redemption date.

(b) Any prepayment pursuant to this Section 3.06 shall be made pursuant to the provisions of Sections 3.01 through 3.04 hereof.

Section 3.07. Tax Redemption.

(a) The Notes may be redeemed, at the option of the Company or a Surviving Person with respect to the Company, as a whole but not in part, upon giving not less than 30 days’ nor more than 60 days’ notice to the Holders and upon reasonable notice in advance of such notice to Holders to the Trustee (which notice shall be irrevocable), at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest (including any Additional Amounts), if any, to the date fixed by the Company or the Surviving Person, as the case may be, for redemption (the “Tax Redemption Date”) if, as a result of:

(i) any change in, or amendment to, laws (or any regulations or rulings promulgated thereunder) affecting taxation; or

 

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(ii) any change in the existing official position or the stating of an official position regarding the application or interpretation of such laws, regulations or rulings (including a holding, judgment or order by a court of competent jurisdiction),

which change or amendment becomes effective on or after (i) with respect to the Company or any Guarantor, the Issue Date, or (ii) with respect to any Future Guarantor or Surviving Person, the date such Future Guarantor or Surviving Person becomes a Future Guarantor or Surviving Person, with respect to any payment due or to become due under the Notes, any Guarantee, or this Indenture, the Company, a Surviving Person or a Guarantor, as the case may be, is, or on the next Interest Payment Date would be, required to pay Additional Amounts, and such requirement cannot be avoided by the taking of reasonable measures by the Company, a Surviving Person or a Guarantor, as the case may be; provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Company, a Surviving Person or a Guarantor, as the case may be, would be obligated to pay such Additional Amounts if a payment in respect of the Notes were then due.

(b) Prior to the mailing of any notice of redemption for Notes pursuant to the foregoing, the Company, a Surviving Person or a Guarantor, as the case may be, will deliver to the Trustee:

(i) an Officers’ Certificate stating that such change or amendment referred to in the prior paragraph has occurred, describing the facts related thereto and stating that such requirement cannot be avoided by the Company, a Surviving Person or a Guarantor, as the case may be, taking reasonable measures available to it; and

(ii) an Opinion of Counsel or a written opinion of a tax consultant who is acceptable to the Trustee, either of recognized standing, in form and substance satisfactory to the Trustee, stating that the requirement to pay such Additional Amounts results from such change or amendment referred to in the prior paragraph.

The Trustee shall accept such certificate and opinion as sufficient evidence of the satisfaction of the conditions precedent described above, in which event it shall be conclusive and binding on the Holders.

(c) Any Notes that are redeemed will be cancelled.

Section 3.08. Mandatory Redemption.

Except as set forth in the second paragraph of this Section 3.08, Sections 4.12 and 4.17 hereof, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to, or offer to purchase, the Notes.

Unless the Notes have been previously redeemed, repurchased and cancelled, the Company will redeem the Notes at the Stated Maturity at a redemption price equal to 100% of the principal amount if a Qualifying IPO has occurred on or before such date, or, if no Qualifying IPO has occurred on or before such date, 112% of the principal amount, in either case, plus accrued and unpaid interest and Additional Amounts.

Section 3.09. Offer To Purchase.

(a) In the event that, pursuant to Section 4.12 or Section 4.17 hereof, the Company shall be required to commence an Asset Sale Offer or a Change of Control Offer (each of the foregoing, an “Offer to Purchase”), respectively, it shall follow the procedures specified below.

(b) The Company shall commence the Offer to Purchase by sending, by first-class mail, with a copy to the Trustee, to each Holder at such Holder’s address appearing in the Security Register, a notice the terms of which shall govern the Offer to Purchase stating:

 

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(i) that the Offer to Purchase is being made pursuant to this Section and Section 4.12 or Section 4.17, as the case may be, and, in the case of a Change of Control Offer, that such event has occurred, the circumstances and relevant facts regarding such event, and that a Change of Control Offer is being made pursuant to Section 4.17;

(ii) the principal amount of Notes required to be purchased pursuant to Section 4.12 or Section 4.17, as the case may be (the “Offer Amount”), the purchase price set forth in Section 4.12 or Section 4.17, as applicable (the “Purchase Price”), the Offer Period and the Purchase Date (each as defined below);

(iii) except as provided in clause (ix), that all Notes timely tendered and not withdrawn shall be accepted for payment;

(iv) that any Note not tendered or accepted for payment shall continue to accrue interest;

(v) that, unless the Company defaults in making such payment, any Note accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest after the Purchase Date;

(vi) that Holders electing to have a Note purchased pursuant to an Offer to Purchase may elect to have Notes purchased in integral multiples of $100,000 only;

(vii) that Holders electing to have a Note purchased pursuant to any Offer to Purchase shall be required to surrender the Note, with the form entitled “Option of Holder to Elect Purchase” on the reverse of the Note completed, or transfer by book-entry transfer, to the Company, or the Common Depositary, if appointed by the Company, before the close of business on the third Business Day before the Purchase Date;

(viii) that Holders shall be entitled to withdraw their election if the Company, the Common Depositary, as the case may be, receives, not later than the expiration of the Offer Period, a SWIFT facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note (or portions thereof) the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Note purchased;

(ix) that, in the case of an Asset Sale Offer, if the aggregate principal amount of Notes surrendered by Holders exceeds the Offer Amount, the Company shall select the Notes to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $100,000 or integral multiples thereof shall be purchased);

(x) that Holders whose Notes were purchased in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry transfer); and

(xi) any other procedures the Holders must follow in order to tender their Notes (or portions thereof) for payment and the procedures that Holders must follow in order to withdraw an election to tender Notes (or portions thereof) for payment.

(c) The Offer to Purchase shall remain open for a period of at least 30 days but no more than 60 days following its commencement, except to the extent that a longer period is required by applicable law (the “Offer Period”). No later than five (5) Business Days (and in any event no later than the 60th day following any Change of Control) after the termination of the Offer Period (the “Purchase Date”) which shall be a Business Day, the Company shall purchase the Offer Amount or, if less than the Offer Amount has been tendered, all Notes tendered in response to the Offer to Purchase. Payment for any Notes so purchased shall be made in the same manner as interest payments are made. The Company shall publicly announce the results of the Offer to Purchase on the Purchase Date in accordance with Section 12.01 of this Indenture.

(d) On or prior to the Purchase Date, the Company shall, to the extent lawful:

 

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(i) accept for payment (on a pro rata basis to the extent necessary in connection with an Asset Sale Offer) from each tendering Holder, the Offer Amount of Notes or portions of Notes properly tendered and not withdrawn pursuant to the Offer to Purchase, or if less than the Offer Amount has been tendered, all Notes tendered; and

(ii) surrender to the Trustee the Notes properly accepted to be cancelled by the Trustee in accordance with Section 2.11 together with an Officers’ Certificate stating the aggregate principal amount of Notes or portions of Notes being purchased by the Company and that such Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this Section.

(e) Upon receipt of the Notes in accordance with Section 3.09(b)(i), the Company shall promptly, and in any event no later than one (1) Business Day prior to the Purchase Date, deliver to the Trustee or the Agent, as the case may be, on behalf of each tendering Holder, the Purchase Price. In the event that any portion of the Notes surrendered is not purchased by the Company, the Company shall promptly execute and issue a new Note in a principal amount equal to such unpurchased portion of the Note surrendered, and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate and deliver (or cause to be transferred by book-entry) such new Note to such Holder, in a principal amount equal to any unpurchased portion of the Note surrendered; provided, however, that each such new Note shall be in a principal amount of $100,000 or an integral multiple thereof. Any Note not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof.

(f) If the Purchase Date is on or after a Regular Record Date and on or before the related Interest Payment Date, any accrued and unpaid interest shall be paid to the Person in whose name a Note is registered at the close of business on such Regular Record Date, and no further interest shall be payable to Holders who tender Notes pursuant to the Offer to Purchase.

(g) Other than as specifically provided in this Section, any purchase pursuant to this Section shall be made in accordance with the provisions of Section 3.01 through 3.05 hereof.

ARTICLE 4.

COVENANTS

Section 4.01. Payment of Notes.

The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any (including the redemption price upon redemption or the repurchase price upon repurchase, in each case pursuant to Article 3), Additional Amounts and Interest (including post-petition interest in any proceeding under any Bankruptcy Law), on each of the Notes at the places, at the respective times and in the manner provided herein and in the Notes. Payments of principal, premium, if any, Additional Amounts and interest shall be made by the Company to the account designated by the Paying Agent (if other than the Company or a Subsidiary thereof) one Business Day prior to the due date and shall be considered paid on the date due if the Paying Agent, if other than the Company or a Subsidiary thereof, holds as of 11:00 a.m. Hong Kong time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, Additional Amounts and interest then due. Such Paying Agent shall return to the Company promptly, and in any event, no later than five (5) Business Days following the date of payment, any money that exceeds such amount of principal, premium, if any, Additional Amounts and interest paid on the Notes. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue on such payment for the intervening period, provided, however, that if such extension would cause payment of Interest to be made in the next following calendar month, such payment shall be made on the next preceding Business Day.

The Company shall pay, from time to time on demand, interest (including post-petition interest in any proceeding under any Bankruptcy Law) accrued on overdue principal and premium and Additional Amounts, if any, at a rate that is 4.0% per annum in excess of the rate then in effect; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace periods), from time to time on demand at the same rate to the extent lawful.

 

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Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed.

If any Notes become due and payable under Section 6.02, the rates of interest payable in respect of such Notes thereafter shall nevertheless continue to be calculated as previously by the Calculation Agent in accordance with the provisions (amended as necessary) of paragraph (1) of the Notes.

Section 4.02. Maintenance of Office or Agency.

(a) The Company shall maintain an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar) where Notes may be presented or surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands.

(b) The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.

(c) The Company hereby designates the Corporate Trust Office of the Trustee, as one such office, drop facility or agency of the Company in accordance with Section 2.03 hereof.

Section 4.03. Reports.

(a) So long as any of the Notes remain outstanding and prior to a Qualifying IPO, the Company shall file with the Trustee and upon the request of the Holders furnish to the Holders all of the following:

(i) As soon as they are available but in any event within 120 calendar days (or 90 calendar days if the Company’s Common Shares are listed on any international securities exchange or are approved for quotation on any system for automated dissemination of securities prices, or if the Company is otherwise required by law or regulation to publicly file information on a periodical basis with a securities regulatory authorities) after the end of the fiscal year of the Company, copies of its financial statements (on a consolidated basis) in respect of such fiscal year (including a statement of income, balance sheet and cash flow statement) audited by a member firm of an internationally-recognized firm of independent accountants in accordance with GAAP, together with an unqualified audit report in respect thereof;

(ii) As soon as they are available, but in any event within 75 calendar days after the end of each of the first, second and third Fiscal Quarters of the Company, copies of its unaudited financial statements (on a consolidated basis) in respect of the respective period (including a statement of income, balance sheet and cash flow statement) prepared on a basis consistent with the audited financial statements of the Company; provided that the Company shall make commercially reasonable efforts to furnish such financial statements within 45 calendar days after the end of each such Fiscal Quarter; and provided further that the financial statements delivered after the end of the second Fiscal Quarter shall cover the six-month period then ended; and

(iii) All public filings with the relevant trading market and regulatory authorities in connection with the Qualifying IPO and thereafter.

 

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(b) So long as any of the Notes remains outstanding, the Company will provide to the Trustee (i) within (x) 45 days after the close of the second Fiscal Quarter of the Company and (y) within the time period described in Section 4.03(a)(i) after the close of the Company’s fiscal year (which is ended December 31), an Officers’ Certificate stating the Consolidated Interest Expense Coverage Ratio, the Consolidated Subsidiary Debt to Consolidated Total Tangible Assets Ratio, the Consolidated Net Worth, the Cash Balance and the Working Capital Ratio, each as of the end of the six month period ending on the end of the second Fiscal Quarter or fiscal year, as the case may be, and showing in reasonable detail the calculation of such ratios and amounts, including the arithmetic computations of each component of such ratios and amounts; and (ii) as soon as possible and in any event within 14 days after the Company becomes aware of the occurrence of a Default, an Officers’ Certificate setting forth the details of the Default, and the action that the Company proposes to take with respect thereto.

(c) For as long as any Notes are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, during any period in which the Company is neither subject to Section 13 or 15(d) of the Exchange Act, nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, the Company shall supply (i) to any Holder or Beneficial Owner of a Note or (ii) upon their request to a prospective purchaser of a Note or beneficial interest therein designated by such holder or owner, the information specified in, and meeting the requirements of Rule 144A(d)(4) under the Securities Act.

(d) The Company shall notify the Trustee in writing within five (5) Business Days prior to filing a registration statement or other filing with any stock exchange for a Qualifying IPO, and shall notify the Trustee of the consummation of the Qualifying IPO on the date that of consummation thereof.

Section 4.04. Compliance Certificate.

(a) The Company and each Guarantor shall deliver to the Trustee, within the time period required for annual report to be delivered pursuant to Section 4.03(a)(i), an Officers’ Certificate stating that a review of the activities of the Company, the Guarantors and their respective Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company, the Guarantors and their respective Subsidiaries have kept, observed, performed and fulfilled their obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company, the Guarantors and their respective Subsidiaries have kept, observed, performed and fulfilled each and every covenant contained in this Indenture and are not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of, premium, if any, Additional Amounts or interest on the Notes is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto.

(b) The Company shall deliver to the Trustee, as soon as possible and in any event no later than 14 days after the occurrence thereof, written notice in the form of an Officers’ Certificate of any event that with the giving of notice and/or the lapse of time would become an Event of Default, its status and what action the Company is taking or proposes to take with respect thereto.

Section 4.05. Taxes.

The Company will pay or discharge, or cause to be paid or discharged, before the same may become delinquent, (i) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, (ii) all claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon the property of the Company or any Subsidiary and (iii) all stamp taxes and other duties, if any, which may be imposed by the Cayman Islands or any political subdivision thereof or therein in connection with the issuance, transfer, exchange, conversion, redemption or repurchase of any Notes or with respect to this Indenture other than pursuant to Section 2.07; provided that, in the case of clauses (i) and (ii), the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim if the amount, applicability or validity is being contested in good faith by appropriate proceedings.

 

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Section 4.06. Stay, Extension and Usury Laws.

The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted.

Section 4.07. Corporate Existence.

Subject to Section 5.01 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence, and the corporate, partnership or other existence of each of its Subsidiaries, in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Subsidiary and (ii) the rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of the Notes.

Section 4.08. Payments for Consent.

The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to or for the benefit of any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Notes unless such consideration is offered to be paid and is paid to all Holders that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement.

Section 4.09. Incurrence of Additional Debt.

The Company shall not, and shall not permit any of its Subsidiaries to, Incur, directly or indirectly, any Debt unless, after giving effect to the application of the proceeds thereof, no Default or Event of Default would occur as a consequence of such Incurrence or be continuing following such Incurrence and such Debt is Permitted Debt.

Notwithstanding anything to the contrary contained in this Section,

(a) the Company shall not, and shall not permit any Subsidiary to, Incur any Debt pursuant to this covenant if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations unless such Debt shall be subordinated to the Notes or the applicable Guarantee, as the case may be, to at least the same extent as such Subordinated Obligations and such Incurrence otherwise complies with the Indenture;

(b) the Company shall not permit any of its Subsidiaries that is not a Guarantor to Incur any Debt pursuant to this covenant if the proceeds thereof are used, directly or indirectly, to Refinance any Debt of the Company or any Guarantor; and

(c) accrual of interest, accretion or amortization of original issue discount and the payment of interest or dividends in the form of additional Debt, will be deemed not to be an Incurrence of Debt for purposes of this Section.

 

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For purposes of determining compliance with this Section, in the event that an item of Debt meets the criteria of more than one of the categories of Permitted Debt described in clauses (a) through (n) of the definition of “Permitted Debt”, the Company shall, in its sole discretion, classify (or later reclassify in whole or in part, in its sole discretion) such item of Debt in any manner that complies with this Section.

Section 4.10. Restricted Payments.

The Company shall not make, and shall not permit any of its Subsidiaries to make, directly or indirectly, any Restricted Payment prior to a Qualifying IPO, and thereafter shall not make any Restricted Payment if at the time of, and after giving effect to, such proposed Restricted Payment,

(a) a Default or Event of Default shall have occurred and be continuing, or

(b) the Minimum Consolidated Interest Expense Coverage Ratio is not complied with, or

(c) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made since the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value at the time of such Restricted Payment) would exceed an amount equal to the sum of:

(1) 50% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from the date of initial receipt by the Company of proceeds from the sale of Common Shares in the Qualifying IPO to the end of the most recent Fiscal Quarter ending at least 45 days prior to the date of such Restricted Payment (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit), plus

(2) 100% of the Capital Stock Sale Proceeds, plus

(3) the sum of:

(A) the aggregate net cash proceeds received by the Company or any Subsidiary from the issuance or sale after the Issue Date of convertible or exchangeable Debt that has been converted into or exchanged for Capital Stock (other than Disqualified Stock) of the Company, and

(B) the aggregate amount by which Debt (other than Subordinated Obligations) of the Company or any Subsidiary is reduced on the Company’s consolidated balance sheet on or after the Issue Date upon the conversion or exchange of any Debt (other than Subordinated Obligations) issued or sold on or prior to the Issue Date that is convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Company,

excluding, in the case of clause (A) or (B):

(x) any such Debt issued or sold to the Company or a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any such Subsidiary for the benefit of their employees, and

(y) the aggregate amount of any cash, securities (other than such Capital Stock) or other Property distributed by the Company or any of its Subsidiaries upon any such conversion or exchange, plus

(4) an amount equal to the net reduction in Investments made after the Issue Date and counted as a Restricted Payment in any Person other than the Company or any of its Subsidiaries resulting from dividends, repayments of loans or advances or other transfers of Property, in each case to the Company or any of its Subsidiaries from such Person.

 

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Notwithstanding the foregoing limitation, the Company may:

(a) pay dividends on its Capital Stock within 60 days of the declaration thereof if, on the declaration date, such dividends could have been paid in compliance with the Indenture; provided, however, that at the time of such payment of such dividend, no Default or Event of Default shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments;

(b) purchase, repurchase, redeem, legally defease, acquire or retire for value Capital Stock of the Company or Subordinated Obligations in exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any such Subsidiary for the benefit of their employees) of the Company (or options, warrants or other rights to acquire such Capital Stock (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company) of the Company, other than Debt that is convertible into or exchangeable for Capital Stock); provided, however, that

(1) such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded from the calculation of the amount of Restricted Payments and

(2) the Capital Stock Sale Proceeds from such exchange or sale shall be excluded from the calculation pursuant to clause (c)(2) above; and

(c) purchase, repurchase, redeem, legally defease, acquire or retire for value any Subordinated Obligations in exchange for, or out of the proceeds of the substantially concurrent sale of, Permitted Refinancing Debt; provided, however, that such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded from the calculation of the amount of Restricted Payments.

Section 4.11. Liens.

The Company shall not, and shall not permit any Subsidiary to, directly or indirectly, Incur, assume or permit to exist any Lien on the Collateral (other than Liens incurred pursuant to the Security Documents).

The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, Incur or suffer to exist, any Lien (other than Permitted Liens) upon any of its Property (including Capital Stock of any of its Subsidiaries), whether owned at the Issue Date or thereafter acquired, or any interest therein or any income or profits therefrom, unless it has made or will make effective provision whereby the Notes or the applicable Guarantee will be secured by such Lien equally and ratably with (or, if such other Debt constitutes Subordinated Debt, prior to) all other Debt of the Company or any of its Subsidiaries secured by such Lien for so long as such other Debt is secured by such Lien.

Section 4.12. Asset Sales.

The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, consummate any Asset Sale unless:

(a) no Default or Event of Default shall have occurred and be continuing;

(b) the Company or such Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Property subject to such Asset Sale;

(c) at least 75% of the consideration paid to the Company or such Subsidiary in connection with such Asset Sale is in the form of cash or Cash Equivalents or the assumption by

 

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the purchaser of liabilities of the Company or any of its Subsidiaries (other than contingent liabilities or liabilities that are by their terms subordinated to the Notes or the applicable Guarantee) as a result of which the Company and its Subsidiaries are no longer obligated with respect to such liabilities; and

(d) the Company delivers an Officers’ Certificate to the Trustee certifying that such Asset Sale complies with the foregoing clauses (a), (b) and (c).

The Net Available Cash (or any portion thereof) from Asset Sales may be applied by the Company or any of its Subsidiaries, to the extent the Company or such Subsidiary elects (or is required by the terms of any Debt) to reinvest in Additional Assets (including by means of an Investment in Additional Assets by any Subsidiary of the Company with Net Available Cash received by the Company or another Subsidiary of the Company).

Any Net Available Cash from an Asset Sale not applied in accordance with the preceding paragraph within 120 days from the date of the receipt of such Net Available Cash shall constitute “Excess Proceeds”.

When the aggregate amount of Excess Proceeds exceeds $5.0 million (taking into account income earned on such Excess Proceeds, if any), the Company will be required to make an offer to repurchase (the “Asset Sale Offer”) the Notes, which offer shall be in the amount of the Allocable Excess Proceeds (rounded to the nearest $100,000), on a pro rata basis according to principal amount, at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest if any to the Purchase Date (subject to the right of holders of record on the relevant Regular Record Date to receive interest due on the relevant Interest Payment Date), in accordance with the procedures (including prorating in the event of oversubscription) set forth in Section 3.09. To the extent that any portion of the amount of Net Available Cash remains after compliance with the preceding sentence and provided that all holders of Notes have been given the opportunity to tender their Notes for repurchase in accordance with Section 3.09, the Company or such Subsidiary may use such remaining amount first to Repay the Credit Facilities or any other Senior Debt of the Company or any Guarantor or Debt of any Subsidiary of the Company that is not a Guarantor (excluding, in any such case, any Debt owed to the Company or an Affiliate of the Company), and only thereafter, for any purpose permitted by this Indenture, and the amount of Excess Proceeds will be reset to zero.

The term “Allocable Excess Proceeds” shall mean the product of:

(a) the Excess Proceeds and

(b) a fraction,

(1) the numerator of which is the aggregate principal amount of the Notes outstanding on the date of the Asset Sale Offer, and

(2) the denominator of which is the sum of the aggregate principal amount of the Notes outstanding on the date of the Asset Sale Offer and the aggregate principal amount (or accreted value, if applicable) of other Debt of the Company outstanding on the date of the Asset Sale Offer that is pari passu in right of payment with the Notes and subject to terms and conditions in respect of Asset Sales similar in all material respects to this Section and requiring the Company to make an offer to repurchase such Debt at substantially the same time as the Asset Sale Offer.

Section 4.13. Limitation on Restrictions on Distributions from Subsidiaries.

The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any of its Subsidiaries to:

(a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock owned by, or pay any Debt or other obligation owed, to the Company or any other Subsidiary of the Company,

 

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(b) make any loans or advances to the Company or any other Subsidiary of the Company, or

(c) transfer any of its Property to the Company or any other Subsidiary of the Company.

The foregoing limitations will not apply:

(1) with respect to clauses (a), (b) and (c), to restrictions:

(A) in effect on the Issue Date (including, without limitation, restrictions pursuant to the Notes, this Indenture, the Convertible Notes and the indenture relating thereto),

(B) relating to Debt of any Subsidiary of the Company and existing at the time it became a Subsidiary of the Company if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which such Subsidiary became a Subsidiary of the Company or was acquired by the Company,

(C) that result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (1)(A) or (B) above or in clause (2)(A) or (B) below, provided such restrictions are not less favorable to the holders of Notes than those under the agreements evidencing the Debt so Refinanced, and

(2) with respect to clause (c) only, to restrictions:

(A) relating to Debt that is permitted to be Incurred and secured without also securing the Notes or the applicable Guarantee pursuant to Section 4.09 and Section 4.11 that limit the right of the debtor to dispose of the Property securing such Debt,

(B) encumbering Property at the time such Property was acquired by the Company or any of its Subsidiaries, so long as such restrictions relate solely to the Property so acquired and were not created in connection with or in anticipation of such acquisition,

(C) resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements that restrict assignment of such agreements or rights thereunder,

(D) customary restrictions contained in asset sale agreements limiting the transfer of such Property pending the closing of such sale, or

(E) with respect to any PRC Subsidiary and imposed pursuant to an agreement that has been entered into for the Incurrence of Debt permitted under clause (j) of the definition of “Permitted Debt” if, as determined by the Board of Directors, the encumbrances or restrictions are (i) customary for such types of agreements and (ii) would not, at the time agreed to, be expected to materially and adversely affect the ability of the Company to make any required payment on the Notes and any extension, refinancings, renewals or replacements of any of the foregoing agreements; provided that the encumbrances and restrictions in any such extension, refinancings, renewal or replacement, taken as a whole, are no more restrictive in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced.

 

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Section 4.14. Affiliate Transactions.

The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an “Affiliate Transaction”), unless:

(a) the terms of such Affiliate Transaction are:

(1) set forth in writing,

(2) in the best interest of the Company or such Subsidiary, as the case may be, and

(3) no less favorable to the Company or such Subsidiary, as the case may be, than those that could be obtained in a comparable arm’s-length transaction with a Person that is not an Affiliate of the Company,

(b) if such Affiliate Transaction involves aggregate payments or value in excess of $3.0 million, the Board of Directors (including a majority of the disinterested members of the Board of Directors) approves such Affiliate Transaction and, in its good faith judgment, believes that such Affiliate Transaction complies with clauses (a)(2) and (3) of this paragraph as evidenced by a Board Resolution promptly delivered to the Trustee, and

(c) if such Affiliate Transaction involves aggregate payments or value in excess of $10.0 million, the Company obtains a written opinion from an Independent Financial Advisor to the effect that the consideration to be paid or received in connection with such Affiliate Transaction is fair, from a financial point of view, to the Company and its Subsidiaries.

Notwithstanding the foregoing limitation, the Company or any of its Subsidiaries may enter into or suffer to exist the following:

(a) any transaction or series of transactions between the Company and one or more of its Wholly-Owned Subsidiaries or between two or more of its Wholly-Owned Subsidiaries in the ordinary course of business;

(b) any Restricted Payment permitted to be made pursuant to Section 4.10 or any Permitted Investment;

(c) the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and employees of the Company or any of its Subsidiaries, so long as the Board of Directors in good faith shall have approved the terms thereof and deemed the services theretofore or thereafter to be performed for such compensation to be fair consideration therefor and the payments made in the ordinary course of business and consistent with past practices of the Company or such Subsidiary; and

(d) loans and advances to employees made in the ordinary course of business and consistent with the past practices of the Company or such Subsidiary, as the case may be, provided that such loans and advances do not exceed $500,000 in the aggregate at any one time outstanding.

Section 4.15. Issuance or Sale of Capital Stock of Subsidiaries.

The Company shall not, and shall not permit any of its Subsidiaries to:

(a) sell, pledge, hypothecate or otherwise dispose of any shares of Capital Stock of any of its Subsidiaries, or

 

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(b) permit any Subsidiary of the Company to, directly or indirectly, issue or sell or otherwise dispose of any shares of its Capital Stock,

other than, in the case of either (a) or (b):

(1) directors’ qualifying shares or Capital Stock which is required by applicable law to be held by a Person other than the Company or a Wholly Owned Subsidiary,

(2) to the Company or a Wholly Owned Subsidiary, or

(3) a disposition of 100% of the shares of Capital Stock of such Subsidiary; provided, however, that, in the case of this clause (3),

(A) such disposition is effected in compliance with Section 4.12, and

(B) upon consummation of such disposition and execution and delivery of a supplemental indenture in form satisfactory to the Trustee, such Subsidiary shall be released from any Guarantee previously made by such Subsidiary.

Section 4.16. Maintenance of Consolidated Tangible Net Worth.

The Company shall not, on the Issue Date (after giving effect to the issuance of the Notes) or at any time, permit its Consolidated Tangible Net Worth to be less than the Consolidated Tangible Net Worth Threshold. The “Consolidated Tangible Net Worth Threshold” shall be equal to $60.0 million from the Issue Date through December 31, 2007; $95.0 million from January 1, 2008 through December 31, 2008; $145.0 million from January 1, 2009 through December 31, 2009; and $195.0 million thereafter.

Section 4.17. Repurchase at the Option of Holders Following a Change of Control.

(a) Upon the occurrence of a Change of Control, the Company shall, within 7 days thereafter notify the Trustee and the Holders of such Change of Control, and within 30 days of a Change of Control, make an offer (the “Change of Control Offer”) pursuant to the procedures set forth in Section 3.09. Each Holder shall have the right to accept such offer and require the Company to repurchase all or any portion (equal to $100,000 or an integral multiple thereof) of such Holder’s Notes pursuant to the Change of Control Offer at a purchase price, in cash equal to (x) 105% of the then outstanding principal amount of the Notes, plus accrued and unpaid interest, if any, on the Notes repurchased, to the Purchase Date if such Change of Control occurs prior to the Qualifying IPO or (y) 101% of the then outstanding principal amount of the Notes, plus accrued and unpaid interest, if any, on the Notes repurchased, to the Purchase Date if such Change of Control occurs after the Qualifying IPO.

(b) The Company shall not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Company and purchases all Notes properly tendered and not withdrawn under such Change of Control Offer.

Section 4.18. Future Guarantors.

The Company shall cause each Person that becomes a Subsidiary following the Issue Date to execute and deliver to the Trustee a Guarantee at the time such Person becomes a Subsidiary; provided that no PRC Subsidiary shall be required to execute a Guarantee unless there has been after the Issue Date a change in PRC law or interpretation in PRC law that permits such Guarantees without any approval from the PRC Governmental Authority, and provided further that the refusal of any PRC Governmental Authority, acting solely in its own discretion, to register or approve such Guarantee (if required by PRC law) shall not be deemed as a Default or Event of Default hereunder.

 

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Section 4.19. Business Activities.

The Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, engage in any business other than a Related Business.

Section 4.20. Sale and Leaseback Transactions.

The Company shall not, and shall not permit any of its Subsidiaries to, enter into any Sale and Leaseback Transaction with respect to any Property unless:

(a) the Company or such Subsidiary would be entitled to:

(1) Incur Debt in an amount equal to the Attributable Debt with respect to such Sale and Leaseback Transaction pursuant to Section 4.09 and

(2) create a Lien on such Property securing such Attributable Debt without also securing the Notes or the applicable Guarantee pursuant to Section 4.11 and

(b) such Sale and Leaseback Transaction is effected in compliance with Section 4.12.

Section 4.21. Impairment of Security Interest.

The Company shall not, and shall not permit any of its Subsidiaries to, take or omit to take any action that might or would have the result of impairing the security interest with respect to the Collateral for the benefit of the Trustee and the holders of the Notes, and the Company shall not, and shall not permit any of its Subsidiaries to, grant to any Person other than the Collateral Agent, for the benefit of the Trustee, the holders of the Notes, the trustee for the Convertible Notes, the holders of the Convertible Notes and the other beneficiaries described in the Security Documents, any interest whatsoever in any of the Collateral.

Section 4.22. Amendments to Security Documents.

The Company shall not, and shall not permit any of its Subsidiaries to, amend, waive or otherwise modify, or permit or consent to any amendment, waiver or other modification, the Security Documents in any way that would be adverse to the holders of the Notes.

Section 4.23. Use of Proceeds.

The Company will use the net proceeds from the sale of the Notes to (i) repay to (x) Blue Ridge China Partners, L.P. and (y) EI Fund II China, LLC the Shareholders’ Loan in its entirety and (ii) after giving effect to the application of such net proceeds, the Company will use the remaining net proceeds from the sale of the Notes to be paid to the account of Xinyuan Real Estate for further credit to the account of the WFOE to be used for (A) Capital Expenditures, in particular, the acquisition of land-use rights in the cities of Suzhou, Hefei, Jinan and Zhengzhou in the PRC, and other cities in the PRC consistent with the Company’s development strategy and that is suitable for residential development comparable in nature to residential development that has been completed by the Company prior to the Issue Date, (B) working capital and (C) general corporate purposes, all in accordance with and subject to the Account Agreement and pending the application of all of such net proceeds in such manner, to invest the portion of such net proceeds not yet so applied in Cash Equivalents. Following the application of net proceeds in such manner, any remaining net proceeds may be applied for general corporate purposes not otherwise prohibited by the terms of this Indenture.

Section 4.24. Maintenance of Insurance.

The Company shall, and shall cause its Subsidiaries to, maintain insurance policies covering such risks, in such amounts and with such terms as are normally carried by similar companies engaged in a similar business to the Related Business in the PRC.

 

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Section 4.25. Qualifying IPO.

The Company shall make such filings, registrations or qualifications and take all other necessary action and will use its commercially reasonable efforts to obtain such consents, approvals and authorizations, if any, and satisfy all conditions that may be required in connection with listing the Company’s Common Shares in a Qualifying IPO and shall use its commercially reasonable efforts to complete a Qualifying IPO by no later than October 15, 2009 and maintain such listing continuously thereafter.

Section 4.26. Enforcement of Loan Rights.

If at any time there has been and is existing an Event of Default, the Company shall cause Xinyuan Real Estate to immediately exercise all of its rights to require immediate repayment of all amounts outstanding pursuant to that certain loan agreement between Xinyuan Real Estate and the WFOE, whether pursuant to contract or statute.

Section 4.27. Government Approvals and Licenses; Compliance with Law.

The Company shall, and shall cause its Subsidiaries to, (a) obtain and maintain in full force and effect all Governmental Approvals, authorizations, consents, permits, concessions and licenses as are necessary to engage in a Related Business, (b) preserve and maintain good and valid title to its properties and assets (including land-use rights) free and clear of any Liens other than Permitted Liens and (c) comply with all laws, regulations, orders, judgments and decrees of any Governmental Authority, except to the extent that failure so to obtain, maintain, preserve and comply would reasonably not be expected to have a Material Adverse Effect.

Section 4.28. Maintenance of Financial Ratios.

The Company shall:

(a) maintain an average daily Cash Balance of no less than (x) $10.0 million during the last 30 days of each Fiscal Quarter in the fiscal year ending December 31, 2007, (y) $20.0 million during the last 30 days of each Fiscal Quarter in the fiscal year ending December 31, 2008 and (z) $30.0 million during (1) the last 30 days of each Fiscal Quarter thereafter and (2) the fifteen calendar days preceding Stated Maturity of the Notes.

(b) maintain at all times a Consolidated Subsidiary Debt to Consolidated Total Tangible Asset Ratio of no more than 0.25 to 1.00.

(c) maintain at all times a Working Capital Ratio of no less than 1.20 to 1.00 before the date of initial receipt by the Company of proceeds from the sale of Common Shares in the Qualifying IPO, and 1.33 to 1.00 thereafter.

Section 4.29. Notes to Rank Senior.

The Notes and all other obligations of the Company and the Guarantors under this Indenture are and at all times shall remain direct and first-priority secured obligations of the Company and each Guarantor ranking pari passu as against the assets of the Company and each Guarantor with all other Notes from time to time issued and outstanding hereunder, without any preference among themselves and senior in right and priority of payment to all other present and future unsecured Indebtedness (actual or contingent) of the Company and each Guarantor (except as otherwise required by law) as well as all Subordinated Obligations, including the Convertible Notes and the Convertible Note Guarantees.

 

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Section 4.30. Capital Expenditure.

The Company shall not make or Incur, or permit to be made or incurred, Capital Expenditure during each of the fiscal years set forth below, in aggregate, in excess of the maximum amount set forth for such fiscal year:

 

Fiscal Year Ending		Maximum Capital Expenditures ($ in millions)
2007		1.5
2008		1.5
2009		1.5
2010		1.5

Section 4.31. Additional Amounts.

All payments of principal of, and premium (if any) and interest on the Notes or under the Guarantees will be made without withholding or deduction for, or on account of, any present or future Taxes, unless such withholding or deduction is required by law or by regulation or governmental policy having the force of law. In the event that any such withholding or deduction is so required, the Company or the applicable Guarantor, as the case may be, will pay such withholding or deduction which is required by law or by regulation or governmental policy having the force of law, and will pay additional amounts (“Additional Amounts”) as will result in receipt by the holder of each Note or the Guarantees, as the case may be, of such amounts as would have been received by such holder had no such withholding or deduction been required, except that no Additional Amounts shall be payable:

(a) for or on account of:

(i) any Tax that would not have been imposed but for:

(A) the existence of any present or former connection between the holder or beneficial owner of such Note or Guarantee, as the case may be, and the Governmental Authority imposing the Tax other than merely holding such Note or the receipt of payments thereunder or under a Guarantee, including, without limitation, such holder or beneficial owner being or having been a national, domiciliary or resident of the jurisdiction of such Governmental Authority or treated as a resident thereof or being or having been physically present or engaged in a business therein or having or having had a permanent establishment therein;

(B) the presentation of such Note (in cases in which presentation is required) more than 30 days after the later of the date on which the payment of the principal of, premium, if any, and interest on, such Note became due and payable pursuant to the terms thereof or was made or duly provided for, except to the extent that the holder thereof would have been entitled to such Additional Amounts if it had presented such Note for payment on any date within such 30-day period;

(C) the failure of the holder or beneficial owner to comply with a timely request of the Company or any Guarantor addressed to the holder or beneficial owner, as the case may be, to provide information concerning such

 

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holder’s or beneficial owner’s nationality, residence, identity or connection with any Governmental Authority, if and to the extent that due and timely compliance with such request would have reduced or eliminated any withholding or deduction as to which Additional Amounts would have otherwise been payable to such holder;

(D) the presentation of such Note (in cases in which presentation is required) for payment in a jurisdiction in which the Company, a Surviving Person, or a Guarantor is resident for tax purposes, unless such Note could not have been presented for payment elsewhere;

(ii) any estate, inheritance, gift, sale, transfer, personal property or similar Tax;

(iii) any withholding or deduction that is imposed or levied on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or

(iv) any combination of Taxes referred to in the preceding clauses (i) and (ii); or

(b) with respect to any payment of the principal of, or premium, if any, or interest on, such Note or any payment under any Guarantee to a holder, if the holder is a fiduciary, partnership or person other than the sole beneficial owner of any payment to the extent that the beneficiary or settlor with respect to the fiduciary, or a member of the partnership, or the beneficial owner would not have been entitled to such Additional Amounts had that beneficiary, settler, partner or beneficial owner been the holder thereof.

Whenever there is mentioned in any context the payment of principal of, and any premium or interest on, any Note or under any Guarantee, such mention shall be deemed to include payment of Additional Amounts provided for in this Indenture to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof.

Section 4.32. Additional Interest and Delivery of WFOE Share Pledge.

The Company shall use its reasonable best efforts to deliver to the Collateral Agent (i) within 30 days after the WFOE’s obtaining the extension of its business license but in no event shall be later than October 30, 2007, an Officers’ Certificate attaching thereto written evidence that the Company or its agent has submitted the WFOE Share Pledge to the local counterpart of the MOFCOM for the Province of Henan in the PRC and (ii) within fifteen calendar days following the receipt of MOFCOM approval as described in the foregoing clause (i), an Officers’ Certificate attaching thereto written evidence that the Company or its agent has submitted the WFOE Share Pledge to the local counterpart of the SAFE for approval (if required) and the SAIC for registration with the SAIC. If the Company fails to deliver to the Collateral Agent the above-mentioned Officer’s Certificate with the required written evidence attached thereto, the Company is required to pay Additional Interest to holders of Notes, and the Company will provide written notice (“Additional Interest Notice”) to the Trustee and the holders of the Company’s obligation to pay Additional Interest no later than fifteen (15) days prior to the proposed payment date for the payment of the Additional Interest, and the Additional Interest Notice shall set forth the amount of Additional Interest to be paid by the Company on such payment date and manner of calculation thereof. The Trustee shall not at any time be under any duty or responsibility to any holder of Notes to determine the Additional Interest, or with respect to the nature, extent or calculation of the amount of Additional Interest when made, or with respect to the method employed in such calculation of the Additional Interest.

Section 4.33. Cash Management.

The Company shall cause each of its PRC Subsidiaries (other than the WFOE), to the extent permissible under applicable laws or regulations, to maintain only a minimum level of Cash Balance for its respective operations that is appropriate and desirable in accordance with good business practice in maximizing the interests of the Company, as shareholder of the WFOE, and shall transfer any cash and Cash Equivalents in excess of such amounts to the WFOE on the 30^th day of each month.

 

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ARTICLE 5.

SUCCESSORS

Section 5.01. Merger, Consolidation and Sale of Assets.

(a) The Company shall not merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all of its Property in any one transaction or series of transactions unless:

(i) the Company shall be the Surviving Person in such merger, consolidation or amalgamation, or the Surviving Person (if other than the Company) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia or the Cayman Islands;

(ii) the Surviving Person (if other than the Company) expressly assumes, by supplemental indenture in form satisfactory to the Trustee, executed and delivered to the Trustee by such Surviving Person, the due and punctual payment of the principal of, and premium, if any, Additional Amounts and interest on, all the Notes, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be performed by the Company;

(iii) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all of the Property of the Company, such Property shall have been transferred as an entirety or virtually as an entirety to one Person;

(iv) immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (iv) and clauses (v) and (vi) below, any Debt that becomes, or is anticipated to become, an obligation of the Surviving Person or any Subsidiary of the Company as a result of such transaction or series of transactions as having been Incurred by the Surviving Person or such Subsidiary at the time of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing;

(v) immediately after giving effect to such transaction or series of transactions on a pro forma basis:

(1) the Company or the Surviving Person, as the case may be, would be in compliance with the Minimum Consolidated Interest Expense Coverage Ratio; and

(2) the Company or the Surviving Person, as the case may be, would have a Consolidated Interest Expense Coverage Ratio that is not lower than the Consolidated Interest Expense Coverage Ratio of the Company immediately prior to such transaction;

(vi) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Surviving Person shall have a Consolidated Net Worth in an amount which is not less than the Consolidated Net Worth of the Company immediately prior to such transaction or series of transactions;

(vii) the Company shall deliver, or cause to be delivered, to the Trustee, an Officers’ Certificate and an Opinion of Counsel, each stating that such transaction or series of transactions and the supplemental indenture, if any, in respect thereto comply with this covenant and that all conditions precedent herein provided for relating to such transaction or series of transactions have been satisfied; and

 

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(viii) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the holders will not recognize income, gain or loss for federal income tax purposes as a result of such transaction and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred.

The foregoing provisions (other than clause (iv)) shall not apply to any transaction or series of transactions which constitute an Asset Sale if the Company has complied with Section 4.12.

(b) The Company shall not permit any Guarantor to merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company or such Guarantor) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its Property in any one transaction or series of transactions unless:

(i) the Surviving Person (if not such Guarantor) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation, company (including a limited liability company) or partnership organized and existing under the laws of the United States of America, any State thereof or the District of Columbia or the Cayman Islands;

(ii) the Surviving Person (if other than such Guarantor) expressly assumes, by supplemental indenture in form satisfactory to the Trustee, executed and delivered to the Trustee by such Surviving Person, the due and punctual performance and observance of all the obligations of such Guarantor under its Guarantee;

(iii) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or a substantial part of all the Property of such Guarantor, such Property shall have been transferred as an entirety or virtually as an entirety to one Person;

(iv) immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (iv) and clauses (v) and (vi) below, any Debt that becomes, or is anticipated to become, an obligation of the Surviving Person, the Company or any of its Subsidiaries as a result of such transaction or series of transactions as having been Incurred by the Surviving Person, the Company or such Subsidiary at the time of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing;

(v) immediately after giving effect to such transaction or series of transactions on a pro forma basis:

(1) the Company would be in compliance with the Minimum Consolidated Interest Expense Coverage Ratio, and

(2) the Company would have a Consolidated Interest Expense Coverage Ratio which is not lower than the Consolidated Interest Expense Coverage Ratio of the Company immediately prior to such transaction; and

(vi) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Company shall have a Consolidated Net Worth in an amount which is not less than the Consolidated Net Worth of the Company immediately prior to such transaction or series of transactions;

(vii) the Company shall deliver, or cause to be delivered, to the Trustee, an Officers’ Certificate and an Opinion of Counsel, each stating that such transaction or series of transactions and the supplemental indenture, if any, in respect thereto comply with this covenant and that all conditions precedent herein provided for relating to such transaction or series of transactions have been satisfied; and

 

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(viii) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the holders will not recognize income, gain or loss for federal income tax purposes as a result of such transaction and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred.

The foregoing provisions (other than clause (iv)) shall not apply to any transaction or series of transactions which constitute an Asset Sale if the Company has complied with Section 4.12.

Section 5.02. Successor Corporation Substituted.

The Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of the Company or a Guarantor, as applicable, under this Indenture; provided, however, that the predecessor entity shall not be released from any of the obligations or covenants under this Indenture, including with respect to the payment of the Notes and obligations under the Guarantee, as the case may be, in the case of:

(a) a sale, transfer, assignment, conveyance or other disposition (unless such sale, transfer, assignment, conveyance or other disposition is of all or substantially all of the assets of the Company, taken as a whole or, in the case of a Guarantor, such sale, transfer, assignment, conveyance or other disposition is of (i) all or substantially all of the assets of such Guarantor to a Person that is not (either before or after giving effect to such transaction) a Subsidiary of the Company, or (ii) such portion of the Capital Stock of such Guarantor such that it ceases to be a Subsidiary of the Company), or

(b) a lease.

ARTICLE 6.

DEFAULTS AND REMEDIES

Section 6.01. Events of Default.

Each of the following constitutes an “Event of Default” with respect to the Notes:

(a) failure to make the payment of any interest on the Notes when the same becomes due and payable, and such failure continues for a period of 15 days; provided that if such payment is not made by reason of having been prohibited by PRC Governmental Authorities, then such failure to make such payment shall be an Event of Default only if such failure continues for a period of 30 days;

(b) failure to make the payment of any principal of, or premium, if any, on, any of the Notes when the same becomes due and payable at its Stated Maturity, upon acceleration, mandatory redemption, optional redemption, required repurchase or otherwise;

(c) failure to comply with Sections 4.09, 4.10, 4.12, 4.17 or 5.01;

(d) failure to comply with any other covenant or agreement in the Notes or in this Indenture (other than a failure that is the subject of the foregoing clause (a), (b) or (c)), and such failure continues for 45 days after written notice is given to the Company by the Trustee (upon the instruction of the Holders in accordance with Section 6.02) or the Holders of not less than 10% in aggregate principal amount of the Notes then outstanding specifying the default, demanding that it be remedied and stating that such notice is a “Notice of Default;”

(e) a default under any Debt by the Company or any of its Subsidiaries that results in acceleration of the maturity of such Debt, or failure to pay any such Debt when due, in an aggregate amount greater than $3.0 million or its foreign currency equivalent at the time;

 

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(f) one or more final judgments or orders for the payment of money are rendered against the Company or any Subsidiary and are not paid or discharged, and there is a period of 60 consecutive days following entry of the final judgment or order and the aggregate amount of all such final judgments or orders outstanding and not paid or discharged against all such Persons exceed $3.0 million (or its foreign currency equivalent at the time) during which a stay of enforcement, by reason of a pending appeal or otherwise, is not in effect;

(g) any Guarantee ceases to be in full force and effect (other than in accordance with the terms of such Guarantee) or any Guarantor or a group of Guarantors that, taken as a whole, would constitute a Significant Subsidiary denies or disaffirms its obligations under its Guarantee;

(h) the Company, any of its Significant Subsidiaries (or any group of Subsidiaries that, when taken together, would constitute a Significant Subsidiary) pursuant to or within the meaning of any Bankruptcy Law:

(A) commences a voluntary case or gives notice of intention to make a proposal under any Bankruptcy Law;

(B) consents to the entry of an order for relief against it in an involuntary case or consents to its dissolution or winding up;

(C) consents to the appointment of a receiver, interim receiver, receiver and manager, liquidator, trustee or custodian of it or for all or substantially all of its property;

(D) makes a general assignment for the benefit of its creditors; or

(E) admits in writing its inability to pay its debts as they become due or otherwise admits its insolvency;

(i) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:

(A) is for relief against the Company, any of its Significant Subsidiaries (or any group of Subsidiaries that, when taken together, would constitute a Significant Subsidiary) in an involuntary case; or

(B) appoints a receiver, interim receiver, receiver and manager, liquidator, trustee or custodian of the Company, any of its Significant Subsidiaries (or any group of Subsidiaries that, when taken together, would constitute a Significant Subsidiary) for all or substantially all of the property of the Company, any of its Significant Subsidiaries (or any group of Subsidiaries that, when taken together, would constitute a Significant Subsidiary); or

(C) orders the liquidation of the Company, any of its Significant Subsidiaries (or any group of Subsidiaries that, when taken together, would constitute a Significant Subsidiary);

and such order or decree remains unstayed and in effect for 60 consecutive days;

(j) any default by the Company or Future Guarantor Pledgor or any other Person that pledges Collateral on behalf of the holders in any of its obligations under the Security Documents; the security interest under the Security Documents shall, at any time, cease to be in full force and effect for any reason other than the satisfaction in full of all obligations under the Indenture and discharge of the Indenture or any security interest created thereunder shall be declared invalid or unenforceable or the Company or any Guarantor shall assert that any such security interest is invalid or unenforceable;

 

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(k) the Company or any Future Guarantor Pledgor or any other Person that pledges Collateral on behalf of the holders denies or disaffirms its obligations under any Security Document or, other than in accordance with this Indenture and the Security Documents, any Security Document ceases to be or is not in full force and effect or the Trustee ceases to have a first priority interest in the Collateral;

(l) the WFOE ceases to be a Wholly Owned Subsidiary of the Company; or

(m)(i) the confiscation, expropriation or nationalization by any Governmental Authority of any Property of the Company or any of its Subsidiaries that is material to the operation of the Related Business; or (ii) if such revocation or repudiation could reasonably be expected to have a Material Adverse Effect, the revocation or repudiation by any Governmental Authority of any previously granted Governmental Approval to any PRC Subsidiary; or (iii) the imposition or introduction of material and discriminatory taxes, tariffs, royalties, customs or excise duties imposed on any PRC Subsidiary, or the material and discriminatory withdrawal or suspension of privileges or specifically granted rights of a fiscal nature, or (iv) the Company or any of its Subsidiary is prevented from exercising normal control over all or any material part of its property, assets or revenues.

Section 6.02. Acceleration.

If any Event of Default (other than those of the type described in Section 6.01(h) or (i)) occurs and is continuing, the Trustee may, and the Trustee upon the request of Holders of 25% in principal amount of the outstanding Notes shall, or the Holders of at least 25% in principal amount of outstanding Notes may, declare the principal of all the Notes, together with all accrued and unpaid interest, premium, if any, to be due and payable by notice in writing to the Company and the Trustee specifying the respective Event of Default and that such notice is a notice of acceleration (the “Acceleration Notice”), and the same shall become immediately due and payable.

In the case of an Event of Default specified in Section 6.01 (h) or (i) hereof, all outstanding Notes shall become due and payable immediately without any further declaration or other act on the part of the Trustee or the Holders. Holders may not enforce this Indenture or the Notes except as provided in this Indenture.

In the case of an Event of Default with respect to the Notes occurring by reason of any willful action or inaction taken or not taken by the Company or on the Company’s behalf with the intention or effect of avoiding payment of the premium that the Company would have been required to pay at maturity or if the Company had then elected to redeem the Notes pursuant to Section 3.06 hereof, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Notes.

Section 6.03. Other Remedies.

If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture.

The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies shall be cumulative to the extent permitted by law.

Section 6.04. Waiver of Defaults.

The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes, waive any existing Default or Event of Default, and its consequences, except a continuing Default or Event of Default (i) in the payment of the principal of, premium, if

 

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any, or interest, on the Notes and (ii) in respect of a covenant or provision which under this Indenture cannot be modified or amended without the consent of the Holder of each Note affected by such modification or amendment. In the event of any Event of Default specified in Section 6.01(e), such Event of Default and all consequences of that Event of Default, including without limitation any acceleration or resulting payment default, shall be annulled, waived and rescinded, automatically and without any action by the Trustee or the Holders of the Notes, if within 30 days after the Event of Default arose:

(a) the Debt that is the basis for the Event of Default has been discharged;

(b) the holders of such Debt have rescinded or waived the acceleration, notice or action, as the case may be, giving rise to the Event of Default; or

(c) if the default that is the basis for such Event of Default has been cured.

Upon any waiver of a Default or Event of Default, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed cured for every purpose of this Indenture but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon.

Section 6.05. Control by Majority.

Subject to Section 7.01 and Section 7.07 hereof, in case an Event of Default shall occur and be continuing, the Holders of a majority in aggregate principal amount of the Notes then outstanding shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Notes.

Section 6.06. Limitation on Suits.

No Holder shall have any right to institute any proceeding with respect to this Indenture, or for the appointment of a receiver or trustee, or for any remedy thereunder, unless:

(a) such Holder has previously given to the Trustee written notice of a continuing Event of Default or the Trustee receives the notice from the Company,

(b) Holders of at least 25% in aggregate principal amount of the Notes then outstanding have made written request to the Trustee to institute such proceeding as trustee and have provided the Trustee security or indemnity satisfactory to the Trustee against any loss, liability or expense but the Trustee has not complied with such request within 30 days after the receipt of the request and the security or indemnity satisfactory to the Trustee, and

(c) the Trustee shall not have received from the Holders of a majority in aggregate principal amount of the Notes then outstanding a direction inconsistent with such request and shall have failed to institute such proceeding within 30 days.

The preceding limitations shall not apply to a suit instituted by a Holder for enforcement of payment of principal of, and premium, if any, or interest on, a Note on or after the respective due dates for such payments set forth in such Note.

A Holder may not use this Indenture to affect, disturb or prejudice the rights of another Holder or to obtain a preference or priority over another Holder.

Section 6.07. Rights of Holders to Receive Payment.

Notwithstanding any other provision of this Indenture (including Section 6.06), the right of any Holder to receive payment of principal, premium, if any, and interest on the Notes held by such Holder, on or after the respective due dates expressed in the Notes (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder.

 

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Section 6.08. Collection Suit by Trustee.

If an Event of Default specified in Section 6.01 (h) or (i) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, premium, if any, and interest then due and owing (together with interest on overdue principal and, to the extent lawful, interest) and such further amount as shall be sufficient to cover the costs and expenses of collection, including the compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.

Section 6.09. Trustee May File Proofs of Claim.

The Trustee shall be authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee and its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, moneys, securities and any other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.

Section 6.10. Priorities.

If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order:

First: to the Trustee, the Agents and their respective agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expenses and liabilities incurred, and all advances made, by the Trustee and (where applicable), the Agents and the costs and expenses of collection in connection with this Indenture, the Security Documents or the Notes, including the collection or distribution of such amounts held or realized or in connection with expenses incurred in enforcing its remedies under the Security Documents and preserving the Collateral and all amounts for which the Trustee is entitled to indemnification under the Security Documents;

Second: in case the principal of the outstanding Notes shall not have become due and be unpaid, to the payment of Interest on the Notes in default in the order of the maturity of the installments of such Interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of Interest at the rate specified in the Notes, such payments to be made ratably to the Persons entitled thereto;

Third: in case the principal of the outstanding Notes shall have become due, by declaration or otherwise, and be unpaid to the payment of the whole amount then owing and unpaid upon the Notes for principal and Interest, with Interest on the overdue principal and (to the extent that such Interest has been collected by the Trustee) upon overdue installments of Interest at the rate specified in the Notes, and in case such monies shall be insufficient to pay in full the whole amounts so due and unpaid upon the Notes, then to the payment of such principal and Interest without preference or priority of principal over Interest, or of Interest over principal, or of any installment of Interest over any other installment of Interest, or of any Note over any other Note, ratably to the aggregate of such principal and accrued and unpaid Interest; and

 

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Fourth: to the Company or the Guarantors or to such party as a court of competent jurisdiction shall direct.

The Trustee may but is not obligated to fix a record date and payment date for any payment to Holders pursuant to this Section.

Section 6.11. Undertaking for Costs.

In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys’ fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section shall not apply to a suit by the Trustee, a suit by the Company, a suit by a Holder pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes.

ARTICLE 7.

TRUSTEE

Section 7.01. Duties of Trustee.

(a) The Trustee may at its discretion take proceedings against either or both the Company or the Guarantor to enforce payment of the Notes after the Notes have become due and payable or to declare the Notes due and payable, provided that the Trustee shall not be under any obligation to do any of the foregoing unless it shall have been so requested in writing by the holders of not less than 25% in principal amount of the Notes then outstanding and it shall have been indemnified to its satisfaction.

(b) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent Person would exercise or use under the circumstances in the conduct of such Person’s own affairs.

(c) Except during the continuance of an Event of Default:

(1) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and

(2) in the absence of fraud, willful misconduct or gross negligence on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. .

(d) The Trustee may not be relieved from liabilities for its own fraud, willful misconduct or gross negligence, except that:

(1) this paragraph does not limit the effect of paragraph (b) of this Section;

(2) The Trustee shall not be liable for any error of judgment by any officer or employee of the Trustee assigned by the Trustee to administer its corporate trust matters, unless it is proved that the Trustee was grossly negligent in ascertaining the pertinent facts; and

 

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(3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof.

(e) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to the provisions of Article 7 of this Indenture.

(f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law.

Section 7.02. Rights of Trustee.

(a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in any such document. The Trustee, however, in the case of any document which is specifically required to be furnished to the Trustee pursuant to any provision hereof, shall examine the document to determine whether it conforms to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculation or other facts stated therein).

(b) Before the Trustee acts or refrains from acting, it may require an Officers’ Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers’ Certificate or Opinion of Counsel. The Trustee shall be entitled to accept such opinion and certificate as sufficient and conclusive evidence of the fulfillment of the applicable conditions precedent, in which event it shall be conclusive and binding on the Holders. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon.

(c) The Trustee shall not be liable for any action taken or omitted by it except to the extent that a court of competent jurisdiction determines that the Trustee’s gross negligence or willful misconduct was the primary cause of any loss to the Holders.

(d) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company.

(e) The Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a Default or Event of Default is received by a Responsible Officer of the Trustee at the Corporate Trust Office of the Trustee from the Company or the Holders of 25% in aggregate principal amount of the outstanding Notes, and such notice references the specific Default or Event of Default, the Notes and this Indenture.

(f) The Trustee shall not be required to give any bond or surety in respect of the performance of its power and duties hereunder.

(g) The Company and the Guarantor each covenant with the Trustee that each will comply with and perform and observe all the provisions of this Indenture, the Notes, the Security Documents or any other document in connection with the sale of the Notes or pursuant to this Indenture which are expressed to be binding on either of the Company and the Guarantor. Until the Trustee has actual knowledge or express notice to the contrary, the Trustee shall be entitled to assume no Event of Default and that each of the Company and the Guarantor are observing and performing all of their respective obligations.

 

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(h) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed and supervised with reasonable care by it hereunder.

(i) Neither the Trustee nor any market or exchange on which the Notes are traded shall have any obligation or duty to monitor, determine or inquire as to compliance, and shall not be responsible or liable for compliance, with restrictions on transfer, exchange, redemption, purchase or repurchase, as applicable, of minimum denominations imposed hereunder or under applicable law or regulation with respect of any transfer, exchange, redemption, purchase or repurchase, as applicable, of interest in any Note.

(j) In the event the Trustee receives inconsistent or conflicting requests and indemnity from two or more groups of Holders, each representing less than a majority in aggregate principal amount of the Notes then outstanding, pursuant to the provisions of this Indenture, the Trustee, in its sole discretion, may determine what action, if any, will be taken.

(k) The permissive right of the Trustee to take the actions permitted hereby will not be construed as an obligation or duty to do so.

(l) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and will be enforceable by, the Trustee in each of its capacities hereunder, and each agent, custodian and other Person employed to act hereunder.

(m) The Trustee may request that the Company deliver an Officers’ Certificate setting forth the names of individuals or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers’ Certificate may be signed by any person authorized to sign an Officers’ Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded.

(n) The Trustee is entitled to enter into business transactions with the Company, its Affiliates or any entity related thereto without accounting for any profit.

(o) In connection with the exercise of its functions (including but not limited to those in relation to any proposed modification, authorization, waiver or substitution), the Trustee will have regard to the interests of the Holders as a class, and will not have regard to the consequences of such exercise for individual Holders. The Trustee will not be entitled to require, nor will any Holder be entitled to claim, from the Company or any Guarantor, any indemnification or payment in respect of any tax consequences of any such exercise upon individual Holders.

(p) The Trustee may refrain from taking any action in any jurisdiction if the taking of such action in that jurisdiction would, in its opinion based upon legal advice in the relevant jurisdiction, be contrary to any law of that jurisdiction or, to the extent applicable, of the State of New York. Furthermore, the Trustee may also refrain from taking such action if it would otherwise render it liable to any person in that jurisdiction or the State of New York or if, in its opinion based upon such legal advice, it would not have the power to do the relevant thing in that jurisdiction by virtue of any applicable law in that jurisdiction or in the State of New York or if it is determined by any court or other competent authority in that jurisdiction or in the State of New York that it does not have such power.

(q) Each party shall be solely responsible for making and continuing to make its own independent appraisal of and investigation into the financial condition, creditworthiness, condition, affairs, status and nature of the Company and the Guarantor, and the Trustee shall not at any time have any responsibility for the same and each party shall not rely on the Trustee in respect thereof.

(r) No provision of these presents shall require the Trustee to do anything which may: (i) be illegal or contrary to applicable law or regulation; (ii) cause it to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties or in the exercise of any of its own rights or powers, if it shall have grounds for believing that repayment of such funds or satisfactory indemnity against such risk or the liability is not assured to it.

 

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(s) The Trustee shall not be responsible for any consolidation, amalgamation, merger, reconstruction or scheme of the Company or any sale or transfer of all or substantially all of the assets of the Company or the Guarantor or the form or substance of any plan relating thereto or the consequences thereof to any Holder.

(t) Whenever in this Indenture or any other document in connection with the sale of the Notes or pursuant to this Indenture or by law, the Trustee shall have discretion or permissive power it may decline to exercise the same in the absence of approval by the Holders. Save as expressly provided in this Indenture, the Trustee will have absolute and unfettered discretion as to the exercise of its functions and will not be responsible for any loss, liability, cost, claim, action, demand, damages, expense or inconvenience which may result from their exercise or non–exercise, except to the extent that a court of competent jurisdiction determines that the Trustee’s gross negligence or wilful misconduct was the primary cause of any loss to the Holders.

(u) The Trustee shall engage and consult, at the expense of the Company with any legal adviser and professional adviser selected by it and rely upon any advice so obtained and each of its respective directors, officers, employees and duly appointed agents shall be protected and shall not be liable in respect of any action taken, or omitted to be done or suffered to be taken, in accordance with such advice.

(v) Any Trustee being a banker, lawyer, broker or other person engaged in any profession or business shall be entitled to charge and be paid all usual professional and other charges for business transacted and acts done by him or his partner or firm on matters arising in connection with this Indenture, the Notes and the Security Documents and any incurred charges in addition to disbursements for all other work and business done and all time spent by him or his partner or firm on matters arising in connection with this Indenture, the Notes and the Security Documents, including matters which might or should have been attended to in person by a trustee not being a banker, lawyer, broker or other professional person.

Section 7.03. Individual Rights of Trustee.

The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue as Trustee or resign. Any Agent may do the same with like rights and duties. The Trustee shall also be subject to Section 7.10 hereof.

Section 7.04. Trustee’s Disclaimer.

The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Company’s use of the proceeds from the Notes or any money paid to the Company or upon the Company’s direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement, recital, warranty or representation of any party herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication.

Section 7.05. Notice of Defaults.

If the Trustee receives notice of any Default or Event of Default from the Company, the Trustee shall notify the Holders of the Default or Event of Default as soon as possible and in any event within 30 days after receipt thereof in accordance with Section 12.01. Except in the case of a Default or Event of Default in payment of principal of, premium, if any, or interest on any Note, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders.

 

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Section 7.06. Reports by Trustee to Holders.

Within 30 days after each May 15 beginning with the May 15 following the first anniversary of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders a brief report dated as of such reporting date with respect to any of the following events which may have occurred within the previous 12 months (but if no such event has occurred such date, no report need be transmitted):

(a) the character and amount of any disbursements made by it, as the Trustee under this Indenture, which remain unpaid for 90 days from the date of issuance of any such disbursement as at the date of such report, and for the reimbursement of which it has claimed in writing a lien or charge, prior to that of Notes, on property or funds held or collected by it as the Trustee under this Indenture, if such disbursements so remaining unpaid, being in the aggregate more than US$375,000;

(b) any release, or release and substitution, of property subject to the Lien under the Security Documents (and the consideration therefor, if any) which it has not previously notified to the Holders under this Indenture or the Security Documents; and

(c) any action taken by it in the performance of its duties under this Indenture which it has not previously notified to the Holders under this Indenture or the Security Documents and which in its opinion materially affects the Notes, except action in respect of a default, notice of which has been or is to be withheld by it in accordance with this Indenture.

A copy of each report at the time of its mailing to the Holders shall be mailed to the Company. The Company shall promptly notify the Trustee when the Notes are listed on any stock exchange and any delisting thereof.

Section 7.07. Compensation and Indemnity.

Each of the Company and the Guarantor hereby jointly and severally, unconditionally and irrevocably covenants and undertakes to indemnify and hold harmless the Trustee, its directors, officers, employees and agents (each an “indemnified party”) in full at all times against all losses, liabilities, actions, proceedings, claims, demands, penalties, damages, costs, expenses disbursements, and other liabilities whatsoever (the “Losses”), including without limitation the costs and expenses of legal advisors and other experts, which may be incurred, suffered or brought against such indemnified party as a result or in connection with (a) their appointment or involvement hereunder or the exercise of any of their powers or duties hereunder or the taking of any acts in accordance with the terms of this Indenture, the Notes and the Security Documents or its usual practice; (b) this Indenture, the Notes and the Security Documents and any other documents in connection with the sale of the Notes or pursuant to this Indenture, or (c) any instruction or other direction upon which the Trustee may rely under this Indenture, the Notes and the Security Documents, as well as the costs and expenses incurred by an indemnified party of defending itself against or investigating any claim or liability with respect of the foregoing provided that this indemnity shall not apply in respect of an indemnified party to the extent but only to the extent that any such Losses incurred or suffered by or brought against such indemnified party arises directly from the fraud, willful misconduct or gross negligence of such indemnified party. The parties hereto acknowledge that the foregoing indemnities shall survive the resignation or removal of the Trustee or the termination of this Indenture, the Notes and the Security Documents.

Notwithstanding any other term or provision of this Indenture, the Notes and the Security Documents to the contrary, the Trustee shall not be liable for special, punitive, indirect or consequential loss or damage of any kind whatsoever including but not limited to loss of profits, whether or not foreseeable, and regardless of whether the claim for such loss or damage is made in negligence, for breach of contract, breach of trust, breach of fiduciary obligation or otherwise. The provisions of this Section shall survive the termination or discharge of this Indenture, the Notes and the Security Documents or the resignation or removal of the Trustee.

 

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The obligations of the Company under this Section shall survive the satisfaction and discharge of this Indenture pursuant to Article 11 hereof, the termination of this Indenture and the Security Documents, the resignation or removal of the Trustee or payment in full of the Notes through the expiration of the applicable statute of limitations.

To secure the Company’s payment obligations in this Section, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal, premium, if any, and interest on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture pursuant to Article 11 hereof, the termination of this Indenture and the Security Documents, the resignation or removal of the Trustee or payment in full of the Notes through the expiration of the applicable statute of limitations.

When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(h) or (i) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law.

Section 7.08. Replacement of Trustee.

A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee’s acceptance of appointment as provided in this Section.

The Trustee may resign in writing at any time upon 45 days’ prior written notice to the Company and be discharged from the trust hereby created by so notifying the Company, without assigning any reason and without being responsible for any costs, charges and expenses occasioned by such retirement. The Holders of a majority in aggregate principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if:

(a) the Trustee fails to comply with Section 7.10 hereof;

(b) the Trustee is adjudged bankrupt or insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law;

(c) a custodian or public officer takes charge of the Trustee or its property; or

(d) the Trustee becomes incapable of acting.

If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company.

If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the Company hereby covenants that in the event of the Trustee giving notice under this Section it shall use its best endeavors to procure a trustee to be appointed and if the Company has not procured the appointment of a new trustee within 30 days after the expiration of such written notice, the Trustee shall petition any court of competent jurisdiction for its resignation provided that it has notified the Company prior to it doing so. If such petition is granted, the Trustee shall notify the Holders and the Company in writing of its resignation.

If the Trustee, after written request by any Holder who has been a Holder for at least six months, fails to comply with Section 7.10 hereof, such Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.

A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the

 

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successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. Subject to the Lien provided for in Section 7.07 hereof, the retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee; provided, however, that all sums owing to the Trustee hereunder shall have been paid. Notwithstanding replacement of the Trustee pursuant to this Section, the Company’s obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee.

In the case of an appointment hereunder of a separate or successor Trustee with respect to the Notes, the Company, the Guarantors, any retiring Trustee and each successor or separate Trustee with respect to the Notes shall execute and deliver a supplemental indenture in form satisfactory to the Trustee (1) which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of any retiring Trustee with respect to the Notes as to which any such retiring Trustee is not retiring shall continue to be vested in such retiring Trustee and (2) that shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustee co-trustees of the same trust and that each such separate, retiring or successor Trustee shall be Trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any such other Trustee.

Section 7.09. Successor Trustee by Merger, etc.

Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor to the Trustee hereunder without the execution or filing of any papers or any further act on the part of any of the parties hereto.

In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trust created by this Indenture any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor to the Trustee.

Section 7.10. Eligibility; Disqualification.

There shall at all times be a Trustee hereunder that is authorized under the laws of its jurisdiction of incorporation to exercise corporate trustee power, that is subject to supervision or examination by Governmental Authorities of its jurisdiction of incorporation and, in the case of any successor trustee, that has a combined capital and surplus of at least $50.0 million (or is a wholly-owned subsidiary of a bank or trust company, or of a bank holding company, the principal subsidiary of which is a bank or trust company having a combined capital and surplus of at least $50.0 million) as set forth in its most recent published annual report of condition.

Section 7.11. Certain Provisions.

Each Holder by accepting a Note authorizes and directs on his or her behalf the Trustee to enter into and to take such actions and to make such acknowledgements as are set forth in this Indenture or other documents entered into in connection therewith.

The Trustee shall not be responsible for the execution, legality, validity, effectiveness, genuineness, suitability, adequacy or enforceability or admissibility in evidence of any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture or of any of the Security Documents or any obligation or rights created or purported to be created thereby or pursuant thereto or any security or the priority thereof constituted or purported to be constituted thereby or pursuant thereto, nor shall it be responsible or liable to any person because of any invalidity of any provision of such documents or the

 

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unenforceability thereof, whether arising from statute, law or decision of any court. The Trustee shall be under no obligation to monitor or supervise the functions of the Collateral Agent under the Security Documents and shall be entitled to assume that the Collateral Agent is properly performing its functions and obligations thereunder and the Trustee shall not be responsible for any diminution in the value of or loss occasioned to the assets subject thereto by reason of the act or omission by the Collateral Agent in relation to its functions thereunder. The Trustee shall have no responsibility whatsoever to the Company, any Guarantor or any Holder as regards any deficiency which might arise because the Trustee is subject to any tax in respect of the Security Documents, the security created thereby or any part thereof or any income therefrom or any proceeds thereof.

Section 7.12. Force Majeure

Notwithstanding anything to the contrary in this Indenture, the Notes or the Security Documents or in any other document in connection with the sale of the Notes pursuant to this Indenture, neither the Trustee nor any Agent shall in any event be liable for any failure or delay in the performance of its obligations hereunder if it is prevented from so performing its obligations by any existing or future law or regulation, any existing or future act of governmental authority, Act of God, flood, war whether declared or undeclared, terrorism, riot, rebellion, civil commotion, strike, lockout, other industrial action, general failure of electricity or other supply, aircraft collision, technical failure, accidental or mechanical or electrical breakdown, computer failure or failure of any money transmission system or any reason which is beyond the control of the Trustee.

ARTICLE 8.

AMENDMENT, SUPPLEMENT AND WAIVER

Section 8.01. Without Consent of Holders.

Notwithstanding Section 8.02 of this Indenture, the Company and the Trustee may amend or supplement this Indenture, the Security Documents or the Notes without consent of any Holder to:

(a) cure any ambiguity, omission, defect or inconsistency without adversely affecting the legal rights hereunder of any Holder;

(b) provide for the assumption by a Surviving Person of the obligations of the Company under this Indenture;

(c) provide for uncertificated Notes in addition to or in place of certificated Notes;

(d) add additional Guarantees or additional obligors with respect to the Notes or release Guarantors from guarantees as permitted by the terms of this Indenture;

(e) further secure the Notes, or release all or any portion of the Collateral pursuant to the terms of the Security Documents;

(f) add to the covenants of the Company for the benefit of the Holders or to surrender any right or power conferred upon the Company; or

(g) make any other change that does not adversely affect the legal rights hereunder of any such Holder.

Section 8.02. With Consent of Holders.

Except as provided below in this Section, the Company and the Trustee may amend or supplement this Indenture, the Security Documents and the Notes with the consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding voting as a single class (including consents obtained in connection with a purchase of or tender offer or exchange offer for the Notes), and, subject to Sections 6.04 and 6.07, any

 

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existing Default or Event of Default (except a continuing Default or Event of Default in (i) the payment of principal, premium, if any, or interest on the Notes and (ii) in respect of a covenant or provision which under this Indenture cannot be modified or amended without the consent of the Holder of each Note affected by such modification or amendment) or compliance with any provision of this Indenture or the Notes may be waived with the consent of the Holders of a majority in aggregate principal amount of the Notes then outstanding voting as a single class (including consents obtained in connection with a purchase of or tender offer or exchange offer for the Notes).

Without the consent of each Holder, an amendment or waiver under this Section may not (with respect to any Notes held by a non-consenting Holder):

(a) reduce the amount of Notes whose Holders must consent to an amendment or waiver;

(b) reduce the rate of, or extend the time for payment of, interest, Additional Amount or default interest, if any, on, any Note;

(c) reduce the principal of, or extend the Stated Maturity of, any Note;

(d) make any Note payable in money other than that stated in the Note;

(e) impair the right of any Holder to receive payment of principal of, premium, if any, Additional Amounts and interest, if any, on, such Holder’s Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such Holder’s Notes or any Guarantee;

(f) subordinate the Notes or any Guarantee to any other obligation of the Company or the applicable Guarantor;

(g)(A) release the security interest granted in favor of the holders of the Notes in the Collateral other than pursuant to the terms of the Security Documents, or

(B) release any other security interest that may have been granted in favor of the holders of the Notes other than pursuant to the terms of such security interest;

(h) reduce the amount payable upon the redemption of any Note or change the time at which any Note may be redeemed, as described under Section 3.06, Section 3.07, Section 4.12 or Section 4.17;

(i) reduce the premium payable upon a Change of Control or, at any time after a Change of Control has occurred, change the time at which the Change of Control Offer relating thereto must be made or at which the Notes must be repurchased pursuant to such Change of Control Offer;

(j) at any time after the Company is obligated to make an Asset Sale Offer with the Excess Proceeds from Asset Sales, change the time at which such Asset Sale Offer must be made or at which the Notes must be repurchased pursuant thereto; or

(k) make any change in any Guarantee that would adversely affect the Holders.

The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to consent to any supplemental indenture. If a record date is fixed, the Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to consent to such supplemental indenture, whether or not such Holders remain Holders after such record date; provided that unless such consent shall have become effective by virtue of the requisite percentage having been obtained prior to the date which is 120 days after such record date, any such consent previously given shall automatically and without further action by any Holder be cancelled and of no further effect.

It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof.

 

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After an amendment, supplement or waiver under this Section becomes effective, the Company shall mail to the Holder of each Note affected thereby to such Holder’s address appearing in the Security Register a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental indenture or waiver.

Upon the request of the Company, and upon receipt by the Trustee of the documents described in Section 12.03 hereof, the Trustee will join with the Company in the execution of any amended or supplemental indenture or waiver authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee will not be obligated to enter into such amended or supplemental indenture or waiver that affects its own rights, duties or immunities under this Indenture or otherwise.

Section 8.03. Revocation and Effect of Consents.

Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder of a Note and every subsequent Holder of a Note or portion thereof that evidences the same debt as the consenting Holder’s Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to its Note or portion thereof if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver shall become effective in accordance with its terms and thereafter shall bind every Holder.

Section 8.04. Notation on or Exchange of Notes.

The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and, upon receipt of an Authentication Order in accordance with Section 2.02 hereof, the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver.

Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver.

Section 8.05. Trustee to Sign Amendments, etc.

The Trustee shall sign any amended or supplemental indenture (in form satisfactory to the Trustee) authorized pursuant to this Article 8 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. None of the Company nor any Guarantor may sign an amendment or supplemental indenture until its board of directors (or committee serving a similar function) approves it. In executing any amended or supplemental indenture or any amendment or supplement to the Security Documents or Notes, the Trustee shall be entitled to receive in addition to the documents required by Section 12.03, and (subject to Section 7.01 hereof) shall be fully protected in relying upon an Officers’ Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture and that such amended or supplemental indenture is the legal, valid and binding obligations of the Company enforceable against it in accordance with its terms, subject to customary exceptions and that such amended or supplemental indenture complies with the provisions hereof.

ARTICLE 9.

GUARANTEES

Section 9.01. Guarantee.

Subject to this Article 9, each Guarantor hereby unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns: (a) the due and

 

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punctual payment of the principal of, premium, if any, Additional Amounts and interest on the Notes, subject to any applicable grace period, whether at Stated Maturity, by acceleration, redemption or otherwise, the due and punctual payment of interest on the overdue principal of and premium, if any, Additional Amounts and, to the extent permitted by law, interest, and the due and punctual performance of all other obligations of the Company to the Holders or the Trustee under this Indenture or any other agreement with or for the benefit of the Holders or the Trustee, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration pursuant to Section 6.02, redemption or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantors shall be jointly and severally obligated to pay the same immediately. Each Guarantor agrees that this is a guarantee of payment and not a guarantee of collection.

Each Guarantor hereby agrees that its obligations with regard to its Guarantee shall be joint and several, unconditional, irrespective of the validity or enforceability of the Notes or the obligations of the Company under this Indenture, the absence of any action to enforce the same, the recovery of any judgment against the Company or any other obligor with respect to this Indenture, the Notes or the Obligations of the Company under this Indenture or the Notes, any action to enforce the same or any other circumstances (other than complete performance) which might otherwise constitute a legal or equitable discharge or defense of a Guarantor. Each Guarantor further, to the extent permitted by law, waives and relinquishes all claims, rights and remedies accorded by applicable law to guarantors and agrees not to assert or take advantage of any such claims, rights or remedies, including but not limited to: (a) any right to require any of the Trustee, the Holders or the Company (each a “Benefited Party”), as a condition of payment or performance by such Guarantor, to (1) proceed against the Company, any other guarantor (including any other Guarantor) of the Obligations under the Guarantees or any other Person, (2) proceed against or exhaust any security held from the Company, any such other guarantor or any other Person, (3) proceed against or have resort to any balance of any deposit account or credit on the books of any Benefited Party in favor of the Company or any other Person, or (4) pursue any other remedy in the power of any Benefited Party whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of the Company including any defense based on or arising out of the lack of validity or the unenforceability of the Obligations under the Guarantees or any agreement or instrument relating thereto or by reason of the cessation of the liability of the Company from any cause other than payment in full of the Obligations under the Guarantees; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Benefited Party’s errors or omissions in the administration of the Obligations under the Guarantees, except behavior which amounts to bad faith; (e)(1) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of the Guarantees and any legal or equitable discharge of such Guarantor’s obligations hereunder, (2) the benefit of any statute of limitations affecting such Guarantor’s liability hereunder or the enforcement hereof, (3) any rights to set-offs, recoupments and counterclaims and (4) promptness, diligence and any requirement that any Benefited Party protect, secure, perfect or insure any security interest or lien or any property subject thereto; (f) notices, demands, presentations, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of the Guarantees, notices of Default under the Notes or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Obligations under the Guarantees or any agreement related thereto, and notices of any extension of credit to the Company and any right to consent to any thereof; (g) to the extent permitted under applicable law, the benefits of any “One Action” rule and (h) any defenses or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms of the Guarantees. Except to the extent expressly provided herein, including Section 9.05, each Guarantor hereby covenants that its Guarantee shall not be discharged except by complete performance of the obligations contained in its Guarantee and this Indenture.

If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Guarantors or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or the Guarantors, any amount paid by either to the Trustee or such Holder, the Guarantee of such Guarantor, to the extent theretofore discharged, shall be reinstated in full force and effect.

Each Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. Each Guarantor further agrees that, as between the Guarantors, on the one hand, and the Holders and the Trustee, on

 

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the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Section 6.02 hereof for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby and (y) in the event of any declaration of acceleration of such Obligations as provided in Section 6.02 hereof, such Obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Guarantee. The Guarantors shall have the right to seek contribution from any non-paying Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Guarantee.

Section 9.02. Limitation on Guarantor Liability.

(a) Each Guarantor, and by its acceptance of Notes, each Holder, hereby confirms that it is the intention of all such parties that the Guarantee of such Guarantor not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to any guarantee. To effectuate the foregoing intention, the Trustee, the Holders and the Guarantors hereby irrevocably agree that each Guarantor’s liability shall be that amount from time to time equal to the aggregate liability of such Guarantor under the guarantee, but shall be limited to the lesser of (x) the aggregate amount of the Company’s obligations under the Notes and this Indenture or (y) the amount, if any, which would not have (1) rendered the Guarantor “insolvent” (as such term is defined in Bankruptcy Law and in the Debtor and Creditor Law of the State of New York) or (2) left it with unreasonably small capital at the time its guarantee with respect to the Notes was entered into, after giving effect to the incurrence of existing Debt immediately before such time; provided, however, it shall be a presumption in any lawsuit or proceeding in which a Guarantor is a party that the amount guaranteed pursuant to the guarantee with respect to the Notes is the amount described in clause (x) above unless any creditor, or representative of creditors of the Guarantor, or debtor in possession or trustee in bankruptcy of the Guarantor, otherwise proves in a lawsuit that the aggregate liability of the Guarantor is limited to the amount described in clause (y).

(b) In making any determination as to the solvency or sufficiency of capital of a Guarantor in accordance with the proviso of Section 9.02(a), the right of each Guarantor to contribution from other Guarantors and any other rights such Guarantor may have, contractual or otherwise, shall be taken into account.

Section 9.03. Execution and Delivery of Guarantee.

To evidence its Guarantee set forth in Section 9.01, each Guarantor hereby agrees that a notation of such Guarantee in substantially the form included in Exhibit B attached hereto shall be endorsed by an Officer of such Guarantor on each Note authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of such Guarantor by its President or one of its Vice Presidents.

Each Guarantor hereby agrees that its Guarantee set forth in Section 9.01 shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Guarantee.

If an Officer whose signature is on this Indenture or on the Guarantee no longer holds that office at the time the Trustee authenticates the Note on which a Guarantee is endorsed, the Guarantee shall be valid nevertheless.

The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Guarantee set forth in this Indenture on behalf of the Guarantors.

The Company hereby agrees that it shall cause each Person that becomes obligated to provide a Guarantee pursuant to Section 4.18 (each, a “Future Guarantor”) to immediately execute a supplemental indenture in form and substance satisfactory to the Trustee, pursuant to which such Person provides the guarantee set forth in this Article 9 and otherwise assumes the obligations and accepts the rights of a Guarantor under this Indenture, in each case with the same effect and to the same extent as if such Person had been named herein as a Guarantor. The Company also hereby agrees to immediately cause each such new Guarantor to evidence its guarantee by endorsing a notation of such guarantee on each Note as provided in this Section.

 

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Section 9.04. Guarantors May Consolidate, etc., on Certain Terms.

Except as otherwise provided in Section 9.05, no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the Surviving Person) another Person whether or not affiliated with such Guarantor unless:

(a) subject to Section 9.05, the Person formed by or surviving any such consolidation or merger (if other than a Guarantor or the Company) unconditionally assumes all the obligations of such Guarantor, pursuant to a supplemental indenture in form and substance satisfactory to the Trustee, under this Indenture, the Guarantee on the terms set forth herein or therein; and

(b) the Guarantor complies with the requirements of Article 5 hereof.

In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form and substance to the Trustee, of the Guarantee endorsed upon the Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Guarantor, such successor Person shall succeed to and be substituted for the Guarantor with the same effect as if it had been named herein as a Guarantor. Such successor Person thereupon may cause to be signed any or all of the Guarantees to be endorsed upon all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Guarantees so issued shall in all respects have the same legal rank and benefit under this Indenture as the Guarantees theretofore and thereafter issued in accordance with the terms of this Indenture as though all of such Guarantees had been issued at the date of the execution hereof.

Except as set forth in Articles 4 and 5, and notwithstanding clauses (a) and (b) above, nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of a Guarantor with or into the Company or another Guarantor, or shall prevent any sale or conveyance of the property of a Guarantor as an entirety or substantially as an entirety to the Company or another Guarantor.

Section 9.05. Releases Following Merger, Consolidation or Sale of Assets, Etc.

In the event of a sale or other disposition of all or substantially all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the Capital Stock of any Guarantor, in each case to a Person that is not (either before or after giving effect to such transactions) the Company or a Subsidiary of the Company, then such Guarantor (in the event of a sale or other disposition, by way of merger, consolidation or otherwise, of all of the Capital Stock of such Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all or substantially all of the assets of such Guarantor) shall (subject to the other provisions of this Section 9.05) be released and relieved of any obligations under its Guarantee; provided that the net proceeds of such sale or other disposition shall be applied in accordance with the applicable provisions of this Indenture, including without limitation Section 4.12. Upon delivery by the Company to the Trustee of an Officers’ Certificate and an Opinion of Counsel to the effect that such sale or other disposition was made by the Company in accordance with the provisions of this Indenture, including without limitation Section 4.12, the Trustee shall execute any documents reasonably required in order to evidence the release of any Guarantor from its obligations under its Guarantee.

Any Guarantor not released from its obligations under its Guarantee shall remain liable for the full amount of principal of and interest on the Notes and for the other obligations of any Guarantor under this Indenture as provided in this Article 9.

 

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ARTICLE 10.

COLLATERAL AND SECURITY

Section 10.01. Security Documents.

(a) The due and punctual payment of the principal of and interest on the Notes when and as the same shall be due and payable, whether on an Interest Payment Date, at maturity, by acceleration, repurchase, redemption or otherwise, and interest on the overdue principal of and interest on the Notes and performance of all other obligations of the Company to the Holders or the Trustee under this Indenture and the Notes, according to the terms hereunder or thereunder, are secured as provided in the Security Documents which the Company has entered into simultaneously with the execution of this Indenture and which is attached as Exhibit D hereto. Each Holder, by its acceptance thereof, consents and agrees to the terms of the Security Documents (including, without limitation, the provisions providing for foreclosure and release of Collateral) as the same may be in effect or may be amended from time to time in accordance with its terms and authorizes and directs the Trustee to enter into the Security Documents and to perform its obligations and exercise its rights thereunder as a Secured Party in accordance therewith. The Company will do or cause to be done all such acts and things as may be required by applicable law or may be necessary or proper, or as may be required by the provisions of the Security Documents, to assure and confirm to the Trustee the security interest in the Collateral contemplated hereby, by the Security Documents or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and of the Notes secured hereby, according to the intent and purposes herein expressed. The Company will take, and will cause its Subsidiaries to take, upon request of the Trustee, any and all actions required to cause the Security Documents to create and maintain, as security for the Obligations of the Company hereunder, a valid and enforceable perfected first priority Lien in and on all the Collateral, in favor of the Trustee, as Secured Party, for the benefit of the Holders, superior to and prior to the rights of all third Persons and subject to no other Liens than Permitted Liens.

(b) So long as no Default or Event of Default has occurred and is continuing, and subject to certain terms and conditions, the Company and the Guarantors will be entitled to receive all cash dividends, interest and other payments made upon or with respect to the Collateral pledged by them.

(c) So long as there has occurred no Event of Default, then the Company and the Guarantors shall have the right to exercise any voting and other consensual rights pertaining to the Collateral pledged by them.

(d) Upon the occurrence and during the continuance of a Default or Event of Default, all rights of the Company and the Guarantors to receive all cash dividends, interest and other payments made upon or with respect to the Collateral will cease and such cash dividends, interest and other payments will be paid to the Collateral Agent;

(e) Upon the occurrence and during the continuance of an Event of Default:

(i) all rights of the Company and the Guarantors to exercise such voting or other consensual rights will cease, and all such rights will become vested in the Collateral Agent, which, to the extent permitted by law, will have the sole right to exercise such voting and other consensual rights; and

(ii) the Collateral Agent may sell the Collateral or any part of the Collateral in accordance with the terms of the Security Documents. The Collateral Agent, in accordance with the provisions of this Indenture, will distribute all funds distributed under the Security Documents and received by the Collateral Agent to the Trustee for the benefit of the holders of the Notes.

(f) If at any time after the Issue Date there is a change in PRC law or interpretation in PRC law that permits the encumbrance of the WFOE’s assets or Property by a Lien without the approval of any governmental body of the PRC, then the Company shall cause the WFOE to, concurrently:

 

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(i) execute and deliver to the Trustee a Security Document upon substantially the same terms granting a Lien upon such property to the Trustee for the benefit of the holders of Notes, which Lien shall be first priority if such assets or Property is not then encumbered by any other Lien (other than Liens required by law) or a second priority Lien if such assets or Property is at that time so encumbered;

(ii) cause the Lien to be granted in such Security Document to be duly perfected in any manner permitted by law; and

(iii) deliver to the Trustee an Opinion of Counsel confirming as to such Security Document the matters set forth as to the Security Documents and Liens thereunder in the Opinions of Counsel delivered to holders on the Issue Date and, if the property subject to such Security Document is an interest in real estate, such local counsel opinions, insurance policies, surveys and other supporting documents as the Trustee may reasonably request.

(g) Notwithstanding (i) anything to the contrary contained in this Indenture, the Security Documents, the Notes or any other instrument governing, evidencing or relating to any Debt, (ii) the time, order or method of attachment of any Liens, (iii) the time or order of filing or recording of financing statements or other documents filed or recorded to perfect any Lien upon any Collateral, (iv) the time of taking possession or control over any Collateral or (v) the rules for determining priority under any law of any relevant jurisdiction governing relative priorities of secured creditors:

(A) the Liens will rank at least equally and ratably with all valid, enforceable and perfected Liens, whenever granted upon any present or future Collateral, but only to the extent such Liens are permitted under this Indenture to exist and to rank equally and ratably with the Notes and the Guarantees and senior to a Lien for a Subordinated Obligation, including the Convertible Notes; and

(B) all proceeds of the Collateral applied under the Security Documents shall be allocated and distributed as set forth in Section 6.10.

Section 10.02. Future Guarantor Pledgors.

(a) The Company will use its commercially reasonable efforts promptly to obtain any necessary consents and waivers and to take all other actions necessary to pledge and to cause each Future Guarantor to pledge (i) the Capital Stock of any future Subsidiary (other than any PRC Subsidiary unless there has been after the Issue Date a change in PRC law or interpretation in PRC law that permits such pledges without approval of any Governmental Authority) in each case owned by the Company or such Future Guarantor and (ii) any loan or other extension of credit by such Future Guarantor or any other Guarantor to the WFOE, on a first priority basis in order to secure the obligations of the Company under the Notes and this Indenture and of such Future Guarantor under its Guarantee; provided that in exercising such reasonable best efforts the Company shall not be required to take any action that is commercially unreasonable.

(b) The Company will, for the benefit of the Holders of the Notes, pledge, or cause each Guarantor to pledge, (i) the Capital Stock owned by the Company or such Guarantor of any Person that becomes a Subsidiary (other than any PRC Subsidiary unless there has been after the Issue Date a change in PRC law or interpretation in PRC law that permits such pledges without approval of any Governmental Authority) after the Issue Date and (ii) any loan or other extension of credit by such Future Guarantor or any other Guarantor to the WFOE, immediately upon such Person becoming a Subsidiary or a creditor of the WFOE, to secure the obligations of the Company under the Notes and this Indenture, and of such Guarantor under its Guarantee, in the manner described above.

(c) Each Guarantor that pledges Capital Stock of a Subsidiary or a loan or extension of credit to the WFOE after the Issue Date is referred to as a “Future Guarantor Pledgor” and, upon giving such pledge, will be a “Guarantor Pledgor.”

 

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(d) Upon each pledge by a Future Guarantor of the Capital Stock of any Subsidiary that is not a Guarantor or any future Subsidiary, or a loan or extension of credit to the WFOE, in accordance with Section 10.02(a) or Section 10.02(b), the Company will deliver to the Trustee an Officers’ Certificate stating that entry into the applicable pledge agreement has been duly and validly authorized and an Opinion of Counsel to the effect that (i) in the opinion of such counsel, such action has been taken with respect to the recording, registering and filing of or with respect to this Indenture and the applicable pledge agreement and all other instruments of further assurance as are necessary to make effective the lien created by such pledge agreement in the Capital Stock referenced in Section 10.02(a) or Section 10.02(b), and referencing the details of such action; or (ii) in the opinion of such counsel, no such action is necessary to make such lien effective; provided that any such Opinion of Counsel may rely on an Officers’ Certificate or certificates of public officials with respect to matters of fact.

(e) All Opinions of Counsel delivered pursuant to Section 10.02(d) may contain assumptions, qualifications, exceptions and limitations as are appropriate and customary for similar opinions relating to the nature of the Capital Stock pledged.

(f) Upon each pledge by any Future Guarantor of the Capital Stock of any Subsidiary that is not a Guarantor or any future Subsidiary, or a loan or extension of credit to the WFOE, in accordance with Section 10.02(a) or Section 10.02(b), the Company will give notice, file, register or record any supplemental indentures, financing statements, continuation statements, pledge agreements, intercreditor agreement or other instruments or cause each such Future Guarantor Pledgor to give notice, file, register or record any supplemental indentures, financing statements, continuation statements, pledge agreements or other instruments and take any other actions necessary in order to perfect and protect the first priority lien thereby created.

Section 10.03. Recording and Opinions.

(a) The Company will furnish to the Trustee within three months after each anniversary of the Issue Date, an Opinion of Counsel, dated as of such date, stating either that (i) in the opinion of such counsel, action has been taken with respect to the recording, registering, filing, re-recording, re-registering and re-filing of all supplemental indentures, financing statements, continuation statements or other instruments of further assurance as is necessary to maintain the Lien of the Security Documents and reciting with respect to the security interest in the Collateral the details of such action or referring to prior Opinions of Counsel in which such details are given, and stating that, in the opinion of such counsel, based on relevant laws as in effect on the date of such Opinion of Counsel, all financing statements and continuation statements have been executed and filed that are necessary as of such date and during the succeeding 12 months fully to preserve and protect, to the extent such protection and preservation are possible by filing, the rights of the Holders and the Trustee hereunder and under the Security Documents with respect to the security interest in the Collateral; or (ii) in the opinion of such counsel, no such action is necessary to maintain such Lien and assignment.

Section 10.04. Release of Collateral.

(a) Subject to subsections (b), (c) and (d) of this Section 10.04, Collateral may be released from the Lien and security interest created by the Security Documents at any time or from time to time in accordance with the provisions of the Security Documents or as provided hereby. In addition, upon the request of the Company pursuant to an Officers’ Certificate certifying that all conditions precedent provided in the Security Documents or as provided hereby have been met and stating whether or not such release is in connection with an Asset Sale and (at the sole cost and expense of the Company) the Trustee will release Collateral that is sold, conveyed or disposed of in compliance with the provisions of this Indenture; provided, that if such sale, conveyance or disposition constitutes an Asset Sale, the Company will apply the Net Available Cash in accordance with Section 4.12 hereof. Upon receipt of such Officers’ Certificate the Trustee shall execute, deliver or acknowledge any necessary or proper instruments of termination, satisfaction or release to evidence the release of any Collateral permitted to be released pursuant to this Indenture or the Security Documents.

(b) No Collateral may be released from the Lien and security interest created by the Security Documents pursuant to the provisions of the Security Documents unless the certificate required by this Section has been delivered to the Trustee.

 

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(c) At any time when a Default or Event of Default has occurred and is continuing and the maturity of the Notes has been accelerated (whether by declaration or otherwise), no release of Collateral pursuant to the provisions of the Security Documents will be effective as against the Holders.

(d) The release of any Collateral from the terms of this Indenture and the Security Documents will not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Collateral is released pursuant to the terms of the Security Documents and hereof.

Section 10.05. Authorization of Actions to Be Taken by the Trustee Under the Security Documents.

Subject to the provisions of Section 7.01 and 7.02 hereof, the Trustee may, but is not obligated to, in its sole discretion and without the consent of the Holders, take, on behalf of the Holders, all actions it deems necessary or appropriate in order to:

(a) enforce any of its rights or any of the rights of the Holders of the Notes under the Security Documents; and

(b) collect and receive any and all amounts payable in respect of the Obligations of the Company hereunder.

The Trustee will have power to institute and maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any acts that may be unlawful or in violation of the Security Documents or this Indenture, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or be prejudicial to the interests of the Holders or of the Trustee).

Section 10.06. Authorization of Receipt of Funds by the Trustee Under the Security Documents.

The Trustee is authorized to receive any funds for the benefit of the Holders distributed under the Security Documents, and to make further distributions of such funds to the Holders according to the provisions of this Indenture.

Section 10.07. Termination of Security Interest.

Upon the payment in full of all Obligations of the Company under this Indenture and the Notes, the Trustee will, at the request of the Company, release the Liens pursuant to this Indenture and the Security Documents.

ARTICLE 11.

SATISFACTION AND DISCHARGE

Section 11.01. Satisfaction and Discharge.

This Indenture shall be discharged and shall cease to be of further effect, except as to surviving rights of registration of transfer or exchange of the Notes, as to all Notes issued hereunder, when:

(a) either:

(i) all Notes that have been previously authenticated and delivered (except lost, stolen or destroyed Notes that have been replaced or paid and Notes for whose payment money has previously been deposited in trust or segregated and held in trust by the Company and is thereafter repaid to the Company or discharged from the trust) have been delivered to the Trustee for cancellation; or

 

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(ii)(x) all Notes that have not been previously delivered to the Trustee for cancellation, have become due and payable by their terms or have been called for redemption, and the Company has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust solely for the benefit of the Holders, cash in U.S. dollars in such amounts as shall be sufficient without consideration of any reinvestment of interest to pay and discharge the entire Debt on the Notes not previously delivered to the Trustee for cancellation or redemption for principal, premium, if any, Additional Amounts and interest on the Notes to the date of deposit, in the case of Notes that have become due and payable, or to the Stated Maturity or redemption date, as the case may be; (y) the Company has paid all other sums payable by the Company with respect to the Notes under this Indenture; and (z) the Company has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Notes at Stated Maturity or on the redemption date, as the case may be.

In the case of either clause (i) or (ii):

(x) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company is a party or by which the Company is bound; and

(y) the Company shall have delivered to the Trustee an Officers’ Certificate and Opinion of Counsel stating that all conditions precedent relating to the satisfaction and discharge of this Indenture have been satisfied.

Section 11.02. Deposited Cash to be Held in Trust; Other Miscellaneous Provisions.

Subject to Section 11.03, all cash deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section, the “Trustee”) pursuant to Section 11.01 hereof in respect of the outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium, if any, Additional Amounts and interest but such cash and securities need not be segregated from other funds except to the extent required by law.

Section 11.03. Repayment to Company.

Any cash deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, Additional Amounts or interest on, any Note and remaining unclaimed for two years after such principal, and premium, if any, Additional Amounts or interest has become due and payable shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder shall thereafter, as an unsecured creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such cash and securities, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in The New York Times and The Wall Street Journal (national edition), notice that such cash remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such cash then remaining shall be repaid to the Company.

Section 11.04. Reinstatement.

If the Trustee or the paying agent is unable to apply any money in accordance with Section 11.02 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company’s obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 11.01 until such time as the Trustee or the paying agent is permitted to apply all such money in accordance with Section 11.02; provided that if the Company makes any payment of Interest on or principal of any Note following the reinstatement of its obligations, then only

 

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following the payment and discharge of all amounts under the Notes and this Indenture the Company shall be subrogated to the rights of the holders of such Notes to receive such payment from the money held by the Trustee or paying agent.

ARTICLE 12.

MISCELLANEOUS

Section 12.01. Notices.

Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in person or mailed by first class mail (registered or certified, return receipt requested), facsimile transmission or overnight air courier guaranteeing next-day delivery, to the other’s address:

If to the Company:

No. 18, Xinyuan Road,

Zhengzhou City, Henan Province

PRC

Attention: Mr. Longgen Zhang

Facsimile No: +86 0371 6565 1168

With a copy to:

If to the Trustee:

The Hongkong and Shanghai Banking Corporation Limited

Level 30, HSBC Main Building

1 Queen’s Road, Central

Hong Kong

Attention: Corporate Trust and Loan Agency

Facsimile No: +852 2801 5586

The Company or the Trustee, by notice to the other, may designate additional or different addresses for subsequent notices or communications.

All notices and communications (other than those sent to the Trustee or Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if sent by facsimile transmission; and the second Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next-day delivery. All notices and communications to the Trustee or Holders shall be deemed duly given and effective only upon receipt.

Any notice or communication mailed to a Noteholder shall be mailed to such holder by first class mail, postage prepaid, or sent by express overnight air courier for next day delivery at his address as it appears on the Security Register and shall be sufficiently given to such holder if so mailed within the time prescribed. So long as the Notes are represented by a Global Note which is held by the Common Depositary on behalf of Euroclear or Clearstream, notices to a Noteholder may be given by delivery of the relevant notice to Euroclear or Clearstream for communication by it entitled accountholders in substitution for notification as required elsewhere in this Indenture.

 

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If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it.

If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time.

Section 12.02. Communication by Holders of Notes with Other Holders of Notes.

Holders may communicate with other Holders with respect to their rights under this Indenture or the Notes.

Section 12.03. Certificate and Opinion as to Conditions Precedent.

Upon any request or application by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee:

(a) an Officers’ Certificate (which shall include the statements set forth in Section 12.04 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been complied with; and

(b) an Opinion of Counsel (which shall include the statements set forth in Section 12.04 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been complied with.

Section 12.04. Statements Required in Certificate or Opinion.

Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include:

(a) a statement that the Person making such certificate or opinion has read such covenant or condition;

(b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

(c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable such Person to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with.

With respect to matters of fact, an Opinion of Counsel may rely on an Officers’ Certificate, certificates of public officials or reports or opinions of experts.

Section 12.05. Legal Holidays.

In any case where any Interest Payment Date, Purchase Date or Stated Maturity of any Note is not a Business Day at the city in which the Corporate Trust Office of the Trustee is located, then (notwithstanding any other provision of this Indenture or of the Notes) payment of Interest or principal (and premium, if any, and Additional Amounts) need not be made at such Corporate Trust Office of the Trustee on such date, but such payment may be made on the next succeeding Business Day at such Corporate Trust Office of the Trustee with the same force

 

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and effect as if made on the Interest Payment Date or Purchase Date, or at the Stated Maturity and such extension of time shall in such case be included in the computation of Interest accruing on such Note; provided, however, that if such extension would cause payment of Interest to be made in the next following calendar month, such payment shall be made on the next preceding Business Day.

Section 12.06. Rules by Trustee and Agents.

The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions.

Section 12.07. No Personal Liability of Directors, Officers, Employees and Stockholders.

No past, present or future director, officer, employee, incorporator or stockholder of the Company or any Guarantor, as such, shall have any liability for any obligations of the Company or of the Guarantors under the Notes, this Indenture, the Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. The waiver and release may not be effective to waive or release liabilities under the U.S. federal securities laws.

Section 12.08. Governing Law.

THIS INDENTURE, THE GUARANTEE AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.

Section 12.09. No Adverse Interpretation of Other Agreements.

This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture.

Section 12.10. Successors.

All covenants and agreements of the Company and any Guarantor in this Indenture and the Notes shall bind their respective successors. All covenants and agreements of the Trustee in this Indenture shall bind its successors.

Section 12.11. Severability.

In case any provision in this Indenture, the Guarantee or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions, to the fullest extent permitted by applicable law, shall not in any way be affected or impaired thereby.

Section 12.12. Counterpart Originals.

The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement.

Section 12.13. Table of Contents, Headings, etc.

The Table of Contents and Headings in this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof.

[Signatures on following page]

 

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SIGNATURES

 

Dated April 13, 2007
						COMPANY:
						XINYUAN REAL ESTATE CO., LTD.
						By:
						Name:
						Title:
						GUARANTOR:
						XINYUAN REAL ESTATE LTD.
						By:
						Name:
						Title:

SIGNATURE PAGES TO THE SENIOR NOTE INDENTURE

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SIGNATURE PAGES TO THE SENIOR NOTE INDENTURE

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EXHIBIT A

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(Face of Note)

[GLOBAL NOTE LEGEND]

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF EUROCLEAR BANK S.A./N.V. (“EUROCLEAR”), OR CLEARSTREAM BANKING, SOCIÉTÉ ANONYME (“CLEARSTREAM”), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF ITS AUTHORIZED NOMINEE OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF EUROCLEAR OR CLEARSTREAM (AND ANY PAYMENT IS MADE TO ITS AUTHORIZED NOMINEE, OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF EUROCLEAR OR CLEARSTREAM), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, ITS AUTHORIZED NOMINEE, HAS AN INTEREST HEREIN.

TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF EUROCLEAR OR CLEARSTREAM OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.

[REGULATION S LEGEND]

UNTIL 40 DAYS AFTER THE LATER OF THE DAY ON WHICH THE NOTES ARE FIRST OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S, AS DEFINED BELOW) AND THE DATE OF THE CLOSING OF THE OFFERING OF THE NOTES, AN OFFER OR SALE OF THE NOTES WITHIN THE UNITED STATES (AS DEFINED IN THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “U.S. SECURITIES ACT”) MAY VIOLATE THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT IF SUCH OFFER OR SALE IS MADE OTHERWISE THAN IN ACCORDANCE WITH RULE 144A OR ANOTHER APPLICABLE EXEMPTION THEREUNDER.

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OR OTHER SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT.

THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE U.S. SECURITIES ACT (“RULE 144A”)) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN “OFFSHORE TRANSACTION” PURSUANT TO RULE 904 OF REGULATION S UNDER THE U.S. SECURITIES ACT (“REGULATION S”), (2) AGREES ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SECURITIES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS 40 DAYS AFTER THE LATER OF THE DATE OF THE COMMENCEMENT OF THE OFFERING AND THE DATE OF ORIGINAL ISSUANCE (OR OF ANY PREDECESSOR OF THIS NOTE) AND (Y) SUCH LATER

 

A-1

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DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW (THE “RESALE RESTRICTION TERMINATION DATE”), OFFER, SELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE U.S. SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE U.S. SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF ANOTHER QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT, AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE ISSUER, THE TRUSTEE, THE REGISTRAR AND THE TRANSFER AGENT SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D) PRIOR TO THE END OF THE 40-DAY DISTRIBUTION COMPLIANCE PERIOD WITHIN THE MEANING OF REGULATION S OR PURSUANT TO CLAUSE (E) PRIOR TO THE RESALE RESTRICTION TERMINATION DATE TO REQUIRE THAT AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO THE COMPANY, THE TRUSTEE, THE REGISTRAR AND THE TRANSFER AGENT IS COMPLETED AND DELIVERED BY THE TRANSFEROR. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS “OFFSHORE TRANSACTION,” “UNITED STATES” AND “U.S. PERSON” HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S.

THIS NOTE MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (I) AS PART OF THEIR DISTRIBUTION AT ANY TIME OR (II) OTHERWISE UNTIL 40 DAYS AFTER THE LATER OF THE DATE OF THE COMMENCEMENT OF THE OFFERING AND THE DATE OF ORIGINAL ISSUANCE, EXCEPT IN EITHER CASE IN ACCORDANCE WITH REGULATION S (OR RULE 144A, IF AVAILABLE) OR ANOTHER APPLICABLE EXEMPTION UNDER THE SECURITIES ACT.

[IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.]¹

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1	To be added to Definitive Notes only.

 

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GUARANTEED SENIOR SECURED FLOATING RATE NOTES DUE 2010

ISIN: XS0294703086

Common Code: 029470308

 

No.		$

XINYUAN REAL ESTATE CO., LTD.

promises to pay to HSBC Nominees (Hong Kong) Limited, or registered assigns, as common depositary for Clearstream Banking, societe anonyme (“Clearstream”) and/or Euroclear Bank S.A./N.V. (“Euroclear”), or registered assigns, on April 15, 2010, the principal sum of SEVENTY-FIVE MILLION Dollars ($75,000,000.—) [, or such greater or lesser principal amount at the Stated Maturity hereof as is indicated in the records of the Registrar and the Common Depositary]² if a Qualifying IPO has occurred on or before such date, or, if no Qualifying IPO has occurred on or before such date, 112% of such amount.

Interest Payment Dates:            April 15            October 15

Record Dates: April 1        October 1

Dated: April 13, 2007.

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2	To be added to Global Notes only.

 

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IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officer.

 

CERTIFICATE OF AUTHENTICATION

This is one of the [Global]

Notes referred to in the

within-mentioned Indenture:

The Hongkong and Shanghai

Banking Corporation Limited,

as Trustee and the Agents

 

By:
		Authorized Signatory

Dated April 13, 2007

 

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(Back of Note)

GUARANTEED SENIOR SECURED FLOATING RATE NOTES DUE 2010

Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated.

1. Interest. XINYUAN REAL ESTATE CO., LTD., a company incorporated with limited liability in the Cayman Islands (the “Company”), promises to pay interest on the principal amount of this Note at the rate per annum, reset semi-annually, equal to LIBOR (as determined by the Calculation Agent from the Issue Date) plus the Margin until maturity. LIBOR will be used for all interest periods without interpolation, including the first interest period beginning on the Issue Date and ending on October 15, 2007. The “Margin” shall be 6.80%. Promptly upon determination, the Calculation Agent will inform the Trustee and the Company of the interest rate for the next interest period. The Company shall pay interest semi-annually on April 15 and October 15 of each year, or if any such day is not a Business Day, on the next succeeding Business Day with the same force and effect and such extension of time shall in such case be included in the computation of interest accruing on such Note; provided, however, that if such extension would cause payment of Interest to be made in the next following calendar month, such payment shall be made on the next preceding Business Day (each an “Interest Payment Date”). Interest shall accrue from and including the most recent date to which interest has been paid on the Notes (or one or more Predecessor Notes) or, if no interest has been paid, from the date of issuance, to but excluding the following Interest Payment Date; provided, however, that if there is no existing Default in the payment of interest, and if this Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be October 15, 2007. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, and Additional Amounts from time to time at a rate that is 4.0% per annum in excess of the interest rate then in effect under the Indenture and this Note; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace periods), from time to time at the same rate to the extent lawful. Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed. The amount of interest for each day that the Notes are outstanding (the “Daily Interest Amount”) will be calculated by dividing the interest rate in effect for such day by 360 and multiplying the result by the principal amount of the Notes. The amount of interest to be paid on the Notes for each Interest Period will be calculated by adding the Daily Interest Amounts for each day in the Interest Period. All percentages resulting from any of the above calculations will be rounded, if necessary, to the nearest one decimal place. The Company shall ensure that the interest rate on the Notes will in no event be higher than the maximum rate permitted by New York law as such rate may be modified by United States law of general application.

2. Method of Payment. The Company shall pay interest on the Notes (except defaulted interest) to the Persons in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the April 1 or October 1 next preceding the Interest Payment Date, even if such Notes are cancelled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes shall be payable as to principal, premium, if any, Additional Amounts and interest at the office or agency of the Company maintained for such purpose, or, at the option of the Company, payment of interest may be made by check mailed to the Holders at their addresses set forth in the Security Register; provided, however, that payment by wire transfer of immediately available funds shall be required with respect to principal of and interest and premium and Additional Amounts, if any, on, all Global Notes and all other Notes the Holders of which shall have provided wire transfer instructions to the Company or the Paying Agent. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts.

3. Paying Agent, Registrar and Calculation Agent. Initially, The Hongkong and Shanghai Banking Corporation Limited, the Trustee under the Indenture, shall act as Paying Agent, Registrar and Calculation Agent. The Company may change any Paying Agent, Registrar or Calculation Agent without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity as Paying Agent or Registrar

 

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4. Indenture. The Company issued the Notes under an Indenture dated April 13, 2007 (“Indenture”) among the Company, the guarantor party thereto (the “Guarantor”) and the Trustee. To the extent any provision of this Note conflicts with the express provisions of the Indenture, the provisions of the Indenture shall govern and be controlling.

5. Optional Redemption.

At any time and from time to time, the Company may redeem up to 100% of the aggregate principal amount of the Notes issued under this Indenture at a redemption price (expressed as a percentage of principal amount) equal to 112% of the principal amount thereof, plus accrued and unpaid interest to the redemption date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on the relevant Interest Payment Date) with the proceeds of Debt Incurred by the Company or any of its Subsidiaries for the bona fide intention of refinancing all, but not less than all, the Notes, or with the net cash proceeds of a Qualifying IPO by the Company or any Person in which the Company owns, directly or indirectly, 100% of the Voting Stock; provided, however, that any such redemption shall be made contemporaneously with incurrence of such Debt or within 60 days of receipt of proceeds from such Qualifying IPO, as the case may be.

Unless the Company defaults in the payment of the redemption price, interest will cease to accrue on the Notes or portions thereof called for redemption on the applicable redemption date.

Any prepayment pursuant to this paragraph shall be made pursuant to the provisions of Sections 3.01 through 3.04 of the Indenture.

6. Tax Redemption.

(a) The Notes may be redeemed, at the option of the Company or a Surviving Person with respect to the Company, as a whole but not in part, upon giving not less than 30 days’ nor more than 60 days’ notice to the Holders and upon reasonable notice in advance of such notice to Holders to the Trustee (which notice shall be irrevocable), at a redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest (including any Additional Amounts), if any, to the date fixed by the Company or the Surviving Person, as the case may be, for redemption (the “Tax Redemption Date”) if, as a result of:

(i) any change in, or amendment to, laws (or any regulations or rulings promulgated thereunder) affecting taxation; or

(ii) any change in the existing official position or the stating of an official position regarding the application or interpretation of such laws, regulations or rulings (including a holding, judgment or order by a court of competent jurisdiction),

which change or amendment becomes effective on or after (i) with respect to the Company or any Guarantor, the Issue Date, or (ii) with respect to any Future Guarantor or Surviving Person, the date such Future Guarantor or Surviving Person becomes a Future Guarantor or Surviving Person, with respect to any payment due or to become due under the Notes, any Guarantee, or this Indenture, the Company, a Surviving Person or a Guarantor, as the case may be, is, or on the next Interest Payment Date would be, required to pay Additional Amounts, and such requirement cannot be avoided by the taking of reasonable measures by the Company, a Surviving Person or a Guarantor, as the case may be; provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Company, a Surviving Person or a Guarantor, as the case may be, would be obligated to pay such Additional Amounts if a payment in respect of the Notes were then due.

(b) Prior to the mailing of any notice of redemption for Notes pursuant to the foregoing, the Company, a Surviving Person or a Guarantor, as the case may be, will deliver to the Trustee:

(i) an Officers’ Certificate stating that such change or amendment referred to in the prior paragraph has occurred, describing the facts related thereto and stating that such requirement cannot be avoided by the Company, a Surviving Person or a Guarantor, as the case may be, taking reasonable measures available to it; and

 

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(ii) an Opinion of Counsel or a written opinion of a tax consultant who is acceptable to the Trustee, either of recognized standing, in form and substance satisfactory to the Trustee, stating that the requirement to pay such Additional Amounts results from such change or amendment referred to in the prior paragraph.

The Trustee shall accept such certificate and opinion as sufficient evidence of the satisfaction of the conditions precedent described above, in which event it shall be conclusive and binding on the Holders.

(c) Any Notes that are redeemed will be cancelled.

7. Mandatory Redemption.

Except as set forth in Sections 4.12 and 4.17 of the Indenture, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to, or offer to purchase, the Notes.

8. Repurchase at Option of Holder.

(a) Upon the occurrence of a Change of Control, each Holder shall have the right to require the Company to repurchase all or any part (equal to $100,000 or an integral multiple of $100,000) of such Holder’s Notes (a “Change of Control Offer”) at a purchase price in cash equal to (x) 105% of the then outstanding principal amount of the Notes, plus accrued and unpaid interest, if any, on the Notes repurchased, to the Purchase Date if such Change of Control occurs prior to the Qualifying IPO or (y) 101% of the then outstanding principal amount of the Notes, plus accrued and unpaid interest, if any, on the Notes repurchased, to the Purchase Date if such Change of Control occurs after the Qualifying IPO (subject to the right of Holders of record on the relevant record date to receive interest to, but excluding, the Purchase Date).

(b) If the Company or one of its Subsidiaries consummates any Asset Sales, they shall not be required to apply any Net Available Cash in accordance with the Indenture until the aggregate Net Available Cash from all Asset Sales following the date the Notes are first issued exceeds $5.0 million. Thereafter, the Company shall, after application of the additional aggregate $5.0 million of Net Available Cash as provided in the second paragraph of Section 4.12 of the Indenture, commence an offer for Notes pursuant to the Indenture by applying the Net Available Cash (an “Asset Sale Offer”) pursuant to Section 3.09 of the Indenture to purchase the maximum principal amount of Notes that may be purchased out of the Net Available Cash at an offer price in cash equal to 100% of the principal amount thereof plus accrued and unpaid interest to the date fixed for the closing of such offer in accordance with the procedures set forth in the Indenture. To the extent that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than the Net Available Cash, the Company (or such Subsidiary) may use such deficiency first to repay certain credit facilities or any other Senior Debt of the Company or any Guarantor or Debt of any Subsidiary of the Company that is not a Guarantor (excluding, in any such case, any Debt owed to the Company or an Affiliate of the Company), and only thereafter, for any purpose not prohibited by the Indenture. If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Net Available Cash, the Trustee shall select the Notes to be purchased on a pro rata basis. Holders of Notes that are the subject of an offer to purchase will receive an Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Notes purchased by completing the form entitled “Option of Holder to Elect Purchase” on the reverse of the Notes.

9. Notice of Redemption. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes in denominations larger than $100,000 may be redeemed in part but only in whole multiples of $100,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date interest ceases to accrue on Notes or portions thereof called for redemption.

 

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10. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $100,000 and integral multiples of $100,000. [This Note shall represent the aggregate principal amount of outstanding Notes from time to time endorsed hereon and the aggregate principal amount of Notes represented hereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions.]¹ The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Note or portion of a Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. Also, the Company need not exchange or register the transfer of any Notes for a period of 15 days before a selection of Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date.

11. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes.

12. Amendment, Supplement and Waiver. Subject to certain exceptions, the Company and the Trustee may amend or supplement the Indenture or the Notes with the consent of the Holders of a majority in principal amount of the then outstanding Notes voting as a single class (including consents obtained in connection with a purchase of or tender offer or exchange offer for the Notes), and, subject to Sections 6.04 and 6.07 of the Indenture, any existing Default or Event of Default (except a continuing Default or Event of Default in the payment of principal, premium, if any, Additional Amounts or interest on the Notes) or compliance with any provision of the Indenture or the Notes (except for certain covenants and provisions of the Indenture which cannot be amended without the consent of each Holder) may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes voting as a single class (including consents obtained in connection with a purchase of or tender offer or exchange offer for the Notes). Without the consent of any Holder, the Company and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation, partnership or limited liability company of the obligations of the Company under the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes, to add additional Guarantees or additional obligors with respect to the Notes, to secure the Notes, to add to the covenants of the Company for the benefit of the Holders of the Notes or to surrender any right or power conferred upon the Company, or to make any change that would provide any additional rights or benefits to the Holders of Notes or that does not adversely affect the legal rights under the Indenture of any such Holder.

13. Defaults and Remedies. Each of the following is an Event of Default under the Indenture:

(a) failure to make the payment of any interest on the Notes when the same becomes due and payable, and such failure continues for a period of 15 days; provided that if such payment is not made by reason of having been prohibited by PRC Governmental Authorities, then such failure to make such payment shall be an Event of Default only if such failure continues for a period of 30 days;

(b) failure to make the payment of any principal of, or premium, if any, on, any of the Notes when the same becomes due and payable at its Stated Maturity, upon acceleration, mandatory redemption, optional redemption, required repurchase or otherwise;

(c) failure to comply with Sections 4.09, 4.10, 4.12, 4.17 or 5.01 of the Indenture;

(d) failure to comply with any other covenant or agreement in the Notes or in the Indenture (other than a failure that is the subject of the foregoing clause (a), (b) or (c)), and such failure continues for 45 days after written notice is given to the Company by the Trustee (upon the instruction of the Holders in accordance with Section 6.02) or the Holders of not less than 10% in aggregate principal amount of the Notes then outstanding specifying the default, demanding that it be remedied and stating that such notice is a “Notice of Default;”

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1	Include only if a Global Note.

 

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(e) a default under any Debt by the Company or any of its Subsidiaries that results in acceleration of the maturity of such Debt, or failure to pay any such Debt when due, in an aggregate amount greater than $3.0 million or its foreign currency equivalent at the time;

(f) one or more final judgments or orders for the payment of money are rendered against the Company or any Subsidiary and are not paid or discharged, and there is a period of 60 consecutive days following entry of the final judgment or order and the aggregate amount of all such final judgments or orders outstanding and not paid or discharged against all such Persons exceed $3.0 million (or its foreign currency equivalent at the time) during which a stay of enforcement, by reason of a pending appeal or otherwise, is not in effect;

(g) any Guarantee ceases to be in full force and effect (other than in accordance with the terms of such Guarantee) or any Guarantor or a group of Guarantors that, taken as a whole, would constitute a Significant Subsidiary denies or disaffirms its obligations under its Guarantee;

(h) certain events of bankruptcy or insolvency;

(i) any default by the Company or Future Guarantor Pledgor or any other Person that pledges Collateral on behalf of the holders in any of its obligations under the Security Documents; the security interest under the Security Documents shall, at any time, cease to be in full force and effect for any reason other than the satisfaction in full of all obligations under the Indenture and discharge of the Indenture or any security interest created thereunder shall be declared invalid or unenforceable or the Company or any Guarantor shall assert that any such security interest is invalid or unenforceable;

(j) the Company or any Future Guarantor Pledgor or any other Person that pledges Collateral on behalf of the holders denies or disaffirms its obligations under any Security Document or, other than in accordance with the Indenture and the Security Documents, any Security Document ceases to be or is not in full force and effect or the Trustee ceases to have a first priority interest in the Collateral;

(k) the WFOE ceases to be a Wholly Owned Subsidiary of the Company; or

(l)(i) the confiscation, expropriation or nationalization by any Governmental Authority of any Property of the Company or any of its Subsidiaries that is material to the operation of the Related Business; or (ii) if such revocation or repudiation could reasonably be expected to have a Material Adverse Effect, the revocation or repudiation by any Governmental Authority of any previously granted Governmental Approval to any PRC Subsidiary; or (iii) the imposition or introduction of material and discriminatory taxes, tariffs, royalties, customs or excise duties imposed on any PRC Subsidiary, or the material and discriminatory withdrawal or suspension of privileges or specifically granted rights of a fiscal nature, or (iv) the Company or any of its Subsidiary is prevented from exercising normal control over all or any material part of its property, assets or revenues.

If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 10% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency described in the Indenture, all outstanding Notes shall become due and payable without further action or notice. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in aggregate principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest, or the principal of, the Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default.

 

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14. Trustee Dealings with Company. Subject to certain limitations, the Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or any Affiliate of the Company with the same rights it would have if it were not Trustee.

15. No Recourse Against Others. No past, present or future director, officer, employee, incorporator or stockholder of the Company or of any Guarantor, as such, shall have any liability for any obligations of the Company or any Guarantor under the Indenture, the Notes, the Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability.

16. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent.

17. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).

18. Governing Law. The Indenture, the Guarantee and this Note shall be governed by and construed in accordance with the law of the state of New York.

 

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Option of Holder to Elect Purchase

If you want to elect to have this Note purchased by the Company pursuant to Section 4.12 or 4.17 of the Indenture, check the box below:

Section 4.12                    Purchase Date:                    

Section 4.17

If you want to elect to have only part of the Note purchased by the Company pursuant to Section 4.12 or 4.17 of the Indenture, state the amount you elect to have purchased: $                                    

 

Date:						Your Signature:
						(Sign exactly as your name appears on the Note)
						Tax Identification No.:
						SIGNATURE GUARANTEE:
						Signatures must be guaranteed by an “eligible guarantor institution” meeting the requirements of the Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program (“STAMP”) or such other “signature guarantee program” as may be determined by the Registrar in addition to, or in substitution for, STAMP.

 

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Assignment Form

To assign this Note, fill in the form below:

(I) or (we) assign and transfer this Note to

 

(Insert assignee’s social security or other tax I.D. no.)
(Print or type assignee’s name, address and zip code)
and irrevocably appoint
as agent to transfer this Note on the books of the Company. The agent may substitute another to act for him.

 

Date:
						Your Signature:
								(Sign exactly as your name appears on the face of this Note)

						Signature Guarantee:

 

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SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE

The following exchanges of a part of this Global Note for an interest in another Global Note or for a Definitive Note, or exchanges of a part of another Global Note or Definitive Note for an interest in this Global Note, have been made:

 

Date of Exchange		Amount of decrease in Principal Amount of this Global Note		Amount of increase in Principal Amount of this Global Note		Principal Amount of this Global Note following such decrease (or increase)		Signature of authorized signatory of Trustee

 

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EXHIBIT B

FORM OF NOTATION OF GUARANTEE

For value received, each Guarantor (which term includes any successor Person under the Indenture), jointly and severally, unconditionally guarantees, to the extent set forth in the Indenture and subject to the provisions in the Indenture, dated April 13, 2007 (the “Indenture”), among Xinyuan Real Estate Co., Ltd., as issuer (the “Company”), the Guarantor listed on the signature pages thereto and The Hongkong and Shanghai Banking Corporation Limited, as trustee (the “Trustee”), (a) the due and punctual payment of the principal of, premium, if any, Additional Amounts and interest on the Notes, whether at maturity, by acceleration, redemption or otherwise, the due and punctual payment of interest on overdue principal and premium, if any, Additional Amounts and, to the extent permitted by law, interest and the due and punctual performance of all other obligations of the Company to the Holders or the Trustee all in accordance with the terms of the Indenture and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. The obligations of the Guarantors to the Holders of Notes and to the Trustee pursuant to the Guarantee and the Indenture are expressly set forth in Article 9 of the Indenture and reference is hereby made to the Indenture for the precise terms of the Guarantee. This Guarantee is subject to release as and to the extent set forth in Section 9.05 of the Indenture. Each Holder of a Note, by accepting the same agrees to and shall be bound by such provisions. Capitalized terms used herein and not defined are used herein as so defined in the Indenture.

 

 

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EXHIBIT C

FORM OF CERTIFICATE OF TRANSFER

Xinyuan Real Estate Co., Ltd.

No. 18, Xinyuan Road,

Zhengzhou City, Henan Province

PRC

Attention: Mr. Longgen Zhang

The Hongkong and Shanghai

Banking Corporation Limited

Level 30, HSBC Main Building

1 Queen’s Road, Central

Hong Kong

Attention: Corporate Trust and Loan Agency

 

Re:

SENIOR SECURED FLOATING RATE NOTES DUE 2010

Reference is hereby made to the Indenture, dated April 13, 2007 (the “Indenture”), among XINYUAN REAL ESTATE CO., LTD., as issuer (the “Company”), the Guarantors party thereto and The Hongkong and Shanghai Banking Corporation Limited, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture.

                                , (the “Transferor”) owns and proposes to transfer the Note[s] or interest in such Note[s] in the principal amount of $                    (the “Transfer”), to                                 (the “Transferee”). In connection with the Transfer, the Transferor hereby certifies that:

[CHECK ALL THAT APPLY]

¨ 1. Check if Transferee will take delivery of a beneficial interest in the Global Note or a Definitive Note pursuant to Regulation S. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the U.S. Securities Act of 1933, as amended (the “Securities Act”) and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a Person in the United States and (x) at the time the buy order was originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(a) of Regulation S under the Securities Act, (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) if the proposed transfer is being made prior to the expiration of the Distribution Compliance Period (as defined in Regulation S under the Securities Act), the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person. Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on Transfer enumerated in the legend printed on the Global Note and/or the Definitive Note and in the Securities Act.

¨ 2. Check if Transferee will take delivery of a beneficial interest in the Global Note or a Definitive Note Pursuant to Rule 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the Securities Act, and, accordingly, the Transferor hereby further certifies that the beneficial interest or Definitive Note is being transferred to a Person that the Transferor reasonably believed and believes is purchasing the beneficial interest or Definitive Note for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a “qualified institutional buyer” within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and such Transfer

 

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is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on transfer enumerated in the legend printed on the Global Note or the Definitive Note and in the Securities Act.

¨ 3. Check if Transferee will take delivery of a beneficial interest in the Global Note or a Definitive Note pursuant to any provision of the Securities Act other than Rule 144A or Regulation S. The Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Global Notes and Definitive Notes and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that:

(i) such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or

(ii) such Transfer is being effected to the Company or a subsidiary thereof; or

(iii) such Transfer is being effected pursuant to an effective registration statement under the Securities Act.

This certificate and the statements contained herein are made for your benefit and the benefit of the Company.

 

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TABLE OF CONTENTS

 

				Page
ARTICLE 1.		DEFINITIONS AND INCORPORATION BY REFERENCE		1
Section 1.01.		Definitions.		1
Section 1.02.		Other Definitions		26
Section 1.03.		Rules of Construction		27
ARTICLE 2.		THE NOTES		28
Section 2.01.		Form and Denomination		28
Section 2.02.		Execution and Authentication		29
Section 2.03.		Registrar, Paying Agent and Calculation Agent		29
Section 2.04.		Paying Agent to Hold Money in Trust		32
Section 2.05.		Holder Lists		32
Section 2.06.		Transfer and Exchange		32
Section 2.07.		Replacement Notes		34
Section 2.08.		Outstanding Notes		34
Section 2.09.		Treasury Notes		34
Section 2.10.		Temporary Notes		34
Section 2.11.		Cancellation		35
Section 2.12.		Payment of Interest; Defaulted Interest		35
Section 2.13.		ISIN Numbers		35
Section 2.14.		Record Date		35
ARTICLE 3.		REDEMPTION AND PREPAYMENT		36
Section 3.01.		Notices to Trustee		36
Section 3.02.		Notice of Redemption		36
Section 3.03.		Effect of Notice of Redemption		36
Section 3.04.		Deposit of Redemption Price		37
Section 3.05.		Notes Redeemed in Part		37
Section 3.06.		Optional Redemption		37
Section 3.07.		Tax Redemption		37
Section 3.08.		Mandatory Redemption		38
Section 3.09.		Offer To Purchase		38
ARTICLE 4.		COVENANTS		40
Section 4.01.		Payment of Notes		40
Section 4.02.		Maintenance of Office or Agency		41
Section 4.03.		Reports		41
Section 4.04.		Compliance Certificate		42
Section 4.05.		Taxes		42
Section 4.06.		Stay, Extension and Usury Laws		43
Section 4.07.		Corporate Existence		43
Section 4.08.		Payments for Consent		43
Section 4.09.		Incurrence of Additional Debt		43
Section 4.10.		Restricted Payments		44
Section 4.11.		Liens		45
Section 4.12.		Asset Sales		45
Section 4.13.		Limitation on Restrictions on Distributions from Subsidiaries		46
Section 4.14.		Affiliate Transactions		48
Section 4.15.		Issuance or Sale of Capital Stock of Subsidiaries		48
Section 4.16.		Maintenance of Consolidated Tangible Net Worth		49
Section 4.17.		Repurchase at the Option of Holders Following a Change of Control		49

 

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TABLE OF CONTENTS

(continued)

 

				Page
Section 4.18.		Future Guarantors		49
Section 4.19.		Business Activities		50
Section 4.20.		Sale and Leaseback Transactions		50
Section 4.21.		Impairment of Security Interest		50
Section 4.22.		Amendments to Security Documents		50
Section 4.23.		Use of Proceeds		50
Section 4.24.		Maintenance of Insurance		50
Section 4.25.		Qualifying IPO		51
Section 4.26.		Enforcement of Loan Rights		51
Section 4.27.		Government Approvals and Licenses; Compliance with Law		51
Section 4.28.		Maintenance of Financial Ratios		51
Section 4.29.		Notes to Rank Senior		51
Section 4.30.		Capital Expenditure		52
Section 4.31.		Additional Amounts		52
Section 4.32.		Additional Interest and Delivery of WFOE Share Pledge		53
Section 4.33.		Cash Management		53
ARTICLE 5.		SUCCESSORS		54
Section 5.01.		Merger, Consolidation and Sale of Assets		54
Section 5.02.		Successor Corporation Substituted		56
ARTICLE 6.		DEFAULTS AND REMEDIES		56
Section 6.01.		Events of Default		56
Section 6.02.		Acceleration		58
Section 6.03.		Other Remedies		58
Section 6.04.		Waiver of Defaults		58
Section 6.05.		Control by Majority		59
Section 6.06.		Limitation on Suits		59
Section 6.07.		Rights of Holders to Receive Payment		59
Section 6.08.		Collection Suit by Trustee		60
Section 6.09.		Trustee May File Proofs of Claim		60
Section 6.10.		Priorities		60
Section 6.11.		Undertaking for Costs		61
ARTICLE 7.		TRUSTEE		61
Section 7.01.		Duties of Trustee		61
Section 7.02.		Rights of Trustee		62
Section 7.03.		Individual Rights of Trustee		64
Section 7.04.		Trustee’s Disclaimer		64
Section 7.05.		Notice of Defaults		64
Section 7.06.		Reports by Trustee to Holders		65
Section 7.07.		Compensation and Indemnity		65
Section 7.08.		Replacement of Trustee		66
Section 7.09.		Successor Trustee by Merger, etc.		67
Section 7.10.		Eligibility; Disqualification		67
Section 7.11.		Certain Provisions		67
Section 7.12.		Force Majeure		68
ARTICLE 8.		AMENDMENT, SUPPLEMENT AND WAIVER		68
Section 8.01.		Without Consent of Holders		68

 

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TABLE OF CONTENTS

(continued)

 

				Page
Section 8.02.		With Consent of Holders		68
Section 8.03.		Revocation and Effect of Consents		70
Section 8.04.		Notation on or Exchange of Notes		70
Section 8.05.		Trustee to Sign Amendments, etc.		70
ARTICLE 9.		GUARANTEES		70
Section 9.01.		Guarantee		70
Section 9.02.		Limitation on Guarantor Liability		72
Section 9.03.		Execution and Delivery of Guarantee		72
Section 9.04.		Guarantors May Consolidate, etc., on Certain Terms		73
Section 9.05.		Releases Following Merger, Consolidation or Sale of Assets, Etc.		73
ARTICLE 10.		COLLATERAL AND SECURITY		74
Section 10.01.		Security Documents		74
Section 10.02.		Future Guarantor Pledgors		75
Section 10.03.		Recording and Opinions		76
Section 10.04.		Release of Collateral		76
Section 10.05.		Authorization of Actions to Be Taken by the Trustee Under the Security Documents		77
Section 10.06.		Authorization of Receipt of Funds by the Trustee Under the Security Documents		77
Section 10.07.		Termination of Security Interest		77
ARTICLE 11.		SATISFACTION AND DISCHARGE		77
Section 11.01.		Satisfaction and Discharge		77
Section 11.02.		Deposited Cash to be Held in Trust; Other Miscellaneous Provisions		78
Section 11.03.		Repayment to Company		78
Section 11.04.		Reinstatement		78
ARTICLE 12.		MISCELLANEOUS		79
Section 12.01.		Notices		79
Section 12.02.		Communication by Holders of Notes with Other Holders of Notes		80
Section 12.03.		Certificate and Opinion as to Conditions Precedent		80
Section 12.04.		Statements Required in Certificate or Opinion		80
Section 12.05.		Legal Holidays		80
Section 12.06.		Rules by Trustee and Agents		81
Section 12.07.		No Personal Liability of Directors, Officers, Employees and Stockholders		81
Section 12.08.		Governing Law		81
Section 12.09.		No Adverse Interpretation of Other Agreements		81
Section 12.10.		Successors		81
Section 12.11.		Severability		81
Section 12.12.		Counterpart Originals		81
Section 12.13.		Table of Contents, Headings, etc.		81

 

iii

Exhibit 10.5

EXECUTION COPY

 

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XINYUAN REAL ESTATE CO., LTD.

WARRANT AGREEMENT

DATED AS OF APRIL 13, 2007

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED

Warrant Agent

 

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WARRANT AGREEMENT, dated as of April 13, 2007, between Xinyuan Real Estate Co., Ltd., a company incorporated with limited liability in the Cayman Islands (the “Company”), and The Hongkong and Shanghai Banking Corporation Limited, as warrant agent (the “Warrant Agent”) (the “Agreement”).

RECITALS

WHEREAS, the Company proposes to issue certain contingent warrants (each a “Warrant” and collectively, the “Warrants”) in connection with the offering by the Company of 750 Units (and subject to certain terms and conditions, the offering of an additional 250 Units), with each “Unit” consisting of (i) $100,000 principal amount of the Senior Secured Floating Rate Notes due 2010 of the Company (each, a “Floating Rate Note”, and collectively, the “Floating Rate Notes”), and (ii) a Warrant.

WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act in connection with the issuance of Warrant Certificates (as defined) and other matters as provided herein.

AGREEMENT

NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows:

SECTION 1. CERTAIN DEFINITIONS

As used in this Agreement, the following terms shall have the following respective meanings:

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, “control,” as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. For purposes of this definition, the terms “controlling,” “controlled by” and “under common control with” have correlative meanings.

“Board of Directors” means the board of directors of the corporation or any committee thereof duly authorized to act on behalf of such Board of Directors.

“Business Day” means a day other than a Saturday or Sunday and means any day that is neither a legal holiday nor a day on which banking institutions are authorized or required by law or regulation (including any executive order) to close in the city of New York, Hong Kong or London.

“Cashless Exercise Ratio” has the meaning set forth in Section 4(a).

“Clearstream” means Clearstream Banking, societe anonyme, Luxembourg, and its successors.

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“Commission” means the U.S. Securities and Exchange Commission.

“Common Depositary” means, with respect to the Warrants issuable or issued in whole or in part in global form, the Person specified in Section 3.3 hereof as the Common Depositary with respect to the Warrants, and any and all successors thereto appointed as Common Depositary hereunder and having become such pursuant to the applicable provision of this Warrant Agreement.

“Common Shares” means the Company’s common shares, par value $0.0001.

“Company” has the meaning set forth in the Recitals.

“Definitive Warrants” has the meaning specified in Section 3.5.

“Equity Registration Rights Agreement” means the registration rights agreement, dated as of April 13, 2007, by and among the Company and the purchasers of the Warrants relating to the Warrant Shares.

“Euroclear” means Euroclear Bank S.A./N.V., as operator of the Euroclear system, and its successors.

“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

“Exercise Period” has the meaning set forth in Section 4(a).

“Exercise Price” means, with respect to the exercise price for each Warrant Share, an amount equal to 80% of the price per Common Share (rounded down to the nearest cent) at which Common Shares are sold to the public pursuant to a Qualifying IPO; provided the Exercise Price shall be subject to adjustment from time to time in accordance with Section 8 below.

“Floating Rate Note” and “Floating Rate Notes” have the meanings set forth in the Recitals.

“Global Warrants” has the meaning specified in Section 3.1.

“Market Value” has the meaning set forth in Section 4(a).

“Officer” means, with respect to any Person, the Chief Executive Officer, the President, the Chief Financial Officer or any executive officer of such Person.

“Opinion of Counsel” means an opinion from legal counsel who is reasonably acceptable to the Warrant Agent in form and substance reasonably acceptable to the Warrant Agent. The counsel may be an employee of or counsel to the Company, any subsidiary of the Company or the Warrant Agent.

“Participant” means, with respect to Euroclear or Clearstream, a Person who has an account with Euroclear or Clearstream.

 

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“Permitted Holders” means Mr. ZHANG Yong and Ms. YANG Yuyan, a resident of Zhengzhou in Henan Province, PRC, and their respective estates, ancestors and lineal descendants, the legal representatives of any of the foregoing and the trustees of any bona fide trusts of which the foregoing are the sole beneficiaries or the grantors, or any Person of which the foregoing “beneficially owns” (as defined in Rule 13d-3 under the Exchange Act), individually or collectively with any of the foregoing, at least 80% of the total voting power of the voting stock of such Person.

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

“Regulation S” means Regulation S under the Securities Act.

“Rule 144A” means Rule 144A under the Securities Act.

“Qualifying IPO” means a public offering of Common Shares of the Company that results in (i) at least 15% of the Company’s issued and outstanding share capital being publicly held by Persons other than any Affiliate of the Company, the Permitted Holders or other Persons who, prior to the date of such public offering, held Common Shares of the Company, (ii) the gross proceeds of which are not less than $80.0 million and (iii) listing of the Common Shares on Nasdaq’s Capital Market, Global Market or Global Select Market or any other internationally recognized market outside the PRC other than in the Republic of Singapore.

“Securities Act” means the U.S. Securities Act of 1933, as amended.

“Transfer Agent” has the meaning set forth in Section 6(b).

“U.S.” means the United States of America, its states, territories and possessions.

“Warrant” and “Warrants” have the meanings set forth in the Recitals.

“Warrant Agent” has the meaning set forth in the Recitals.

“Warrant Certificate” has the meaning set forth in Section 3.1.

“Warrant Countersignature Order” has the meaning set forth in Section 3.2.

“Warrant Expiration Date” is the later of (x) the expiration of three years from the date hereof and (y) the expiration of six months following the Qualifying IPO.

“Warrant Register” has the meaning set forth in Section 3.3.

“Warrant Registrar” has the meaning set forth in Section 3.3.

“Warrant Shares” means, with respect to each Warrant, the number of Common Shares equal to the quotient obtained by dividing (x) $40,000 by (y) the Exercise Price; provided that the number of Warrant Shares and Exercise Price shall be subject to adjustment from time to

 

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time in accordance with Section 8 below. The aggregate number of Warrant Shares issuable pursuant to the exercise of all Warrants is equal to the quotient obtained by dividing (x) $30,000,000 by (y) the Exercise Price; provided that the aggregate number of Warrant Shares shall be subject to adjustment from time to time in accordance with Section 8 below; provided further, that if, following the Company’s issuance and sale of 750 Units (consisting of $75,000,000 principal amount of Floating Rate Notes and 750 Warrants) on the date hereof, the Company issues and sells an additional 250 Units (consisting of $25,000,000 principal amount of Floating Rate Notes and 250 Warrants), the aggregate number of Warrant Shares issuable pursuant to the exercise of all Warrants shall be equal to the quotient obtained by dividing (x) $40,000,000 by (y) the Exercise Price.

SECTION 2. APPOINTMENT OF WARRANT AGENT.

The Company hereby appoints the Warrant Agent to act as agent for the Company in accordance with the instructions set forth hereinafter in this Agreement and the Warrant Agent hereby accepts such appointment.

SECTION 3. ISSUANCE OF WARRANTS; WARRANT CERTIFICATES

3.1 FORM AND DATING.

(a) General.

The Warrants and the Warrant Shares may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Warrant shall be dated the date of the countersignature.

The terms and provisions contained in the Warrants shall constitute, and are hereby expressly made, a part of this Warrant Agreement. The Company and the Warrant Agent, by their execution and delivery of this Warrant Agreement, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Warrant conflicts with the express provisions of this Warrant Agreement, the provisions of this Warrant Agreement shall govern and be controlling.

(b) Global Warrants.

The Warrants shall be issued from time to time initially in the form of global warrants (each a “Global Warrant”). Global Warrants shall be substantially in the form of Exhibit A attached hereto (including the Global Warrant Legend and the Regulation S Legend thereon and the “Schedule of Exchanges of Interests in the Global Warrant” attached thereto, each a “Warrant Certificate”). Definitive Warrants shall be substantially in the form of Exhibit A attached hereto, but without the Global Warrant Legend thereon and without the “Schedule of Exchanges of Interests in the Global Warrant” attached thereto. Each Global Warrant shall represent such of the outstanding Warrants as shall be specified therein and each shall provide that it shall represent the number of outstanding Warrants from time to time endorsed thereon and that the number of outstanding Warrants represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Warrant to reflect the amount of any increase or decrease in the

 

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number of outstanding Warrants represented thereby shall be made by the Warrant Agent in accordance with instructions given by the holder thereof as required by Section 3.5 hereof. Each Global Warrant shall be deposited with the Common Depositary, which shall hold such Global Warrant in safe custody for the account of Euroclear and/or Clearstream and instruct Euroclear or Clearstream or both of them, as the case may be, to credit the number of Warrants represented by such Global Warrant to the holder’s distribution account with Euroclear or Clearstream.

(c) Euroclear and Clearstream Procedures Applicable.

The provisions of the “Operating Procedures of the Euroclear System” and “Terms and Conditions Governing Use of Euroclear” and the “General Terms and Conditions of Clearstream Banking” and “Customer Handbook” of Clearstream shall be applicable to transfers of beneficial interests in the Global Warrants that are held by Participants through Euroclear or Clearstream.

3.2 EXECUTION

An Officer shall sign the Warrants on behalf of the Company by manual signature.

If the Officer whose signature is on a Warrant no longer holds that office at the time a Warrant is countersigned, the Warrant shall nevertheless be valid.

A Warrant shall not be valid until countersigned by the manual signature of the Warrant Agent. The signature shall be conclusive evidence that the Warrant has been properly issued under this Warrant Agreement.

The Warrant Agent shall, upon a written order of the Company signed by an Officer (a “Warrant Countersignature Order”), countersign (i) one Global Warrant evidencing 750 Warrants issued as of the date hereof, and (ii) one Global Warrant evidencing any additional Warrants issued by the Company after the date hereof pursuant to the next sentence of this paragraph. The Warrants need not be issued at one time and unless otherwise provided, the Warrants may also be issued by the Company and countersigned and delivered under this Warrant Agreement after the date hereof on the same terms and conditions (other than the date of issue) and with the same ISIN number as the Warrants issued on the date hereof and in the aggregate amount, together with the 750 Warrants issued on the date hereof, not to exceed 1,000 Warrants.

The Warrant Agent may appoint an agent acceptable to the Company to countersign Warrants. Such an agent may countersign Warrants whenever the Warrant Agent may do so. Each reference in this Warrant Agreement to a countersignature by the Warrant Agent includes a countersignature by such agent. Such an agent has the same rights as the Warrant Agent to deal with the Company or an Affiliate of the Company.

 

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3.3 WARRANT REGISTRAR AND COMMON DEPOSITARY

The Company shall maintain an office or agency where Warrants may be presented for registration of transfer or for exchange (“Warrant Registrar”). The Warrant Registrar shall keep a register of the Warrants and of their registration of transfer and exchange (the “Warrant Register”). The Company may appoint one or more co-Warrant Registrars. The term “Warrant Registrar” includes any co-Warrant Registrar. The Company may change any Warrant Registrar without notice to any holder. The Company shall notify the Warrant Agent in writing of the name and address of any agent not a party to this Warrant Agreement. If the Company fails to appoint or maintain another entity as Warrant Registrar, the Warrant Agent shall act as such. The Company or any of its subsidiaries may act as Warrant Registrar.

The Company initially appoints the Warrant Agent to act as the Warrant Registrar with respect to the Global Warrants.

The Company initially appoints the Warrant Agent to act as Common Depositary with respect to the Global Warrants.

3.4 HOLDER LISTS

The Warrant Registrar shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all holders of Warrants. If the Warrant Agent is not the Warrant Registrar, the Company shall promptly furnish to the Warrant Agent at such times as the Warrant Agent may request in writing, a list in such form and as of such date as the Warrant Agent may reasonably require of the names and addresses of the holders.

3.5 TRANSFER AND EXCHANGE

(a) In accordance with the terms of this Warrant Agreement, the Warrant Agent shall deliver at the cost of the Company, upon not less than 45 days’ notice to the Warrant Agent by Euroclear or Clearstream, the relevant Warrants in definitive form (“Definitive Warrants”) in exchange for interests in such Global Warrant. For this purpose, the Warrant Agent is authorized and it shall (A) authenticate each such Definitive Warrant and (B) deliver each such Definitive Warrant to or to the order of Euroclear or Clearstream, in exchange for interests in such Global Warrant. The Warrant Agent shall promptly notify the Company upon receipt of a request for issue of Definitive Warrants the aggregate number of Warrants represented by the relevant Global Warrant to be exchanged in connection therewith. The Company undertakes to deliver to, or to the order of, the Warrant Agent sufficient numbers of duly executed Definitive Warrants to enable the Warrant Agent to comply with its obligations under this Section 3.5(a). Transfer of a Global Warrant by the Common Depositary to another shall be limited to transfer of such Global Warrant in whole, but not in part, to nominees of Euroclear or Clearstream, to a successor of Euroclear or Clearstream, such successor’s nominee, or such depositary other than the Common Depositary (or its nominee) as the Company may designate. Notwithstanding the above, interests in a Global Warrant shall be exchangeable in whole (but not in part) at the cost of the Company for Definitive Warrants if either Euroclear or Clearstream or any other relevant clearing system ceases to operate as a clearing system for 14

 

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consecutive days (other than by reason of public holiday) or announces an intention to permanently cease business and it shall not be practicable to transfer the relevant Warrants to another clearing system within 90 days.

(b) Upon any exchange of an interest in a Global Warrant for Definitive Warrants, the relevant Global Warrant shall be endorsed by the Warrant Agent to reflect the reduction of the number of Warrants so exchanged. Until exchanged in full, the holder of any interest in any Global Warrant shall in all respects be entitled to the same benefits under this Warrant Agreement as Definitive Warrants authenticated and delivered hereunder. Once exchanged in full, a Global Warrant shall be canceled and disposed of by the Warrant Agent in accordance with its customary procedures.

(c) The Warrant Agent shall cause all Global Warrants and Definitive Warrants delivered to it and held by it hereunder to be maintained in safe custody in accordance with this Section 3.5, and shall ensure that such Warrants are issued only in accordance with the provisions of this Warrant Agreement.

(d) The Warrant Agent shall be entitled to treat a facsimile communication from a person purporting to be (and who the Warrant Agent believes in good faith to be) the authorized representative of the Company, named in a list furnished to the Warrant Agent from time to time, as sufficient instructions and authority of the Company for the Warrant Agent to act in accordance with this Section 3.5.

(e) Title to the Definitive Warrants shall pass by notation on the Warrant Register. However, title to Warrants issued in the form of Global Warrants held through Euroclear and Clearstream shall be transferable only in accordance with the rules and procedures of Euroclear and Clearstream, as appropriate.

(f) General Provisions Relating to Transfers and Exchanges

(1) To permit registrations of transfers and exchanges, the Company shall execute and the Warrant Agent shall countersign Global Warrants and Definitive Warrants upon the Company’s order or at the Warrant Registrar’s request.

(2) The Company hereby agrees and instructs the Warrant Agent that the Warrant Registrar shall not register the proposed transfer of any beneficial interest in, or proposed exercise of any right in, any Warrant, unless the Warrant Registrar shall have first received certification in the form of Exhibit B hereto that such transfer or exercise is made in accordance with the provisions of Regulation S.

(3) The Warrant Register shall be in written form in the English language and shall include a record of the certificate number of each Warrant issued, and shall show the number of Warrants, the date of issue, all subsequent transfer and changes of ownership in respect thereof and the names, tax identifying numbers (if relevant to a specific holder) and addresses of the holders.

(4) The Warrant Registrar shall at all reasonable times during office hours make the Warrant Register available to the Company, the Warrant Agent, the

 

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holders of Warrants or any person authorized by the Company in writing for inspection and for the taking of copies thereof or extracts therefrom, and at the expense of the Company, the Warrant Registrar shall deliver to such persons all lists of holders of Warrants, their addresses, number of holdings and other details as they may request.

(5) The Warrant Registrar shall only register the transfer of an interest in a Warrant if the requested transfer is (i) to the Company (including its affiliates); (ii) being made by a person who has provided the Warrant Registrar with a certification in the form of Exhibit B hereto; (iii) pursuant to an effective registration statement under the Securities Act with certification to that effect from such holder; or (iv) being transferred in reliance on any other exemption from the registration requirements of the Securities Act (including Rule 904 thereunder), with a certification to that effect from such holder and an opinion of counsel from such holder or the transferee reasonably acceptable to the Company and to the Warrant Registrar to the effect that such transfer is in compliance with the Securities Act.

(6) No service charge shall be made to a holder of a beneficial interest in a Global Warrant or to a holder of a Definitive Warrant for any registration of transfer or exchange, but the Company or the Warrant Agent may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith and may require that a Person receiving Definitive Warrants must bear the cost of insurance, postage, transportation and the like in the event that such Person does not receive such Definitive Warrants in person at the offices of an Warrant Agent.

(7) All Global Warrants and Definitive Warrants issued upon any registration of transfer or exchange of Global Warrants or Definitive Warrants shall be the duly authorized, executed and issued warrants for Common Shares of the Company, not subject to any preemptive rights, and entitled to the same benefits under this Warrant Agreement, as the Global Warrants or Definitive Warrants surrendered upon such registration of transfer or exchange.

(8) Prior to due presentment for the registration of a transfer of any Warrant, the Warrant Agent, and the Company may deem and treat the Person in whose name any Warrant is registered as the absolute owner of such Warrant for all purposes and none of the Warrant Agent, or the Company shall be affected by notice to the contrary.

(9) The Warrant Agent shall countersign Global Warrants and Definitive Warrants in accordance with the provisions of Section 3.2 hereof.

(g) Facsimile Submissions to Warrant Agent

All certifications, certificates and Opinions of Counsel required to be submitted to the Warrant Registrar pursuant to this Section 3.5 to effect a registration of transfer or exchange may be submitted by facsimile.

Notwithstanding anything herein to the contrary, as to any certificates and/or certifications delivered to the Warrant Registrar pursuant to this Section 3.5, the Warrant

 

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Registrar’s duties shall be limited to confirming that any such certifications and certificates delivered to it are in the form of Exhibit B attached hereto. The Warrant Registrar shall not be responsible for confirming the truth or accuracy of representations made in any such certifications or certificates. As to any Opinions of Counsel delivered pursuant to this Section 3.5, the Warrant Registrar may rely upon, and be fully protected in relying upon, such opinions.

3.6 REPLACEMENT WARRANTS

If any mutilated Warrant is surrendered to the Warrant Agent or the Company and the Warrant Agent receives evidence to its satisfaction of the destruction, loss or theft of any Warrant, the Company shall issue and the Warrant Agent, upon receipt of a Warrant Countersignature Order, shall countersign a replacement Warrant if the Warrant Agent’s requirements are met. If required by the Warrant Agent or the Company, an indemnity bond must be supplied by the holder that is sufficient in the judgment of the Warrant Agent and the Company to protect the Company, the Warrant Agent, any Agent and any agent for purposes of the countersignature from any loss that any of them may suffer if a Warrant is replaced. The Company may charge any holder of Warrants for the Company’s expenses in replacing a Warrant.

Every replacement Warrant is an additional warrant of the Company and shall be entitled to all of the benefits of this Warrant Agreement equally and proportionately with all other Warrants duly issued hereunder.

3.7 TEMPORARY WARRANTS

Until certificates representing Warrants are ready for delivery, the Company may prepare and the Warrant Agent, upon receipt of a Warrant Countersignature Order, shall issue temporary Warrants. Temporary Warrants shall be substantially in the form of certificated Warrants but may have variations that the Company considers appropriate for temporary Warrants and as shall be reasonably acceptable to the Warrant Agent. Without unreasonable delay, the Company shall prepare and the Warrant Agent shall countersign Definitive Warrants in exchange for temporary Warrants.

Holders of temporary Warrants shall be entitled to all of the benefits of this Warrant Agreement.

3.8 CANCELLATION

The Company at any time may deliver Warrants to the Warrant Agent for cancellation. The Warrant Registrar and Warrant Agent shall forward to the Warrant Agent any Warrants surrendered to them for registration of transfer, exchange or exercise. The Warrant Agent and no one else shall cancel all Warrants surrendered for registration of transfer, exchange, exercise, replacement or cancellation and shall destroy canceled Warrants (subject to the record retention requirement of the Exchange Act). Upon the Company’s written request, certification of the destruction of all cancelled Warrants shall be delivered to the Company. The Company may not issue new Warrants to replace Warrants that have been exercised or that have been delivered to the Warrant Agent for cancellation.

 

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SECTION 4. SEPARATION OF WARRANTS; EXERCISE OF WARRANTS; TERMS OF WARRANTS

(a) The Floating Rate Notes and Warrants will be separately transferable from the date hereof. Subject to the terms of this Agreement, each holder of Warrants shall have the right, which may be exercised during the period commencing at the date of the Qualifying IPO (which, for the avoidance of doubt, shall include the right of holders of Warrants to exercise their Warrants in order to sell Warrant Shares in the Qualifying IPO) and until 5:00 p.m., Hong Kong time, on the Warrant Expiration Date (the “Exercise Period”), to receive from the Company the number of fully paid and nonassessable Warrant Shares which the holder may at the time be entitled to receive on exercise of such Warrants and payment of the applicable Exercise Price (i) in cash, by wire transfer or by certified or official bank check payable to the order of the Company, (ii) by tendering Floating Rate Notes having a principal amount of premium, interest, and other amounts actually outstanding at the time of tender equal to the applicable Exercise Price then in effect, (iii) by tendering Warrants as set forth below or (iv) any combination of cash, Floating Rate Notes or Warrants. Each holder may elect, upon exercise of its Warrants during the applicable Exercise Period, to receive Warrant Shares on a net basis, such that, without the exchange of any funds and in satisfaction of and without any obligation to pay the Exercise Price, the holder will receive such number of Warrant Shares as shall equal the product of (A) the number of Warrant Shares for which such Warrant is exercisable as of the date of exercise (if the Exercise Price were being paid in cash) and (B) the Cashless Exercise Ratio. The “Cashless Exercise Ratio” shall be calculated by the Company and shall equal a fraction the numerator of which is the Market Value (as defined below) per Common Share minus the applicable Exercise Price per share as of the date of exercise and the denominator of which is the Market Value per share on the date of exercise. Exercise of Warrants shall be for delivery of Warrant Shares, and under no circumstance shall the Company be obligated to pay or settle exercise of Warrants in cash; provided, however, that the Company may pay cash for fractional interests as set forth in Section 9. Each Warrant not exercised prior to 5:00 p.m., Hong Kong time, on the Warrant Expiration Date shall become void and all rights thereunder and all rights in respect thereof under this agreement shall cease as of such time. The Warrant Agent shall have (y) no obligation to calculate the Cashless Exercise Ratio and (z) no responsibility for making any allocation between items (i) – (iii) above. No adjustments as to dividends will be made upon exercise of the Warrants.

The “Market Value” per Common Share as of any date shall equal (i) if Common Shares are primarily traded on a securities exchange, the last sale price on such securities exchange on the trading day immediately prior to the date of determination, or if no sale occurred on such day, the mean between the closing “bid” and “asked” prices on such day, (ii) if the principal market for Common Shares is in the over-the-counter market, the closing sale price on the trading day immediately prior to the date of the determination, as published by the The Nasdaq Stock Market, Inc. or similar organization, or if such price is not so published on such day, the mean between the closing “bid” and “asked” prices, if available, on such day, which prices may be obtained from any reputable pricing service, broker or dealer, and (iii) if neither clause (i) nor clause (ii) is applicable, the fair market value on the date of determination of Common Shares, as determined in good faith by the Board of Directors of the Company based on a written opinion of an internationally recognized investment banking, appraisal or valuation firm that is not an Affiliate of the Company. Notwithstanding the foregoing, if the Market

 

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Value per Common Share is calculated for the purpose of exercising a Warrant on the date of the Qualifying IPO, the Market Value shall be the actual offering price per Common Share to the public in the Qualifying IPO.

(b) In order to exercise all or any of the Warrants represented by a Warrant Certificate, (i) in the case of a Definitive Warrant, the holder thereof must surrender upon exercise the Warrant Certificate to the Company at the corporate trust office of the Warrant Agent at or before 5:00 p.m., Hong Kong time, on any Business Day, set forth in Section 15 hereof, (ii) in the case of a book-entry interest in a Global Warrant, the exercising Participant whose name appears on a securities position listing of Euroclear or Clearstream as the holder of such book-entry interest must comply with Euroclear or Clearstream’s procedures relating to the exercise of such book-entry interest in such Global Warrant and (iii) in the case of interests in both Global Warrants and Definitive Warrants, the holder thereof or the Participant, as applicable, shall (x) deliver to the Company at the corporate trust office of the Warrant Agent the form of election to purchase on the reverse thereof duly completed and signed, and (y) make payment to the account of the Company of the applicable Exercise Price in accordance with Section 4(a) hereof, for the number of Warrant Shares in respect of which such Warrants are then exercised and (z) in the event of an exercise via tendering of Floating Rate Notes pursuant to Section 4(a)(ii) above, surrender the Floating Rate Note or send the relevant instructions to Euroclear or Clearstream, as the case may be. Upon receipt of the executed form of election to purchase, the Warrant Agent shall promptly, but in no event later than two Business Days following receipt thereof, notify the Company and deliver a copy of such election to purchase form to the Company in accordance with Section 15 hereof.

(c) Subject to the provisions of Section 5 hereof, upon compliance with clause (b) above, the Company shall deliver or cause to be delivered with all reasonable dispatch, to or to the written order of the holder and in such name or names as the holder may designate, a certificate or certificates for the number of whole Warrant Shares issuable upon the exercise of such Warrants or other securities or property to which such holder is entitled hereunder, together with cash as provided in Section 9 hereof; provided that if any consolidation, merger or lease or sale of assets is proposed to be effected by the Company or its subsidiaries as described in Section 8(k) hereof, or a tender offer or an exchange offer for Common Shares shall be made, upon such surrender of Warrants and payment of the applicable Exercise Price in accordance with clause (b) above, the Company shall, as soon as possible, but in any event not later than two business days thereafter, deliver or cause to be delivered the full number of Warrant Shares issuable upon the exercise of such Warrants in the manner described in this sentence or other securities or property to which such holder is entitled hereunder, together with cash as provided in Section 9 hereof and in accordance with the information provided in the form of election to purchase. The Company shall notify the Warrant Agent the number of Warrant Shares that have been delivered to such holder. Such certificate or certificates shall be deemed to have been issued and any Person so designated to be named therein shall be deemed to have become a holder of record of such Warrant Shares as of the date of the surrender of such Warrants and payment of the applicable Exercise Price.

(d) The Warrants shall be exercisable, at the election of the holders thereof, either in full or in part from time to time during the Exercise Period. If less than all the Warrants represented by a Warrant Certificate are exercised, such Warrant Certificate shall be

 

11

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surrendered and a new Warrant Certificate of the same tenor and for the number of Warrants which were not exercised shall be executed by the Company and delivered to the Warrant Agent and the Warrant Agent shall countersign the new Warrant Certificate, registered in such name or names as may be directed in writing by the holder, and shall deliver or cause to be delivered the new Warrant Certificate to the Person or Persons entitled to receive the same.

(e) All Warrant Certificates surrendered upon exercise of Warrants shall be cancelled by the Warrant Agent. Such cancelled Warrant Certificates shall then be disposed of by the Warrant Agent in a manner satisfactory to the Company. The Warrant Agent shall report promptly to the Company with respect to Warrants exercised.

(f) If the exercising holder fails to pay the applicable Exercise Price to the Company, the Company or the Warrant Agent, as the case may be, shall be entitled to return or cause to be returned the relevant Warrant Certificates and the form of election to purchase at the expense of such holder.

(g) The Warrant Agent shall keep copies of this Agreement and any notices given or received hereunder available for inspection by the holders which shall be allowed upon prior written request with reasonable notice and during normal business hours at its office. The Company shall supply the Warrant Agent from time to time with such numbers of copies of this Agreement as the Warrant Agent may request.

SECTION 5. PAYMENT OF TAXES

The Company shall pay all securities transaction taxes and documentary stamp taxes attributable to the initial issuance of Warrant Shares upon the exercise of Warrants; provided that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Warrant Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Warrant Certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. This provision shall survive the resignation or removal of the Warrant Agent or the termination of this Agreement.

SECTION 6. RESERVATION OF WARRANT SHARES

(a) The Company shall at all times reserve and keep available, free and clear of all liens, security interests, charges and other encumbrances or restrictions on sale, free from preemptive rights, out of the aggregate of its authorized but unissued Common Shares or the authorized and issued Common Shares held in its treasury, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the maximum number of Common Shares which may then be deliverable upon the exercise of all outstanding Warrants.

(b) The Company or, if appointed, the transfer agent for the Common Shares (the “Transfer Agent”) and every subsequent transfer agent for any shares of the Company’s capital stock issuable upon the exercise of any of the rights of purchase aforesaid will be irrevocably authorized and directed at all times to reserve such number of authorized shares as

 

12

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shall be required for such purpose. The Company shall keep a copy of this Agreement on file with the Transfer Agent and with every subsequent transfer agent for any shares of the Company’s capital stock issuable upon the exercise of the rights of purchase represented by the Warrants. The Warrant Agent is hereby irrevocably authorized to requisition from time to time from such Transfer Agent the stock certificates required to honor outstanding Warrants upon exercise thereof in accordance with the terms of this Agreement. The Company shall supply such Transfer Agent with duly executed certificates for such purposes and shall provide or otherwise make available any cash which may be payable as provided in Section 9 hereof. The Company shall furnish such Transfer Agent with a copy of all notices of adjustments, and certificates related thereto, transmitted to each holder pursuant to Section 10 hereof.

(c) Before taking any action which would cause an adjustment pursuant to Section 8 hereof to reduce the Exercise Price below the then par value (if any) of the Warrant Shares, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted.

(d) The Company covenants that all Warrant Shares which may be issued upon exercise of Warrants shall, upon issue, be fully paid, nonassessable, free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issuance thereof.

SECTION 7. OBTAINING STOCK EXCHANGE LISTINGS.

The Company shall from time to time take all action which may be necessary so that the Warrant Shares, immediately upon their issuance upon the exercise of Warrants, will be listed on a principal securities exchange, automated quotation system or other internationally-recognized stock market on which other Common Shares are then listed, if any and will be freely transferable without any restrictions.

SECTION 8. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES ISSUABLE

The applicable Exercise Price and the number of Warrant Shares issuable upon the exercise of each Warrant shall be subject to adjustment from time to time during the Exercise Period upon the occurrence of the events enumerated in this Section 8; provided that in no event shall the applicable Exercise Price be less than $0.0001 per Common Share. The Company covenants that it will not take any actions that would otherwise result in an adjustment under this Section 8 unless the Warrants may be exercised at such adjusted Price into legally issued, fully paid and nonassessable Common Shares under applicable law then in effect. For purposes of this Section 8, “Common Shares” includes shares now or hereafter authorized of any class of common shares of the Company and any other stock of the Company, however designated, that has the right (subject to any prior rights of any class or series of preferred stock) to participate in any distribution of the assets or earnings of the Company without limit as to per share amount.

In addition to the adjustments required under this Section 8, the Company may, at any time, reduce the applicable Exercise Price to any amount greater than or equal to $0.0001 per share for any period of time (but not less than 20 Business Days if the Common Shares are listed in the U.S.) deemed appropriate by the Board of Directors of the Company.

 

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(a) Adjustment for Change in Capital Stock.

If the Company (i) pays a dividend or makes a distribution on its Common Shares payable in its Common Shares, (ii) subdivides its outstanding Common Shares into a greater number of shares, (iii) combines its outstanding Common Shares into a smaller number of shares, (iv) makes a distribution on its Common Shares in shares of its capital stock other than Common Shares or (v) issues by reclassification of its Common Shares any shares of its capital stock, then the applicable Exercise Price in effect immediately prior to such action shall, subject to the proviso to the first sentence of the first paragraph of this Section 8, be proportionately adjusted so that the holder of any Warrant thereafter exercised may receive the aggregate number and kind of shares of capital stock of the Company which such holder would have owned immediately following such action as if such Warrant had been exercised immediately prior to such action.

The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. If, after an adjustment, a holder of a Warrant upon exercise of it may receive shares of two or more classes of capital stock of the Company, the Company shall determine, in good faith, the allocation of the adjusted Exercise Price between the classes of capital stock. After such allocation, the exercise privilege and the applicable Exercise Price of each class of capital stock shall thereafter be subject to adjustment on terms comparable to those applicable to Common Shares in this Section 8. Such adjustment shall be made successively whenever any event listed above shall occur.

(b) Adjustment for Rights Issue.

If the Company distributes any rights, options or warrants to all holders of its Common Shares entitling them for a period expiring within 45 days after the record date set forth below to subscribe for Common Shares or securities convertible into, or exchangeable or exercisable for, Common Shares, in either case, at a price per share less than the Market Value per share on that record date, the applicable Exercise Price shall be adjusted in accordance with the formula:

 

O

+

N x P

E’

=

E

x

M

O + N

where:

 

E’		=		the adjusted Exercise Price.
E		=		the then current Exercise Price.

 

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O		=		the number of Common Shares outstanding on the record date.
N		=		the number of additional Common Shares issued pursuant to such rights, options or warrants.
P		=		the price per share of the additional Common Shares.
M		=		the Market Value per Common Share on the record date.

The adjustment shall be made successively whenever any such rights, options or warrants are issued and shall become effective immediately after the record date for the determination of shareholders entitled to receive the rights, options or warrants. If at the end of the period during which such rights, options or warrants are exercisable, not all rights, options or warrants shall have been exercised, the applicable Exercise Price shall be immediately readjusted to what it would have been if “N” in the above formula had been the number of shares actually issued.

(c) Adjustment for Other Distributions.

If the Company distributes to all holders of its Common Shares any of its assets (including cash), debt securities, preferred stock or any rights or warrants to purchase assets (including cash), debt securities, preferred stock or other securities of the Company, the applicable Exercise Price shall be adjusted in accordance with the formula:

 

E’		=		E		x		M –F
								M

where:

 

E’		=		the adjusted Exercise Price.
E		=		the then current Exercise Price.
M		=		the Market Value per Common Share on the record date mentioned below.
F		=		the fair market value on the record date of the debt securities, preferred stock, assets (including cash), securities, rights or warrants to be distributed in respect of one Common Share as determined in good faith by the Board of Directors of the Company based on a written opinion of an internationally recognized investment banking, appraisal or valuation firm that is not an Affiliate of the Company.

The adjustment shall be made successively whenever any such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive the distribution.

 

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This Section 8(c) shall not apply to rights, options or warrants referred to in Section 8(b) hereof.

(d) Adjustment for Common Share Issue.

If the Company issues Common Shares for a consideration per share less than the Market Value per share on the date the Company fixes the offering price of such additional shares, the applicable Exercise Price shall be adjusted in accordance with the formula:

 

P

E’

=

E

x

O

+

M

A

where:

 

E’		=		the adjusted Exercise Price.
E		=		the then current Exercise Price.
O		=		the number of Common Shares outstanding immediately prior to the issuance of such additional shares.
P		=		the aggregate consideration received for the issuance of such additional shares.
M		=		the Market Value per Common Share on the date of issuance of such additional Common Shares.
A		=		the number of shares outstanding of Common Shares immediately after the issuance of such additional Common Shares.

The adjustment shall be made successively whenever any such issuance is made, and shall become effective immediately after such issuance.

This subsection (d) shall not apply to:

(1) any of the transactions described in subsections (a), (b) or (c) of this Section 8, including, without limitation, the Common Shares issuable upon the exercise thereof,

(2) the exercise of Warrants, or the conversion, exchange or exercise of other securities convertible into or exchangeable or exercisable for Common Shares the issuance of which requires an adjustment to be made under Section 8(e),

(3) the issuance of Common Shares to employees, officers or directors of the Company or its subsidiaries under bona fide employee benefit plans adopted by the Board of Directors and approved by the holders of Common Shares when required by law,

 

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if such Common Shares would otherwise be covered by this subsection (d) (but only to the extent that the aggregate number of shares excluded hereby and issued after the date of this Warrant Agreement shall not, together with options exercisable for Common Shares issued under the employee benefit plans referred to Section 8(e)(2), exceed 6,802,495 Common Shares (as adjusted proportionally for stock dividends, stock splits, combinations, recapitalizations and the like), or

(4) the issuance of Common Shares issuable upon the conversion, exchange or exercise of other securities, warrants, options or similar rights if the conversion, exchange or exercise price is not less than the Market Value per Common Share at the time the security, warrant, option or right so converted, exchanged or exercised was issued or granted,

(5) the issuance of Common Shares in connection with the exercise by each of Burnhan Securities Inc. and Mr. Joel B. Gardner of those certain warrants to purchase common shares, dated August 25, 2006, or

(6) the conversion of the Company’s currently issued and outstanding Series A Preferred Shares into Common Shares.

(e) Adjustment for Convertible Securities Issue.

If the Company issues any securities convertible into or exchangeable or exercisable for Common Shares (other than securities issued in transactions described in subsections (a), (b) or (c) of this Section 8) for a consideration per Common Share initially deliverable upon conversion, exchange or exercise of such securities less than the Market Value per share on the date of issuance of such securities or on the date the Company fixes the offering price of such securities, the applicable Exercise Price shall be adjusted in accordance with the formula:

 

P

E’

=

E

x

O

+

M

O

+

D

where:

 

E’		=		the adjusted Exercise Price.
E		=		the then current Exercise Price.
O		=		the number of Common Shares outstanding immediately prior to the issuance of such securities.
P		=		the aggregate consideration received for the issuance of such securities.
M		=		the Market Value per Common Share on the date of issuance of such securities.
D		=		the maximum number of Common Shares deliverable upon conversion or in exchange for such securities at the initial conversion, exchange or exercise rate.

 

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The adjustment shall be made successively whenever any such issuance is made, and shall become effective immediately after such issuance.

If all of the Common Shares deliverable upon conversion, exchange or exercise of such securities have not been issued when such securities are no longer outstanding, then the applicable Exercise Price shall promptly be readjusted to the applicable Exercise Price which would then be in effect had the adjustment upon the issuance of such securities been made on the basis of the actual number of Common Shares issued upon conversion, exchange or exercise of such securities.

This subsection (e) shall not apply to:

(1) convertible securities issued to shareholders of any Person which merges into the Company, or with a subsidiary of the Company, in proportion to their stock holdings of such person immediately prior to such merger, upon such merger, provided that if such Person is an Affiliate of the Company, the Board of Directors shall have obtained a fairness opinion from a internationally recognized investment banking, appraisal or valuation firm, which is not an Affiliate of the Company, stating that the consideration received in such merger is fair to the Company from a financial point of view, or

(2) the issuance of options exercisable for Common Shares to employees, officers or directors of the Company or its subsidiaries under bona fide employee benefit plans adopted by the Board of Directors and approved by the holders of Common Shares when required by law, if such Common Shares would otherwise be covered by this subsection (e) (but only to the extent that the aggregate number of shares excluded hereby and issued after the date of this Warrant Agreement shall not, together with Common Shares issued under the employee benefit plans referred to Section 8(d)(3), exceed 6,802,495 Common Shares (as adjusted proportionally for stock dividends, stock splits, combinations, recapitalizations and the like).

(f) Consideration Received.

For purposes of any computation respecting consideration received pursuant to subsections (d) and (e) of this Section 8, the following shall apply:

(1) in the case of the issuance of Common Shares for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts or other expenses incurred by the Company for any underwriting of the issue or otherwise in connection therewith;

(2) in the case of the issuance of Common Shares for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to

 

18

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be the fair market value thereof as determined in good faith by the Board of Directors based on a written opinion of an internationally recognized investment banking, appraisal or valuation firm that is not an Affiliate of the Company (irrespective of the accounting treatment thereof), whose determination shall be conclusive, and described in a Board resolution which shall be filed with the Warrant Agent;

(3) in the case of the issuance of securities convertible into or exchangeable or exercisable for Common Shares, the aggregate consideration received therefor shall be deemed to be the consideration received by the Company for the issuance of such securities plus the additional minimum consideration, if any, to be received by the Company upon the conversion, exchange or exercise thereof (the consideration in each case to be determined in the same manner as provided in clauses (1) and (2) of this subsection (f)); and

(4) in the case of the issuance of Common Shares pursuant to rights, options or warrants which rights, options or warrants were originally issued together with one or more other securities as part of a unit at a price per unit, the consideration shall be deemed to be the fair value of such rights, options or warrants at the time of issuance thereof as determined in good faith by the Board of Directors based on a written opinion of an internationally recognized investment banking, appraisal or valuation firm that is not an Affiliate of the Company and in accordance with GAAP whose determination shall be conclusive and described in a Board resolution, which shall be filed with the Warrant Agent, plus the additional minimum consideration, if any, to be received by the Company upon the exercise, conversion or exchange thereof (as determined in the same manner as provided in clauses (1) and (2) of this subsection (f)).

(g) When De Minimis Adjustment May Be Deferred.

No adjustment in the applicable Exercise Price need be made unless the adjustment would require an increase or decrease of at least 1% in the applicable Exercise Price. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 8 shall be made by the Company to the nearest cent or to the nearest 1/100th of a share, as the case may be, it being understood that no such rounding shall be made under subsection (o).

(h) When No Adjustment Required.

No adjustment need be made for (i) rights to purchase Common Shares pursuant to a Company plan for reinvestment of dividends or interest or (ii) a change in the par value or no par value of the Common Shares.

(i) Notice of Adjustment.

Whenever the applicable Exercise Price is adjusted, the Company shall provide the notices required by Section 10 hereof.

 

19

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(j) Reorganization of Company.

(1) If the Company consolidates or merges with or into, or transfers or leases all or substantially all its assets to, any Person, upon consummation of such transaction the Warrants shall automatically become exercisable for the kind and amount of securities, cash or other assets which the holder of a Warrant would have owned immediately after the consolidation, merger, transfer or lease if the holder had exercised the Warrant immediately before the effective date of the transaction. Concurrently with the consummation of such transaction, the corporation formed by or surviving any such consolidation or merger if other than the Company, or the Person to which such sale or conveyance shall have been made, shall enter into (i) a supplemental Warrant Agreement so providing and further providing for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in this Section 8 and (ii) a supplement to the Equity Registration Rights Agreement providing for the assumption of the Company’s obligations thereunder. The successor company shall mail to Warrant holders a notice describing the supplemental Warrant Agreement and Equity Registration Rights Agreement. If the issuer of securities deliverable upon exercise of Warrants under the supplemental Warrant Agreement is an Affiliate of the formed, surviving, transferee or lessee corporation, such issuer shall join in the supplemental Warrant Agreement and Equity Registration Rights Agreement. If this Section 8(j) shall be applicable, Sections 8(a), (b), (c), (d), (e) and (f) hereof shall not be applicable to such consolidation, merger, transfer or lease.

(2) Notwithstanding subclause (1) above, if (A) the Company consolidates or merges with or into, or sells, transfers or leases all or substantially all its assets to, any Person and in connection therewith, the consideration payable to holders of Common Shares in exchange for their Common Shares is payable solely in cash or (B) proceedings commence for the voluntary or involuntary dissolution, liquidation or winding up of the Company, then the Warrants shall automatically be exercised into such number of Warrant Shares as is determined pursuant to the provisions of Section 4(a), and the Warrant certificate representing such Warrants shall be deemed cancelled. As a result of such conversion, each holder of Warrant Shares shall be entitled to receive distributions on an equal basis with the holders of the Common Shares. If this Section 8(j) applies to a transaction, Sections 8(a), (b), (c), (d) and (e) hereof do not apply to such transaction.

(3) This Section 8(j) shall not apply in the event that the Company merges with another Person and the holders of the Common Shares immediately prior to such merger hold at least a majority of the voting stock of the surviving corporation immediately following the consummation of such merger.

(k) Company Determination Final.

Any determination that the Company or the Board of Directors must make pursuant to Section 8(a), (b), (c), (d), (e), (f), (g), or (h) hereof, if made in good faith, is conclusive.

 

20

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(l) When Issuance or Payment May Be Deferred.

In any case in which this Section 8 shall require that an adjustment in the applicable Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event (i) issuing to the holder of any Warrant exercised after such record date the Warrant Shares and other capital stock of the Company, if any, issuable upon such exercise over and above the Warrant Shares and other capital stock of the Company, if any, issuable upon such exercise on the basis of the applicable Exercise Price and (ii) paying to such holder any amount in cash in lieu of a fractional share pursuant to Section 9 hereof; provided that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder’s right to receive such additional Warrant Shares, other capital stock and cash upon the occurrence of the event requiring such adjustment.

(m) Adjustment in Number of Shares.

Upon each adjustment of the applicable Exercise Price pursuant to this Section 8, each Warrant outstanding prior to the making of the adjustment in the applicable Exercise Price shall thereafter evidence the right to receive upon payment of the adjusted Exercise Price that number of Common Shares (calculated to the nearest hundredth) obtained from the following formula:

 

N’		=		N		x		E
								E’

where:

 

N’		=		the adjusted number of Warrant Shares issuable upon exercise of a Warrant by payment of the adjusted Exercise Price.
N		=		the number or Warrant Shares previously issuable upon exercise of a Warrant by payment of the Exercise Price prior to adjustment.
E’		=		the adjusted Exercise Price.
E		=		the Exercise Price prior to adjustment.

(n) Form of Warrants.

Irrespective of any adjustments in the applicable Exercise Price or the number or kind of shares purchasable upon the exercise of the Warrants, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the Warrants initially issuable pursuant to this Agreement.

(o) No Impairment. If any event shall occur as to which the provisions of Section 8 are not strictly applicable but the failure to make any adjustment would adversely affect the purchase rights represented by the Warrants in accordance with the essential intent and principles of such Section, then, in each such case, the Company shall appoint an investment banking firm of recognized international standing, or any other financial expert that does not (or whose directors, officers, employees, or affiliates do not) have a direct or material indirect

 

21

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financial interest in the Company or any of its subsidiaries, who has not been, and, at the time it is called upon to given independent financial advice to the Company, is not (and none of its directors, officers, employees or affiliates) are a promoter, director or officer of the Company or any of its subsidiaries, which shall give their opinion upon the adjustment, if any, on a basis consistent with the essential intent and principles established in Section 8 necessary to preserve, without dilution, the purchase rights represented by the Warrants. Upon receipt of such opinion, the Company will promptly deliver a copy thereof to the Warrant Agent and shall make the adjustments described therein.

SECTION 9. FRACTIONAL INTERESTS

The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same holder, the number of full Warrant Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 9, be issuable on the exercise of any Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the Fair Value per Warrant Share, as determined on the day immediately preceding the date the Warrant is presented for exercise, multiplied by such fraction, computed to the nearest whole U.S. cent.

SECTION 10. NOTICES TO WARRANT HOLDERS

(a) Upon any adjustment of the applicable Exercise Price pursuant to Section 8 hereof, the Company shall promptly thereafter (i) cause to be filed with the Warrant Agent a certificate of a firm of independent public accountants of recognized standing selected by the Board of Directors of the Company (who may be the regular auditors of the Company) setting forth the applicable Exercise Price after such adjustment and setting forth in reasonable detail the method of calculation and the facts upon which such calculations are based and setting forth the number of Warrant Shares (or portion thereof) issuable after such adjustment in the applicable Exercise Price, upon exercise of a Warrant and payment of the adjusted Exercise Price, which certificate shall be conclusive evidence of the correctness of the matters set forth therein, and (ii) cause to be given to each of the registered holders of Warrants at the address appearing on the Warrant register for each such registered holder written notice of such adjustments by first-class mail, postage prepaid. Where appropriate, such notice may be given in advance and included as a part of the notice required to be mailed under the other provisions of this Section 10.

(b) In the event:

(i) that the Company shall authorize the issuance to all holders of Common Shares of rights, options or warrants to subscribe for or purchase Common Shares or of any other subscription rights or warrants;

(ii) that the Company shall authorize the distribution to all holders of Common Shares of evidences of its indebtedness or assets (other than dividends payable in Common Shares or distributions referred to in Section 8(a) hereof);

 

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(iii) of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance, lease or transfer of all or substantially all of the Company’s properties and assets, or of any reclassification or change of Common Shares issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or a tender offer or exchange offer for Common Shares;

(iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or

(v) that the Company proposes to take any action which would require an adjustment of the applicable Exercise Price pursuant to Section 8 hereof;

then the Company shall cause to be filed with the Warrant Agent and shall cause to be given to each of the registered holders of Warrants at his address appearing on the Warrant register, at least 20 days (or 10 days in any case specified in clauses (i) or (ii) above) prior to the applicable record date hereinafter specified, or promptly in the case of events for which there is no record date, by first-class mail, postage prepaid, a written notice stating (x) the date as of which the holders of record of Common Shares to be entitled to receive any such rights, options, warrants or distribution are to be determined, (y) the initial expiration date set forth in any tender offer or exchange offer for Common Shares, or (z) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective or consummated, and the date as of which it is expected that holders of record of Common Shares shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. The failure to give the notice required by this Section 10 or any defect therein shall not affect the legality or validity of any distribution, right, option, warrant, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up, or the vote upon any action.

(c) Nothing contained in this Agreement or in any of the Warrant Certificates shall be construed as conferring upon the holders of Warrants the right to vote or to consent or to receive notice as shareholders in respect of the meetings of shareholders or the election of directors of the Company or any other matter, or any rights whatsoever as shareholders of the Company.

SECTION 11. MERGER, CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT

(a) Any corporation into which the Warrant Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Warrant Agent, shall be the successor to such Warrant Agent hereunder without the execution or filing of any papers or any further act on the part of any of the parties hereto; provided that such corporation would have a combined capital and surplus of at least $50.0 million (or would be a wholly-owned subsidiary of a bank or trust company, or of a bank holding company, the principal subsidiary of which is a bank or trust company having a combined capital and surplus of at least $50.0 million) as set forth in its most recent published annual report of condition.

 

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(b) In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent whose name has been changed may adopt the countersignature under its prior name, and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name, and in all such cases such Warrant Certificates shall have the full force and effect provided in the Warrant Certificates and in this Agreement.

SECTION 12. WARRANT AGENT

The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrants, by their acceptance thereof, shall be bound:

(a) The Warrant Agent shall be obligated to perform such duties and only such duties as are set out in this Agreement and no implied duties or obligations shall be read into this Agreement against the Warrant Agent. Notwithstanding anything to the contrary contained in this Agreement, the Warrant Agent shall not be obliged to act or omit to act in accordance with any instruction, direction or request delivered to it by the Company unless such instruction, direction or request is delivered to the Warrant Agent in writing. The Warrant Agent may, in connection with its services hereunder rely upon the terms of any notice, communication or other document believed by it to be genuine.

(b) The Warrant Agent may rely upon and shall not be liable for acting or refraining from acting upon any written notice, instruction or request furnished to it hereunder and believed by it to be genuine and to have been signed or presented by the proper party or parties. The Warrant Agent shall be under no duty to inquire into or investigate the validity, accuracy or content of any such document.

(c) The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Company.

(d) The Warrant Agent may engage and consult at the expense of the Company with any legal adviser and professional adviser selected by it and rely upon any advice so obtained and the Warrant Agent and its respective directors, officers, employees and duly appointed agents shall be protected and shall not be liable in respect of any action taken, or omitted to be done or suffered to be taken, in accordance with such advice.

(e) The Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant Certificate for any action taken in reliance on any Warrant Certificate, certificate of shares, notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties.

 

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(f) The Company agrees to pay to the Warrant Agent compensation for all services rendered by the Warrant Agent in the execution of this Agreement, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges of any kind and nature incurred by the Warrant Agent in the execution of this Agreement. At the request of the Warrant Agent, parties to this Agreement may from time to time during the continuance of this Agreement review the commissions agreed initially with a view to determining whether the parties can mutually agree upon any changes to the commissions. The Company hereby unconditionally and irrevocably covenants and undertakes to indemnify and hold harmless the Warrant Agent, its directors, officers, employees and agents (each an “indemnified party”) in full at all times against all losses, liabilities, actions, proceedings, claims, demands, penalties, damages, costs, expenses disbursements, and other liabilities whatsoever (the “Losses”), including without limitation the costs and expenses of legal advisors and other experts, which may be incurred, suffered or brought against such indemnified party as a result or in connection with (a) their appointment or involvement hereunder or the exercise of any of their powers or duties hereunder or the taking of any acts in accordance with the terms of this Agreement or its usual practice; (b) this Agreement and any other documents in connection with the sale of the Warrants or pursuant to this Agreement, or (c) any instruction or other direction upon which the Warrant Agent may rely under this Agreement, as well as the costs and expenses incurred by an indemnified party of defending itself against or investigating any claim or liability with respect of the foregoing provided that this indemnity shall not apply in respect of an indemnified party to the extent but only to the extent that any such Losses incurred or suffered by or brought against such indemnified party arises directly from the fraud, wilful misconduct or gross negligence of such indemnified party. The parties hereto acknowledge that the foregoing indemnities shall survive the resignation or removal of the Warrant Agent or the termination of this Agreement.

(g) In the event that the Warrant Agent shall be uncertain as to its duties or rights hereunder or shall receive instructions, claims or demands from the Company, in its opinion, conflict with any of the provisions of this Agreement, it shall be entitled to refrain from taking any action until it is directed in writing by a final order or judgment of a court of competent jurisdiction. In addition, the Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless the Company or one or more registered holders of Warrants shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as it may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrant Certificates or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent and any recovery of judgment shall be for the ratable benefit of the registered holders of the Warrants, as their respective rights or interests may appear.

(h) The Warrant Agent, and any shareholder, director, officer or employee of it, may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity.

 

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(i) The Warrant Agent shall not be liable for any action taken or omitted by it except to the extent that a court of competent jurisdiction determines that the Warrant Agent’s gross negligence or willful misconduct was the primary cause of any loss to the Company.

(j) The Warrant Agent shall not at any time be under any duty or responsibility to any holder of any Warrant Certificate to make or cause to be made any adjustment of the applicable Exercise Price or number of the Warrant Shares or other securities or property deliverable as provided in this Agreement, or to determine whether any facts exist which may require any of such adjustments, or with respect to the nature or extent of any such adjustments, when made, or with respect to the method employed in making the same. The Warrant Agent shall not be accountable with respect to the validity or value or the kind or amount of any Warrant Shares or of any securities or property which may at any time be issued or delivered upon the exercise of any Warrant or with respect to whether any such Warrant Shares or other securities will when issued be validly issued and fully paid and nonassessable, and makes no representation with respect thereto.

(k) The Warrant Agent shall not be required to risk or expend its own funds on the performance of it obligations and duties hereunder.

(l) Notwithstanding any other term or provision of this Agreement to the contrary, the Warrant Agent shall not be liable under any circumstances for special, punitive, indirect or consequential loss or damage of any kind whatsoever including but not limited to loss of profits, whether the claim for such loss or damage is made in negligence, for breach of contract, breach of trust, breach of fiduciary obligation or otherwise. The provisions of this Section shall survive the termination or expiration of this Agreement or the resignation or removal of the Warrant Agent.

(m) The Warrant Agent may execute any of its powers and perform any of its duties hereunder directly or through delegates or attorneys and may consult with counsel, accountants and other skilled persons to be reasonably selected and retained by it. The Warrant Agent shall not be liable for the acts of such delegates or attorneys, or for anything done, suffered or omitted by it in accordance with the advice or opinion of any such counsel, accountants or other skilled persons.

(n) The Warrant Agent may take and instruct any delegate to take any action which it in its sole discretion considers appropriate so as to comply with any applicable law, regulation, request of a public or regulatory authority or any HSBC Group policy which relates to the prevention of fraud, money laundering, terrorism or other criminal activities or the provision of financial and other services to sanctioned persons or entities. Such action may include but is not limited to the interception and investigation of transactions on the depositor’s accounts (particularly those involving the international transfer of funds) including the source of the intended recipient of fund paid into or out of the depositor’s accounts. In certain circumstances, such action may delay or prevent the processing of the depositor’s instructions, the settlement of transactions over the depositor’s accounts or the Warrant Agent’s performance

 

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of its obligations under this Agreement. Where possible, the Warrant Agent will endeavor to notify the depositor of the existence of such circumstances. Neither the Warrant Agent nor any delegate will be liable for any loss (whether direct or consequential and including, without limitation, loss of profit or interest) caused in whole or in part by any actions which are taken by the Warrant Agent or any delegate pursuant to this Section. For the purposes of this Section, the “HSBC Group” means HSBC Holdings plc its subsidiaries and associated companies.”

SECTION 13. CHANGE OF WARRANT AGENT

The Warrant Agent may retire at any time on giving not less than 30 days prior written notice to the Company without assigning any reason and without being responsible for any costs, charges and expenses occasioned by such retirement. The Company hereby covenants that in the event of the Warrant Agent giving notice under this Section it shall use its best endeavors to procure a new Warrant Agent to be appointed and if the Company has not procured the appointment of a new Warrant Agent within 15 days after the expiration of such written notice, the Warrant Agent shall petition any court of competent jurisdiction for its resignation provided that it has notified the Company prior to it doing so. If such petition is granted, the Warrant Agent shall notify all transaction parties in writing of its resignation.

SECTION 14. REPORTS

(a) The Company agrees with each holder, for so long as any Warrants or Warrant Shares remain outstanding and during any period in which the Company (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any holder, to such holder or beneficial owner of Warrants or Warrant Shares in connection with any sale thereof and any prospective purchaser of such Warrants or Warrant Shares designated by such holder or beneficial owner, the information required by Rule 144(A)(d)(4) under the Securities Act in order to permit resales of such Warrants or Warrant Shares pursuant to Rule 144A, and (ii) is subject to Section 13 or 15(d) of the Exchange Act, to make all filings required thereby in a timely manner in order to permit resales of such Warrants or Warrant Shares pursuant to Rule 144A.

(b) In addition, so long as any Warrant remains outstanding and prior to a Qualifying IPO, the Company shall file with the Warrant Agent and, upon the request of the holders, furnish to the holders of the Warrants all of the following:

(1) As soon as they are available but in any event within 120 calendar days (or 90 calendar days if the Company’s Common Shares are listed on any international securities exchange or are approved for quotation on any system for automated dissemination of securities prices, or if the Company is otherwise required by law or regulation to publicly file information on a periodical basis with a securities regulatory authorities) after the end of the fiscal year of the Company, copies of its financial statements (on a consolidated basis) in respect of such fiscal year (including a statement of income, balance sheet and cash flow statement) audited by a member firm of an internationally-recognized firm of independent accountants in accordance with GAAP;

 

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(2) As soon as they are available, but in any event within 75 calendar days after the end of each of the first, second and third fiscal quarters of the Company, copies of its unaudited financial statements (on a consolidated basis) in respect of the respective period (including a statement of income, balance sheet and cash flow statement) prepared on a basis consistent with the audited financial statements of the Company; provided that the Company shall make commercially reasonable efforts to furnish such financial statements within 45 calendar days after the end of each such fiscal quarter; and provided further that the financial statements delivered after the end of the second fiscal quarter shall cover the six-month period then ended; and

(3) All public filings with the relevant trading market and regulatory authorities in connection with the Qualifying IPO.

(c) The Company shall provide the Warrant Agent with a sufficient number of copies of all such reports that the Warrant Agent may be required to deliver to the holders of the Warrants and the Warrant Shares under this Section 14.

(d) The Company shall notify the Warrant Agent in writing within five (5) Business Days prior to filing a registration statement or other filing with any stock exchange for a Qualifying IPO, and shall notify the Warrant Agent of the consummation of the Qualifying IPO on the date that of consummation thereof.

SECTION 15. NOTICES TO COMPANY AND WARRANT AGENT

Any notice or demand authorized by this Agreement to be given or made by the Warrant Agent or by the registered holder of any Warrant to or on the Company shall be sufficiently given or made when received if deposited in the mail, first class or registered, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent) or delivered by facsimile as follows:

 

Xinyuan Real Estate Co., Ltd. PO Box 309GT Upland House South Church Street George Town Grand Cayman, Cayman Islands

Facsimile No.: +86 371 6565 1168

Attention: Chief Financial Officer

With a copy to:

Baker & McKenzie LLP BCE Place 181 Bay Street, Suite 211 P.O. Box 874 Toronto, Ontario M5J 2T3 Canada

Facsimile No.: +1 416 863 6275

Attention: Omer Ozden

 

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In case the Company shall fail to maintain such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations may be made and notices and demands may be served at the corporate trust office of the Warrant Agent.

Any notice pursuant to this Agreement to be given by the Company or by the registered holder(s) of any Warrant to the Warrant Agent shall be sufficiently given when and if deposited in the mail, first-class or registered, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company), or delivered by facsimile, to and received by the Warrant Agent at its corporate trust office as follows:

 

The Hongkong and Shanghai Banking Corporation Limited Level 30, HSBC Main Building 1 Queen’s Road Central Hong Kong

Attention: Corporate Trust and Loan Agency

Facsimile No.: +852 2801 5586

SECTION 16. SUPPLEMENTS AND AMENDMENTS

The Company and the Warrant Agent may from time to time supplement or amend this Agreement without the approval of any holders of Warrants in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable and which shall not in any way materially adversely affect the interests of the holders of Warrants.

Any amendment or supplement to this Agreement that has an adverse effect on the interests of the holders of the Warrants shall require the written consent of the holders of a majority of the then outstanding Warrants (excluding the Warrants held by the Company or any of its Affiliates).

The consent of each holder of Warrants affected shall be required for any amendment pursuant to which the applicable Exercise Price would be increased or the number of Warrant Shares purchasable upon exercise of Warrants would be decreased (other than pursuant to adjustments provided in this Agreement). In executing or accepting any supplement, modification or amendment to this Agreement, the Warrant Agent shall be entitled to receive, and shall be fully protected in relying upon, an opinion of counsel stating that the execution of such supplement, modification or amendment is authorized or permitted by this Agreement and all conditions precedent herein have been complied with. The Warrant Agent may, but shall not be obligated to, enter into any such supplement, modification or amendment which affects the Warrant Agent’s own rights, duties or immunities under this Agreement or otherwise.

 

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SECTION 17. SUCCESSORS

All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.

SECTION 18. TERMINATION

This Agreement shall terminate at 5:00 p.m., Hong Kong time, on the Warrant Expiration Date. Notwithstanding the foregoing, this Agreement will terminate on any earlier date if all Warrants have been exercised. The provisions of Section 12 shall survive such termination.

SECTION 19. GOVERNING LAW

This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the internal laws of said State.

SECTION 20. JURISDICTION

The Company agrees that any suit, action or proceeding against it arising out of or based upon this Agreement or the transactions contemplated hereby may be instituted in any State or U.S. federal court in The City of New York and County of New York, and waives any objection which it may now or hereafter have to the laying of venue of any such proceeding, and irrevocably submits to the non-exclusive jurisdiction of such courts in any suit, action or proceeding. The Company hereby appoints Law Debenture Corporate Services Inc., 400 Madison Avenue, Suite 4D, New York, NY 10017, Facsimile No. +1 212 750 1361, as its authorized agent (the “Authorized Agent”) upon whom process may be served in any suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated herein.

SECTION 21. BENEFITS OF THIS AGREEMENT

Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrant Agent and the registered holders of Warrants any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the registered holders of Warrants.

SECTION 22. COUNTERPARTS

This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written.

 

[SIGNATURE PAGE TO WARRANT AGREEMENT]

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EXHIBIT A

[Form of Warrant Certificate]

[Face]

[GLOBAL WARRANT LEGEND]

THIS GLOBAL WARRANT IS HELD BY THE COMMON DEPOSITARY (AS DEFINED IN THE WARRANT AGREEMENT GOVERNING THIS WARRANT) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE WARRANT AGENT MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 3.5 OF THE WARRANT AGREEMENT, (II) THIS GLOBAL WARRANT MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 3.5 OF THE WARRANT AGREEMENT, (III) THIS GLOBAL WARRANT MAY BE DELIVERED TO THE WARRANT AGENT FOR CANCELLATION PURSUANT TO SECTION 3.8 OF THE WARRANT AGREEMENT AND (IV) THIS GLOBAL WARRANT MAY BE TRANSFERRED TO A SUCCESSOR COMMON DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.

[REGULATION S LEGEND]

THIS WARRANT AND THE SECURITIES TO BE ISSUED UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933 (THE “SECURITIES ACT”) AND THE WARRANT AND THE SECURITIES TO BE ISSUED UPON ITS EXERCISE MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO U.S. PERSONS BY OR ON BEHALF OF ANY U.S. PERSON, UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. IN ORDER TO TRANSFER OR EXERCISE ANY INTEREST IN THIS WARRANT, THE BENEFICIAL HOLDER MUST FURNISH TO THE COMPANY AND THE WARRANT REGISTRAR EITHER (A) A WRITTEN CERTIFICATION THAT IT IS NOT A U.S. PERSON AND THE WARRANT IS NOT BEING EXERCISED ON BEHALF OF A U.S. PERSON OR (B) A WRITTEN OPINION OF COUNSEL TO THE EFFECT THAT THE SECURITIES DELIVERED UPON EXERCISE OF THE WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR THAT THE DELIVERY OF SUCH SECURITIES IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. EACH BENEFICIAL HOLDER BY ACCEPTING AN INTEREST IN THIS WARRANT AGREES THAT ANY HEDGING TRANSACTION INVOLVING THIS WARRANT OR THE SECURITIES TO BE ISSUED UPON EXERCISE OF THIS WARRANT MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. TERMS IN THIS LEGEND HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.

No. 1

ISIN No. KYG9828W1116

Common Code: 029635307

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Warrant Certificate

XINYUAN REAL ESTATE CO., LTD.

This Warrant Certificate certifies that HSBC Nominees (Hong Kong) Limited, as nominee for the common depository for Clearstream Banking, societe anonyme (“Clearstream”) and/or Euroclear Bank S.A./N.V. as operator of the Euroclear System, (“Euroclear”), is the registered holder of the Warrants to purchase certain Common Shares, par value $0.0001 (the “Common Shares”), of Xinyuan Real Estate Co., Ltd., a company incorporated under the laws of the Cayman Islands (the “Company”). Capitalized terms used but not defined herein have the meaning ascribed to such terms in the Warrant Agreement.

Each Warrant entitles the registered holder, upon exercise at any time during the Exercise Period, to receive from the Company the Warrant Shares at the Exercise Price per share payable upon surrender of this Warrant Certificate and payment of the Exercise Price to the account of the Company, but only subject to the conditions set forth herein and in the Warrant Agreement referred to on the reverse hereof. The Exercise Price and number of Warrant Shares issuable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events set forth in the Warrant Agreement.

No Warrant may be exercised after 5:00 p.m., Hong Kong time, on the Warrant Expiration Date. To the extent not exercised by such time, any such Warrant shall become void.

Reference is hereby made to the further provisions of this Warrant Certificate set forth on the reverse hereof and such further provisions shall for all purposes have the same effect as though fully set forth at this place.

This Warrant Certificate shall not be valid unless countersigned by the Warrant Agent, as such term is used in the Warrant Agreement.

This Warrant Certificate shall be governed by and construed in accordance with the internal laws of the State of New York.

 

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IN WITNESS WHEREOF, Xinyuan Real Estate Co., Ltd. has caused this Warrant Certificate to be signed below.

Dated:             , 2007

 

Countersigned:

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED

as Warrant Agent

 

By:
		Authorized Signatory

[SIGNATURE PAGE TO WARRANT AGREEMENT]

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[Reverse of Warrant Certificate]

The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring at 5:00 p.m., Hong Kong time, on the Warrant Expiration Date entitling the holder on exercise to receive Common Shares, and are issued or to be issued pursuant to a Warrant Agreement dated as of April 13, 2007 (the “Warrant Agreement”), duly executed and delivered by the Company to The Hongkong and Shanghai Banking Corporation Limited, as warrant agent (the “Warrant Agent”), which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Warrant Agent, the Company and the holders (the words “holders” or “holder” meaning the registered holders or registered holder) of the Warrants. Capitalized terms used but not defined herein have the meaning ascribed to such terms in the Warrant Agreement. A copy of the Warrant Agreement may be obtained by the holder hereof upon written request to the Company.

Warrants may be exercised at any time during the Exercise Period. In order to exercise all or any of the Warrants represented by this Warrant Certificate, the holder must deliver to the Warrant Agent at its corporate trust office set forth in Section 15 of the Warrant Agreement this Warrant Certificate and the form of election to purchase on the reverse hereof duly completed and signed, and upon payment to the account of the Company of the Exercise Price, for the number of Warrant Shares in respect of which such Warrants are then exercised. No adjustment shall be made for any dividends on any Common Shares issuable upon exercise of this Warrant.

The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price set forth on the face hereof may, subject to certain conditions, be adjusted. If the Exercise Price is adjusted, the Warrant Agreement provides that the number of Common Shares issuable upon the exercise of each Warrant shall be adjusted. No fractions of an Common Share will be issued upon the exercise of any Warrant, but the Company will pay the cash value thereof determined as provided in the Warrant Agreement.

The Company has agreed pursuant to an Equity Registration Rights Agreement dated as of April 13, 2007 to, as promptly as practicable upon the request of a certain number of holders of the Company’s securities, file a registration statement on an appropriate form under the U.S. Securities Act of 1933 (the “Securities Act”) covering the resale of the Warrant Shares. The Company will use its reasonable efforts to cause any such registration statement to be declared effective and to keep such registration statement continuously effective under the Securities Act in order to permit the resale of the Warrant Shares by the holders thereof until the Warrant Shares (i) have been sold pursuant thereto or (ii) may be sold without volume limitations pursuant to Rule 144(k).

Warrant Certificates, when surrendered at the corporate trust office of the Warrant Agent by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants.

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Upon due presentation for registration of transfer of this Warrant Certificate at the corporate trust office of the Warrant Agent a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith.

The Company and the Warrant Agent may deem and treat the registered holder(s) thereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, of any distribution to the holder(s) hereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Neither the Warrants nor this Warrant Certificate entitles any holder hereof to any rights of a shareholder of the Company.

This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the internal laws of said State.

The Company agrees that any suit, action or proceeding against it arising out of or based upon this Agreement or the transactions contemplated hereby may be instituted in any State or U.S. federal court in The City of New York and County of New York, and waives any objection which it may now or hereafter have to the laying of venue of any such proceeding, and irrevocably submits to the non-exclusive jurisdiction of such courts in any suit, action or proceeding.

 

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FORM OF ELECTION TO PURCHASE

Xinyuan Real Estate Co Ltd

Transaction Details

 

To:		The Hongkong and Shanghai Banking Corporation Ltd
		Level 30, HSBC Main Building 1 Queen’s Road Central Hong Kong
		Attention:		Corporate Trust and Loan Agency
		Fax No.		(852) 2801 5586

IMPORTANT: PLEASE READ THE NOTES AT THE END OF THIS NOTICE BEFORE COMPLETING THIS NOTICE.

I/We hereby irrevocably elect to exercise the Warrants into the common shares (“Common Shares”) in accordance with Section 4 of the Warrant Agreement.

Please enter the number of Warrants and serial or identifying numbers of Warrant Certificates to be exercised:

 

Total number of Warrants:
Serial or identifying number of Warrant Certificates*:
ISIN number of Global Warrant:

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*	Not required for Warrants represented by a Global Warrant.

Please tick (ü) the box of the elected option.

 

¨		Option 1: Cash Payment
		I/We have arranged/will arrange payment of subscription moneys to the account of the Company.   Cash Amount:                        (please attach payment evidence)
¨		Option 2: Tender Notes
		I/We elect to exercise the Warrants by delivery of the Floating Rate Notes (“Notes) in lieu of payment of the subscription money

 

A-3

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Total principal amount of Notes: (1 Unit = USD100,000 Notes)
Serial or identifying number of Notes **
ISIN number of Notes:

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**	Not required for Notes represented by a Global Note.

 

¨		Option 3: Tender Warrant
		I/We elect to exercise the Warrants on a net basis without the exchange of funds

If a holder wishes to elect in a combination of Option (1) and (2), please specify.

 

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Please complete all remaining sections of this notice before delivering it to the Warrant Agent.

 

 

A. Exercising holder’s Information.
Name of holder
Address of holder:
Telephone Number:
Fax Number:
Email Address:
Contact Person:
B. Delivery of Common Shares
Please register the Common Shares in the name of the following person:
Name:
Address:
Please deliver certificate(s) representing the Common Shares issued in respect of the exercise of the Warrant to the following person (at our risk and, if we request that delivery by mail, at our expense)
Name:
Address:
Account Number with Custodian (if applicable)
Name and Telephone No of Contact Person:

C. Fractional Interest

If the Company does not have sufficient Common Shares to deliver upon exercise, the amount to be paid must be paid to the person whose name is specified above to be registered in the following manner:

 

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Name:
Paid by Check: (with details of address)
Paid by Remittance: (with bank account details)

 

Signed:
(Notice to be signed by an authorised signatory)
Date:

 

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For Company’s use only:

 

1	Common Shares to be Issued Upon exercise.

 

(a)		Aggregate Warrants deposited for exercise
(b)		Aggregate Exercise Price on Exercise Date:
(c)		Cashless Exercise Ratio
(d)		Number of Common Shares deliverable: (Re: Option 1)
(e)		Number of Common Shares deliverable: (Re: Option 2)
(f)		Number of Common Shares deliverable: (Re: Option 3)
(g)		Amount of cash payment due in respect of fractions of Common Shares (if any and if applicable):

Note: The Company shall return a copy of this form to the Warrant Agent after completing the last section.

 

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WARRANTS

 

1	This notice will be void unless all relevant details are duly completed and deposited during the Exercise Period.

 

2	Your attention is particularly drawn to Section 4 of the Warrant Agreement relating to the exercise of the Warrants.

 

3

If a retroactive adjustment of the Exercise Price contemplated by the terms and conditions of the Warrants is required in respect of an exercise of Warrants, additional Common Shares deliverable pursuant to such retroactive adjustment (together with any other securities, property or cash) shall be delivered or dispatched in accordance with the Warrant Agreement.

 

4	Despatch of share certificates or other securities or property will be made at the risk of the exercising holder and the exercising holder will be required to submit any necessary documents required in order to effect, despatch in the manner specified.

 

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SCHEDULE OF EXCHANGES OF INTERESTS OF GLOBAL WARRANTS

The following exchanges of a part of this Global Warrant have been made:

 

Date of Exchange		Amount of decrease in Number of warrants in this Global Warrant		Amount of increase in Number of Warrants in this Global Warrant		Number of Warrants in this Global Warrant following such decrease or increase		Signature of authorized officer of Warrant Agent

 

A-9

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EXHIBIT B

FORM OF CERTIFICATE OF TRANSFER

Xinyuan Real Estate Co., Ltd.

PO Box 309GT

Upland House

South Church Street

George Town

Grand Cayman, Cayman Islands

Facsimile No.:

Attention:

Re: Warrants

Reference is hereby made to the Warrant Agreement, dated as of April 13, 2007 (the “Warrant Agreement”), between Xinyuan Real Estate Co., Ltd., as issuer (the “Company”), and The Hongkong and Shanghai Banking Corporation Limited, as warrant agent. Capitalized terms used but not defined herein shall have the meanings given to them in the Warrant Agreement.

                                         , (the “Transferee”) proposes to acquire              number of Warrant[s] or interest in such Warrant[s] (the “Transfer”). In connection with the Transfer, the Transferee hereby agrees (i) that any hedging transactions involving the Warrants or the securities issuable upon exercise thereof may not be conducted unless in compliance with the Securities Act and (ii) such Transferee will only resell the Warrants or the securities issuable upon exercise of the Warrants in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act or pursuant to an available exemption from registration. The Transferee further certifies that:

[CHECK ALL THAT APPLY]

1. ¨ Check if Transferee will take delivery of a beneficial interest in the Global Warrant or a Definitive Warrant pursuant to Regulation S. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the U.S. Securities Act of 1933 (the “Securities Act”) and, accordingly, the Transferee hereby further certifies that (i) the Transferee is not a person in the United States and (x) at the time the buy order was originated, the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and the Transfer was not prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) if the proposed transfer is being made prior to the expiration of the Distribution Compliance Period, the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person. Upon consummation of the proposed Transfer in accordance with the terms of the Warrant Certificate, the transferred beneficial interest or Definitive Warrant will be subject to the restrictions on transfer printed on the Global Warrant and/or the Definitive Warrant and the Securities Act.

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2. ¨ Check if Transfer is Pursuant to Other Exemption. The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act and in compliance with the transfer restrictions contained in the Warrant Certificate and any applicable blue sky securities laws of any State of the United States.

This certificate and the statements contained herein are made for your benefit and the benefit of the Company.

 

Dated:                     

Exhibit 10.6

EXECUTION COPY

 

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XINYUAN REAL ESTATE CO., LTD.

To

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED

as Trustee

 

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INDENTURE

Dated as of

April 13, 2007

 

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2% Guaranteed Convertible Subordinated Notes due 2012

 

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TABLE OF CONTENTS

 

				Page
ARTICLE I          DEFINITIONS				1
Section 1.01.		Definitions		1
Section 1.02.		Other Definitions		38
Section 1.03.		Rules of Construction		39
ARTICLE II         ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES				40
Section 2.01.		Designation Amount and Issue of Notes		40
Section 2.02.		Form of Notes		40
Section 2.03.		Date And Denomination Of Notes; Payments Of Interest		41
Section 2.04.		Execution of Notes		42
Section 2.05.		Exchange and Registration of Transfer of Notes; Restrictions on Transfer		43
Section 2.06.		Mutilated, Destroyed, Lost or Stolen Notes		47
Section 2.07.		Temporary Notes		48
Section 2.08.		Cancellation of Notes		49
Section 2.09.		ISIN Numbers		49
ARTICLE III       REDEMPTION AND REPURCHASE OF NOTES				49
Section 3.01.		Redemption of Notes		49
Section 3.02.		Redemption for Tax Reasons		49
Section 3.03.		Payment of Notes Called For Redemption by the Company		51
Section 3.04.		Conversion Arrangement on Call for Redemption		51
Section 3.05.		Repurchase at Option of Holders Upon a Designated Event		52
Section 3.06.		Repurchase of Notes by the Company at Option of the Holder		56
Section 3.07.		Company Repurchase Notice		57
Section 3.08.		Effect of Repurchase Notice		58
Section 3.09.		Deposit of Repurchase Price		59
Section 3.10.		Notes Repurchased in Part		59
Section 3.11.		Repayment to the Company		59

 

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TABLE OF CONTENTS

(continued)

 

				Page
ARTICLE IV       PARTICULAR COVENANTS OF THE COMPANY				59
Section 4.01.		Payment of Principal, Premium and Interest		59
Section 4.02.		Maintenance of Office or Agency		60
Section 4.03.		Appointments to Fill Vacancies in Trustee’s Office		60
Section 4.04.		Provisions as to Paying Agent		60
Section 4.05.		Existence		62
Section 4.06.		Maintenance of Properties		62
Section 4.07.		Payment of Taxes and Other Claims		62
Section 4.08.		Reports		62
Section 4.09.		Incurrence of Additional Debt		64
Section 4.10.		Restricted Payments		64
Section 4.11.		Limitation on Liens		66
Section 4.12.		Asset Sales		67
Section 4.13.		Restrictions on Distributions from Subsidiaries		68
Section 4.14.		Affiliate Transactions		70
Section 4.15.		Issuance or Sale of Capital Stock of Subsidiaries		71
Section 4.16.		Maintenance of Consolidated Tangible Net Worth		72
Section 4.17.		Repurchase at the Option of Holders Following a Change of Control		72
Section 4.18.		Future Guarantors		73
Section 4.19.		Business Activities		73
Section 4.20.		Sale and Leaseback Transactions		73
Section 4.21.		Impairment of Security Interest		73
Section 4.22.		Amendment to Security Documents		73
Section 4.23.		Use of Proceeds		73
Section 4.24.		Maintenance of Insurance		74
Section 4.25.		Qualifying IPO		74
Section 4.26.		Enforcement of Loan Rights		74
Section 4.27.		Government Approvals and Licenses; Compliance with Law		74
Section 4.28.		Maintenance of Financial Ratios		75

 

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TABLE OF CONTENTS

(continued)

 

				Page
Section 4.29.		Ranking of Notes		75
Section 4.30.		Capital Expenditure.		75
Section 4.31.		Additional Amounts		76
Section 4.32.		Limitation on Layering of Debt		77
Section 4.33.		Compliance Certificate		78
Section 4.34.		Stay, Extension and Usury Laws		78
Section 4.35.		Additional Interest and Delivery of WFOE Share Pledge		79
Section 4.36.		Payments for Consent		79
Section 4.37.		Repurchase Upon Designated Event		79
Section 4.38.		Cash Management		79
ARTICLE V         CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE				80
Section 5.01.		Company May Consolidate on Certain Terms		80
Section 5.02.		Successor to be Substituted		83
Section 5.03.		Opinion of Counsel to be Given to Trustee		84
ARTICLE VI       REMEDIES OF THE TRUSTEE AND HOLDERS OF THE NOTES ON AN EVENT OF DEFAULT				84
Section 6.01.		Events Of Default		84
Section 6.02.		Payments of Notes on Default; Suit therefor		88
Section 6.03.		Application of Monies Collected By Trustee		90
Section 6.04.		Proceedings by Holders of the Notes		91
Section 6.05.		Proceedings By Trustee		92
Section 6.06.		Remedies Cumulative And Continuing		92
Section 6.07.		Direction of Proceedings and Waiver of Defaults By Majority of Holders of the Notes		92
Section 6.08.		Notice of Defaults		93
Section 6.09.		Undertaking To Pay Costs		93
ARTICLE VII     THE TRUSTEE				94
Section 7.01.		Duties and Responsibilities of Trustee		94
Section 7.02.		Reliance on Documents, Opinions, Etc.		98

 

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TABLE OF CONTENTS

(continued)

 

				Page
Section 7.03.		No Responsibility For Recitals, Etc		100
Section 7.04.		Trustee, Paying Agents, Conversion Agents or Registrar May Own Notes		100
Section 7.05.		Monies to Be Held in Trust		100
Section 7.06.		Compensation and Expenses of Trustee		100
Section 7.07.		Officers’ Certificate As Evidence		101
Section 7.08.		Resignation or Removal of Trustee		102
Section 7.09.		Eligibility; Disqualification		102
Section 7.10.		Acceptance by Successor Trustee		102
Section 7.11.		Succession By Merger		103
Section 7.12.		Preferential Collection of Claims		103
Section 7.13.		Trustee’s Application For Instructions From The Company		103
ARTICLE VIII    SUPPLEMENTAL INDENTURES				104
Section 8.01.		Supplemental Indentures Without Consent of Holders of the Notes		104
Section 8.02.		Supplemental Indenture With Consent Of Holders of the Notes		106
Section 8.03.		Effect of Supplemental Indenture		107
Section 8.04.		Notation on Notes		108
Section 8.05.		Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee		108
ARTICLE IX       GUARANTEES				108
Section 9.01.		Guarantee		108
Section 9.02.		Limitation on Guarantor Liability		110
Section 9.03.		Execution and Delivery of Guarantee		111
Section 9.04.		Guarantors May Consolidate, etc., on Certain Terms		111
Section 9.05.		Releases Following Merger, Consolidation or Sale of Assets, Etc		112
ARTICLE X         COLLATERAL SECURITY				113
Section 10.01.		Security Documents		113
Section 10.02.		Future Guarantor Pledgors		115

 

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TABLE OF CONTENTS

(continued)

				Page
Section 10.03.		Recording and Opinions		116
Section 10.04.		Release of Collateral		117
Section 10.05.		Authorization of Actions to Be Taken by the Trustee Under the Security Documents		117
Section 10.06.		Authorization of Receipt of Funds by the Trustee Under the Security Documents		118
Section 10.07.		Termination of Security Interest		118
ARTICLE XI       SATISFACTION AND DISCHARGE OF INDENTURE				118
Section 11.01.		Discharge of Indenture		118
Section 11.02.		Deposited Monies to be Held in Trust by Trustee		119
Section 11.03.		Paying Agent to Repay Monies Held		119
Section 11.04.		Return of Unclaimed Monies		120
Section 11.05.		Reinstatement		120
ARTICLE XII     THE HOLDERS				120
Section 12.01.		Action By Holders		120
Section 12.02.		Proof of Execution by Holders		120
Section 12.03.		Who Are Deemed Absolute Owners		121
Section 12.04.		Company-owned Notes Disregarded		121
Section 12.05.		Revocation Of Consents, Future Holders Bound		122
ARTICLE XIII    MEETINGS OF HOLDERS OF THE NOTES				122
Section 13.01.		Purpose of Meetings		122
Section 13.02.		Call of Meetings by Trustee		122
Section 13.03.		Call of Meetings by Company or Holders of the Notes		123
Section 13.04.		Qualifications For Voting		123
Section 13.05.		Regulations		123
Section 13.06.		Voting		124
Section 13.07.		No Delay Of Rights By Meeting		124
ARTICLE XIV		HOLDERS’ LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE		125
Section 14.01.		Holders’ Lists		125
Section 14.02.		Preservation and Disclosure of Lists		125

 

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TABLE OF CONTENTS

(continued)

				Page
Section 14.03.		Reports by Company		125
ARTICLE XV     CONVERSION OF NOTES				126
Section 15.01.		Right to Convert		126
Section 15.02.		Exercise of Conversion Privilege; Issuance of Common Shares on Conversion; No Adjustment for Interest or Dividends		127
Section 15.03.		Cash Payments in Lieu of Fractional Shares		130
Section 15.04.		Conversion Rate		131
Section 15.05.		Adjustment of Conversion Rate		131
Section 15.06.		Effect of Reclassification, Consolidation, Merger or Sale		140
Section 15.07.		Taxes on Shares Issued		141
Section 15.08.		Reservation of Shares, Shares to be Fully Paid; Compliance with Governmental Requirements; Listing of Common Shares		141
Section 15.09.		Responsibility of Trustee		142
Section 15.10.		Notice to Holders Prior to Certain Actions		142
Section 15.11.		Shareholder Rights Plans		143
Section 15.12.		Transfer Restrictions		143
ARTICLE XVI    SUBORDINATION OF NOTES				144
Section 16.01.		Agreement of Subordination		144
Section 16.02.		No Payments to Holders upon Defaults Relating to Senior Debt		144
Section 16.03.		Payments over to Senior Debt upon Dissolution		146
Section 16.04.		Prior Payment of Senior Debt upon Acceleration of Notes		146
Section 16.05.		Payment over to Senior Debt		147
Section 16.06.		Subrogation		147
Section 16.07.		Payment Obligations Unconditional		148
Section 16.08.		Authorization to Effect Subordination		148
Section 16.09.		Notice to Trustee		148
Section 16.10.		Trustee’s Relation to Senior Debt		149

 

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TABLE OF CONTENTS

(continued)

 

				Page
Section 16.11.		No Impairment of Subordination		150
Section 16.12.		Certain Conversions not Deemed Payment		150
Section 16.13.		Article Applicable to Paying Agents		151
Section 16.14.		Senior Debt Entitled to Rely		151
Section 16.15.		Reliance on Judicial Order or Certificate of Liquidating Agent		151
ARTICLE XVII  GENERAL PROVISIONS				152
Section 17.01.		Provisions Binding on Company’s Successors		152
Section 17.02.		Official Acts by Successor Corporation		152
Section 17.03.		Addresses for Notices, Etc		152
Section 17.04.		Governing Law		153
Section 17.05.		Evidence of Compliance with Conditions Precedent, Certificates to Trustee		153
Section 17.06.		Legal Holidays		153
Section 17.07.		Benefits of Indenture		153
Section 17.08.		Table of Contents, Headings, Etc		153
Section 17.09.		Authenticating Agent		154
Section 17.10.		Execution in Counterparts		155
Section 17.11.		Severability		155
Section 17.12.		Company Responsible for Making Calculations		155
Section 17.13.		Indenture and Notes Solely Corporate Obligations		155

Exhibit A: Regulation S Legend

Exhibit B: Form of Guarantee

Exhibit C: Form of Security Documents

Exhibit D: Conversion Notice

Exhibit E: Agent Conversion Fax

 

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INDENTURE

INDENTURE dated as of April 13, 2007 between XINYUAN REAL ESTATE CO., LTD., a company incorporated with limited liability in the Cayman Islands (hereinafter called the “Company”), having its principal office at P.O. Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands, the Guarantor and The Hongkong and Shanghai Banking Corporation Limited, as trustee (hereinafter called the “Trustee”).

WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issue of its 2% Guaranteed Convertible Subordinated Notes due 2012 (hereinafter called the “Notes”) and, to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; and

WHEREAS, the Notes, the certificate of authentication to be borne by the Notes, a form of assignment, a form of Designated Event Repurchase Notice, a form of Repurchase Notice and a form of Conversion Notice to be borne by the Notes are to be substantially in the forms hereinafter provided for; and

WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee or a duly authorized authenticating agent, as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute this Indenture a valid agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Notes have in all respects been duly authorized,

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

That in order to declare the terms and conditions upon which the Notes are, and are to be, authenticated, issued and delivered, and in consideration of the premises and of the purchase and acceptance of the Notes by the holders thereof, each of the Company and the Guarantor covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Notes (except as otherwise provided below), as follows:

ARTICLE I

DEFINITIONS

Section 1.01. Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture that are defined in the Trust Indenture Act or which are by reference therein defined in the Securities Act (except as herein otherwise expressly provided or unless the context otherwise requires) shall have the meanings assigned to such terms in the Trust

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Indenture Act (as defined herein) and in the Securities Act (as defined herein) as in force at the date of the execution of this Indenture. The words “herein”, “hereof”, “hereunder” and words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other Subdivision. The terms defined in this Article include the plural as well as the singular.

“Account Agreement” means the onshore account agreement dated as of the Issue Date by and among the WFOE and Industrial and Commercial Bank of China, Zhengzhou Branch, as account bank.

“Additional Interest” means an annual rate of interest equal to 0.5% payable on the outstanding Notes if the Company fails to deliver to the Collateral Agent an Officers’ Certificate with the required written evidence pursuant to Section 4.35, such interest accruing from and including the relevant date in Section 4.35 (or, if Interest has been paid since such date, from and including the most recent Interest Payment Date thereafter) to but excluding each date of payment thereof until the earlier of (x) the filing of WFOE Share Pledge with the MOFCOM (or, if approved by the MOFCOM, all subsequent filings with the SAFE, the SAIC and any other PRC Governmental Authorities (to the extent required by law to perfect a security interest)) and (y) the repayment in full of the Notes.

“Additional Amounts” has the meaning set forth in Section 4.31.

“Additional Assets” means:

(a) any Property (other than cash, Cash Equivalents and securities) to be owned by the Company or any of its Subsidiaries and used in a Related Business; or

(b) Capital Stock of a Person that becomes a Subsidiary of the Company as a result of the acquisition of such Capital Stock by the Company or another Subsidiary of the Company from any Person other than the Company or an Affiliate of the Company; provided, however, that, in the case of clause (b), such Subsidiary is primarily engaged in a Related Business.

“Affiliate” of any specified Person means:

(a) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person, or

(b) any other Person who is a director or officer of:

(1) such specified Person,

(2) any Subsidiary of such specified Person,

(3) any Person described in clause (a) above, or

 

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(c) any spouse, parent, child, brother or sister of any Person described in clauses (a) or (b) above.

For the purposes of this definition, “control,” when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing. For purposes of Section 4.12 and Section 4.14 and the definition of “Additional Assets” only, “Affiliate” shall also mean any Beneficial Owner of shares representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such Beneficial Owner pursuant to the first sentence hereof.

“Agent” means the Trustee, any Security Registrar, co-registrar, paying agent or additional paying agent, conversion agent or the Collateral Agent, and collectively they are referred to herein as “Agents”.

“Asset Sale” means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by the Company or any of its Subsidiaries, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a “disposition”), of

(a) any shares of Capital Stock of a Subsidiary of the Company (other than directors’ qualifying shares), or

(b) any other Property of the Company or any of its Subsidiaries outside of the ordinary course of business of the Company or such Subsidiary,

other than, in the case of clause (a) or (b) above,

(1) any disposition by a Subsidiary of the Company to the Company or by the Company or one of its Subsidiaries to a Wholly Owned Subsidiary,

(2) any disposition that constitutes a Permitted Investment or Restricted Payment permitted by Section 4.10,

(3) any disposition effected in compliance with the first paragraph of Section 5.01,

(4) any disposition of inventory (including, without limitation, residential units held for sale in the ordinary course of business), receivables and other current assets of the Company or any of its Subsidiaries (including properties under development for sale and

 

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completed properties for sale) in the ordinary course of business, or inventory or other property that in the reasonable judgment of the Company have become uneconomic, obsolete or worn out,

(5) the sale or discount of accounts receivable in connection with the compromise or collection thereof in the ordinary course of business, and

(6) any disposition in a single transaction or a series of related transactions of assets for aggregate consideration and with a Fair Market Value of less than $1.0 million.

“Attributable Debt” in respect of a Sale and Leaseback Transaction means, at any date of determination,

(a) if such Sale and Leaseback Transaction is a Capital Lease Obligation, the amount of Debt represented thereby according to the definition of “Capital Lease Obligations,” and

(b) in all other instances, the present value (discounted at the weighted average interest rate implicit in the Sale and Leaseback Transaction, compounded annually in the most recently completed twelve months) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended).

“Average Life” means, as of any date of determination, with respect to any Debt or Preferred Stock, the quotient obtained by dividing:

(a) the sum of the product of the numbers of years (rounded to the nearest one-twelfth of one year) from the date of determination to the dates of each successive scheduled principal payment of such Debt or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by

(b) the sum of all such payments.

“Bankruptcy Law” means Title 11, U.S. Code or any similar U.S. federal or state law for the relief of debtors, or the law of any other jurisdiction relating to bankruptcy, insolvency, winding up, liquidation, reorganization or relief of debtors.

“Beneficial Owner” has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular “person” (as such term is used in Section 13(d)(3) of the Exchange Act), such “person” shall be deemed to have beneficial ownership of all securities that such “person” has the right to acquire by conversion or exercise of other securities, whether

 

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such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition or passage of time. The terms “Beneficially Owns” and “Beneficially Owned” have a corresponding meaning.

“Board of Directors” means (1) except as set out in clause (3), in respect of a corporation, the board of directors of the corporation, or (except if used in the definition of “Change of Control”) any duly authorized committee thereof; (2) except as set out in clause (3), in respect of any other Person, the board or committee of that Person serving an equivalent function; and (3) in the case of each PRC Subsidiary other than the WFOE, one executive director.

“Board Resolution” of a Person means a copy of a resolution (in form and substance satisfactory to the Trustee) certified by the secretary (or individual performing comparable duties) of the applicable Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee.

“Business Day” means any day other than a Legal Holiday.

“Capital Expenditures” means expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Lease Obligations which is capitalized on the consolidated balance sheet of the Company and its Subsidiaries) by the Company and its Subsidiaries that, in conformity with GAAP, are included in “additions to property, plant and equipment” or as capitalized internally developed software or comparable items reflected in the consolidated balance sheet of the Company and its Subsidiaries, excluding, however, (i) the application of insurance loss proceeds and (ii) the purchase, development, construction or improvement of real estate or land-use rights used in a Related Business.

“Capital Lease Obligations” means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by such obligation shall be the capitalized amount of such obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. For purposes of Section 4.11 a Capital Lease Obligation shall be deemed secured by a Lien on the Property being leased.

“Capital Stock” means, with respect to any Person, any shares or other equivalents (however designated) of any class of corporate stock or partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in such Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest.

“Capital Stock Sale Proceeds” means the aggregate cash proceeds received by the Company from the issuance or sale (other than to a Subsidiary of the Company or an

 

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employee stock ownership plan or trust established by the Company or any such Subsidiary for the benefit of their employees) by the Company of its Capital Stock (other than Disqualified Stock) after the Issue Date, net of attorneys’ fees, accountants’ fees, underwriters’ or placement agents’ fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof.

“Cash Balance” means cash and Cash Equivalents in hand or at a bank or financial institution and credited to an account in the name of the Company or any Subsidiary of the Company and to which the Company or such Subsidiary is alone beneficially entitled and has sole control.

“Cash Equivalents” means any of the following:

(a) Investments in U.S. Government Securities maturing within 180 days of the date of acquisition thereof;

(b) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 90 days of the date of acquisition thereof issued by a bank or trust company organized under the laws of the United States of America or any state thereof having capital, surplus and undivided profits aggregating in excess of $500 million and whose long-term debt is rated “A” or higher according to Moody’s or S&P (or such similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act));

(c) repurchase obligations with a term of not more than 7 days for underlying securities of the types described in clause (a) entered into with:

(1) a bank meeting the qualifications described in clause (b) above, or

(2) any primary government securities dealer reporting to the Market Reports Division of the Federal Reserve Bank of New York;

(d) Investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America with a rating at the time as of which any Investment therein is made of “P-1” (or higher) according to Moody’s or “A-1” (or higher) according to S&P (or such similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act));

(e) direct obligations (or certificates representing an ownership interest in such obligations) of any state of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such state are pledged and which are not callable or redeemable at the issuer’s option, provided that:

(1) the long-term debt of such state is rated “A-3” or “A-” or higher according to Moody’s or S&P (or such similar equivalent rating by at least one “nationally recognized statistical rating organization” (as defined in Rule 436 under the Securities Act)), and

 

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(2) such obligations mature within 180 days of the date of acquisition thereof; and

(f) time deposit accounts, certificates of deposit and money market deposits with (i) Bank of China, Industrial and Commercial Bank of China, China Construction Bank and China Merchants Bank or (ii) any other bank or trust company organized under the laws of the PRC whose long-term debt is rated as high or higher than any of those banks.

“Change of Control” means the occurrence of any of the following events:

(a) the Permitted Holders cease to be the Beneficial Owners directly or indirectly, of at least 27.5% of the total voting power of the Voting Stock of the Company or are no longer the Beneficial Owners of the largest percentage of voting power of the Voting Stock of the Company, or if Mr. Zhang does not otherwise have the ability to control the Company, whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, any direct or indirect transfer of securities by the Permitted Holders or otherwise (for purposes of this clause (a), the Permitted Holders will be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation so long as the Permitted Holders beneficially own, directly or indirectly, in the aggregate a majority of the total voting power of the Voting Stock of such parent corporation and “control” means the ability, directly or indirectly, to influence any decision of, or to direct or cause the direction of, the management and policies of the Company, including, without limitation, decisions pertaining to operations and maintenance); or

(b) whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, persons holding a majority of the Voting Stock of the Company prior to such transaction hold less than a majority of the Surviving Person’s Voting Stock after such transaction; or

(c) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all of the Property of the Company and its Subsidiaries, considered as a whole (other than a disposition of such Property as an entirety or virtually as an entirety to a Wholly Owned Subsidiary or one or more Permitted Holders), shall have occurred, or the Company merges, consolidates or amalgamates with or into any other Person (other than one or

 

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more Permitted Holders) or any other Person (other than one or more Permitted Holders) merges, consolidates or amalgamates with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where:

(1) the outstanding Voting Stock of the Company is reclassified into or exchanged for other Voting Stock of the Company or for Voting Stock of the Surviving Person, and

(2) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the Company or the Surviving Person immediately after such transaction and in substantially the same proportion as before the transaction; or

(d) Continuing Directors cease for any reason to constitute a majority of the Board of Directors then in office; or

(e) the shareholders of the Company shall have approved any plan of liquidation or dissolution of the Company.

“Clearstream” means Clearstream Banking, société anonyme, and any successor thereto.

“Closing Sale Price” of the Common Shares or other equity securities on any date means the closing sale price per share (or, if no closing sale price is reported, the average of the closing bid and ask prices or, if more than one in either case, the average of the average closing bid and the average closing ask prices) on such date as reported in composite transactions for the principal United States securities exchange on which Common Shares or other equity securities are traded or, if the Common Shares or other equity securities are not listed on a United States national or regional securities exchange, as reported by the Nasdaq Stock Market or by Pink Sheets LLC. In the absence of such quotations, the Company shall be entitled to determine the Closing Sale Price on the basis it considers appropriate. The Closing Sale Price shall be determined without reference to extended or after hours trading.

“Code” means the U.S. Internal Revenue Code of 1986, as amended.

“Collateral” means all the collateral described in the Security Documents.

“Collateral Agent” means The Hongkong and Shanghai Banking Corporation Limited, and any successor collateral agent appointed pursuant to the terms of this Indenture.

 

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“Commission” means the U.S. Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.

“Common Depositary” means, with respect to the Notes issuable or issued in global form, The Hongkong and Shanghai Banking Corporation Limited, as the Common Depositary to Euroclear and Clearstream with respect to the Notes, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provisions of this Indenture.

“Common Shares” means any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and that is not subject to redemption by the Company. Subject to the provisions of Section 15.06, however, shares issuable on conversion of Notes shall include only shares of the class designated as Common Shares of the Company at the date of this Indenture (namely, the Common Shares, par value US$0.0001) or shares of any class or classes resulting from any reclassification or reclassifications thereof and that have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and that are not subject to redemption by the Company; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable on conversion shall be substantially in the proportion that the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications.

“Company” means the corporation named as the “Company” in the first paragraph of this Indenture, and, subject to the provisions of Article 5 and Section 15.06, shall include its successors and assigns.

“Consolidated Interest Expense” means, for any period, the total interest expense (excluding tax) of the Company and its consolidated Subsidiaries (whether paid or accrued), plus, to the extent not included in such total interest expense, and to the extent Incurred by the Company or its Subsidiaries, without duplication,

(a) interest expense attributable to leases constituting part of a Sale and Leaseback Transaction and to Capital Lease Obligations,

(b) amortization of debt discount and debt issuance cost, including commitment fees, but excluding debt issuance costs attributable solely to the warrants issued contemporaneously with the Notes,

(c) capitalized interest,

 

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(d) non-cash interest expense,

(e) commissions, discounts and other fees and charges owed with respect to letters of credit and banker’s acceptance financing,

(f) net costs associated with Hedging Obligations (including amortization of fees),

(g) Disqualified Stock Dividends (other than dividends payable in Capital Stock other than Disqualified Stock),

(h) Preferred Stock Dividends (other than dividends payable in Capital Stock other than Disqualified Stock) of Subsidiaries,

(i) interest accruing on (x) any Debt of any other Person to the extent such Debt is guaranteed by the Company or any of its Subsidiaries (other than Pre-Registration Mortgage Guarantees), and (y) any Debt of any other Person secured by assets or property of the Company or any of its Subsidiaries, and

(j) the cash contributions to any employee stock ownership plan or similar trust, if any and to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Debt Incurred by such plan or trust.

“Consolidated Interest Expense Coverage Ratio” means, as of any date of determination, the ratio of:

(a) the aggregate amount of EBITDA for the most recent four consecutive Fiscal Quarters ending at least 45 days prior to such determination date to

(b) Consolidated Interest Expense for such four Fiscal Quarters;

provided, however, that:

(1) if

(A) since the beginning of such period the Company or any of its Subsidiaries has Incurred any Debt that remains outstanding or Repaid any Debt, or

(B) the transaction giving rise to the need to calculate the Consolidated Interest Expense Coverage Ratio is an Incurrence or Repayment of Debt,

Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Incurrence or Repayment as if such Debt was Incurred or Repaid on the first day of such period, provided that, in the event of

 

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any such Repayment of Debt, EBITDA for such period shall be calculated as if the Company or such Subsidiary had not earned any interest income actually earned during such period in respect of the funds used to Repay such Debt, and provided further that the amount of Debt Incurred under revolving credit facilities shall be deemed to be the average daily balance of such Debt during such period (or any shorter period in which such facilities are in effect) and

(2) if

(A) since the beginning of such period the Company or any of its Subsidiaries shall have made any Asset Sale or an Investment (by merger or otherwise) in any Subsidiary of the Company (or any Person which becomes a Subsidiary of the Company) or an acquisition of Property which constitutes all or a substantial part of an operating unit of a business,

(B) the transaction giving rise to the need to calculate the Consolidated Interest Expense Coverage Ratio is such an Asset Sale, Investment or acquisition, or

(C) since the beginning of such period any Person (that subsequently became a Subsidiary of the Company or was merged with or into the Company or any Subsidiary of the Company since the beginning of such period) shall have made such an Asset Sale, Investment or acquisition,

then EBITDA for such period shall be calculated after giving pro forma effect to such Asset Sale, Investment or acquisition as if such Asset Sale, Investment or acquisition had occurred on the first day of such period.

If any Debt bears a floating rate of interest and is being given pro forma effect, the interest expense on such Debt shall be calculated as if the base interest rate in effect for such floating rate of interest on the date of determination had been the applicable base interest rate for the entire period (taking into account any Interest Rate Agreement applicable to such Debt if such Interest Rate Agreement has a remaining term in excess of 12 months). In the event the Capital Stock of any Subsidiary of the Company is sold during the period, the Company shall be deemed, for purposes of clause (1) above, to have Repaid during such period the Debt of such Subsidiary to the extent the Company and its continuing Subsidiaries are no longer liable (whether directly or indirectly, contingently or otherwise) for such Debt after such sale and have not provided any security or pledged any assets with respect thereto.

“Consolidated Net Income” means, for any period, the net income (loss) of the Company and its consolidated Subsidiaries; provided, however, that there shall not be included in such Consolidated Net Income:

 

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(a) any net income (loss) of any Person (other than the Company) if such Person is not a Subsidiary of the Company, except that:

(1) subject to the exclusions contained in clauses (c), (d) and (e) below, equity of the Company and its consolidated Subsidiaries in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Person during such period to the Company or any of its Subsidiaries as a dividend or other distribution (subject, in the case of a dividend or other distribution to such Subsidiary, to the limitations contained in clause (b) below), and

(2) the equity of the Company and its consolidated Subsidiaries in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income,

(b) any net income (loss) of any Subsidiary of the Company if such Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions, directly or indirectly, to the Company, except that:

(1) subject to the exclusions contained in clauses (c), (d) and (e) below, the equity of the Company and its consolidated Subsidiaries in the net income of any such Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Subsidiary during such period to the Company or another of its Subsidiaries as a dividend or other distribution (subject, in the case of a dividend or other distribution to another Subsidiary of the Company, to the limitation contained in this clause (b)), and

(2) the equity of the Company and its consolidated Subsidiaries in a net loss of any such Subsidiary for such period shall be included in determining such Consolidated Net Income,

(c) any gain (but not loss) realized upon the sale or other disposition of any Property of the Company or any of its consolidated Subsidiaries (including pursuant to any Sale and Leaseback Transaction) that is not sold or otherwise disposed of in the ordinary course of business,

(d) any extraordinary or non-recurring gain or loss,

(e) the cumulative effect of a change in accounting principles, and

(f) any non-cash compensation expense realized for grants of performance shares, stock options or other rights to officers, directors and employees of the Company or any Subsidiary, provided that such shares, options or other rights can be redeemed at the option of the holder only for Capital Stock of the Company (other than Disqualified Stock).

 

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“Consolidated Net Worth” means the total of the amounts shown on the consolidated balance sheet of the Company and its Subsidiaries as of (i) the end of the most recent Fiscal Quarter of the Company in the case of Section 4.16 and (ii) in all other cases, the end of the most recent Fiscal Quarter of the Company ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as:

(a) the par or stated value of all outstanding Capital Stock of the Company, plus

(b) paid-in capital or capital surplus relating to such Capital Stock, plus

(c) any retained earnings or earned surplus, less:

(1) any accumulated deficit, and

(2) any amounts attributable to Disqualified Stock (other than the Company’s Series A Preference Shares as constituted on the Issue Date) or any equity security convertible into or exchangeable for Debt, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of Capital Stock of the Company or any of its Subsidiaries, each item to be determined in conformity with GAAP.

“Consolidated Tangible Net Worth” means, as of any date of determination, the Consolidated Net Worth less the Intangible Assets.

“Consolidated Subsidiary Debt to Consolidated Total Tangible Asset Ratio” means the ratio of (a) the aggregate amount of outstanding Debt of the Company’s consolidated Subsidiaries (other than any Debt owed by a Subsidiary of the Company to the Company or any Wholly Owned Subsidiary) to (b) the sum of the consolidated Total Tangible Assets of the Company (as reflected in the Company’s consolidated balance sheet) as of the end of the Fiscal Quarter.

“Continuing Directors” means, as of any date of determination, any member of the Board of Directors who (a) was a member of the Board of Directors on the date of this Indenture or (b) was nominated for election to the Board of Directors by, or whose election was ratified with the approval of, a majority of the Continuing Directors who were members of the Board of Directors at the time of such nomination or election.

“Contractor Guarantees” means Guarantees by the Company or any Subsidiary of Debt of any contractor, builder or other similar Person engaged by the Company or such Subsidiary in connection with the development, construction or improvement of real property, which Debt was Incurred by such contractor, builder or other similar Person solely to finance the cost of such development, construction or improvement.

 

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“Conversion Price” as of any date shall equal $100,000 divided by the Conversion Rate as of such date.

“Corporate Trust Office” or other similar term, means the designated office of the Trustee at which at any particular time its corporate trust business as it relates to this Indenture shall be administered, which office is, at the date as of which this Indenture is dated, located at Level 30, HSBC Main Building, 1 Queen’s Road, Central, Hong Kong, Attn: Corporate Trust and Loan Agency.

“Credit Facilities” means, with respect to any PRC Subsidiary, one or more debt or commercial paper facilities with banks or other institutional lenders in the PRC providing for revolving credit loans, term loans, receivables or inventory financing (including through the sale of receivables or inventory to such lenders or to special purpose, bankruptcy remote entities formed to borrow from such lenders against such receivables or inventory) or trade letters of credit, in each case together with any Refinancings thereof by any lender or syndicate of lenders.

“Currency Exchange Protection Agreement” means, in respect of a Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect such Person against fluctuations in currency exchange rates.

“Debt” means, with respect to any Person on any date of determination (without duplication):

(a) the principal of and premium (if any) in respect of:

(1) debt of such Person for money borrowed, and

(2) debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable;

(b) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by such Person;

(c) all obligations of such Person representing the deferred purchase price of Property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business);

(d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (a) through (c) above) entered into in the ordinary course

 

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of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit);

(e) the amount of all obligations of such Person with respect to the Repayment of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends);

(f) all obligations of the type referred to in clauses (a) through (e) above of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any guarantee;

(g) all obligations of the type referred to in clauses (a) through (f) above of other Persons secured by any Lien on any Property of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the Fair Market Value of such Property and the amount of the obligation so secured; and

(h) to the extent not otherwise included in this definition, Hedging Obligations of such Person.

Debt shall not include any capital commitments or similar obligations Incurred in the ordinary course of business in connection with the acquisition, development, construction or improvement of real or personal property (including land use rights) to be used in a Related Business; provided that such Debt is not reflected and is not required under GAAP to be reflected on the balance sheet of the Company or any Subsidiary (contingent obligations and commitments referred to in a note to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet).

The amount of Debt of any Person at any date shall be the outstanding balance, or the accreted value of such Debt in the case of Debt issued with original issue discount, at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. The amount of Debt represented by a Hedging Obligation shall be equal to the net amount payable by such Person if such Hedging Obligation terminated at that time due to default by such Person.

“Default” means any event that is, or after notice or passage of time, or both, would be, an Event of Default.

“Designated Event” shall mean the occurrence of a Fundamental Change or a Termination of Trading.

 

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“Designated Senior Debt” of the Company means (a) the Credit Facilities, (b) the Floating Rate Notes and (c) any other Senior Debt of the Company that, at the date of determination, has an aggregate principal amount outstanding of, or under which, at the date of determination, the holders thereof are committed to lend up to, at least $25,000,000 and is specifically designated by the Company in the instrument evidencing or governing such Senior Debt as “Designated Senior Debt” for purposes of this Indenture.

“Disqualified Stock” means any Capital Stock of the Company or any of its Subsidiaries that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise:

(a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,

(b) is or may become redeemable or repurchaseable at the option of the holder thereof (except that any Capital Stock that would constitute Disqualified Stock solely because the holders of such Capital Stock have the right to require the Company to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with Section 4.10 hereof and such repurchase rights are no more favorable to holders of such Capital Stock than rights under Section 4.12 and Section 4.17 granted to Holders hereunder), in whole or in part, or

(c) is convertible or exchangeable at the option of the holder thereof for Debt or Disqualified Stock,

on or prior to, in the case of clause (a), (b) or (c), the first anniversary of the Stated Maturity of the Notes.

“Disqualified Stock Dividends” means all dividends or the distributions with respect to Disqualified Stock of the Company held by Persons other than a Wholly Owned Subsidiary.

“EBITDA” means, for any period, an amount equal to, for the Company and its consolidated Subsidiaries:

(a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period:

(1) the provision for taxes based on income or profits or utilized in computing net loss,

 

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(2) Consolidated Interest Expense,

(3) depreciation,

(4) amortization of intangibles, and

(5) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of, or reserve for, cash expenditures in any future period or amortization of a prepaid cash expense paid in a period prior to the period that is subject to calculation), minus

(b) all non-cash items increasing Consolidated Net Income for such period.

Notwithstanding the foregoing clause (a), the provision for taxes and the depreciation, amortization and non-cash items of a Subsidiary of the Company shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Subsidiary or its shareholders.

“Euroclear” means Euroclear Bank, S.A./N.V., and any successor thereto.

“Event of Default” means any event specified in Section 6.01 as an Event of Default.

“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time.

“Ex-Dividend Time” means, with respect to any distribution on Common Shares, the first date on which the Common Shares trade regular way on the principal securities market on which the Common Shares are then traded without the right to receive such distribution.

“Fair Market Value” means, with respect to any Property at the time of determination, the price that could be negotiated in an arm’s-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value shall be determined, except as otherwise provided,

(a) if such Property has a Fair Market Value equal to or less than $5.0 million, by any Officer of the Company,

 

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(b) if such Property has a Fair Market Value in excess of $5.0 million, by a majority of the Board of Directors and evidenced by a Board Resolution delivered to the Trustee, or

(c) if such Property has a Fair Market Value in excess of $10.0 million, by an Independent Financial Advisor and evidenced by a written opinion from such Independent Financial Advisor dated within 30 days of the relevant transaction delivered to the Trustee.

“Fiscal Quarter” means each of the three month periods ending on March 31, June 30, September 30 and December 31.

“Floating Rate Note Guarantees” means the guarantee by one or more of the Company’s Subsidiaries of the Floating Rate Notes pursuant to the terms of the indenture governing the terms of the Floating Rate Notes.

“Floating Rate Notes” means the Company’s Senior Floating Rate Notes due 2010 issued pursuant to that certain indenture dated April 13, 2007 by and among the Company and The Hongkong and Shanghai Banking Corporation Limited, as Trustee.

“Fundamental Change” means the occurrence, at any time after a Qualifying IPO, of any transaction or event (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) in connection with which all or substantially all the Common Shares shall be exchanged for, converted into, acquired for or constitutes solely the right to receive consideration which is not all or substantially all common stock, depositary receipts, Common Shares or other certificates representing common equity interests that are listed on, or immediately after the transaction or event will be listed on, a United States national securities exchange or approved, or are approved, or immediately after such transaction or event will be approved, for quotation on the Nasdaq Capital Market, Nasdaq Global Market, Nasdaq Global Select Market or any similar United States system of automated dissemination of quotations of securities prices.

“GAAP” means United States generally accepted accounting principles as in effect on the Issue Date, including those set forth in:

(a) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants,

(b) the statements and pronouncements of the Financial Accounting Standards Board,

(c) such other statements by such other entity as approved by a significant segment of the accounting profession, and

 

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(d) the rules and regulations of the Commission governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the Commission.

All ratios and computations based on GAAP contained in this Indenture will be computed in conformity with GAAP.

“Governmental Approval” means any authorization of or by, consent of, approval of, license from, ruling of, permit from, tariff by, rate of, certification by, exemption from, filing with (except any filing relating to the perfection of security interests), variance from, claim of, order from, judgment from, decree of, publication to or by, notice to, declaration of or with or registration by or with any Governmental Authority, whether tacit or express.

“Governmental Authority” means any federal, state, national, provincial, municipal, local, territorial or other government department, ministry (including local counterparts thereof), commission, board, agency, regulatory authority, instrumentality, judicial or administrative body, domestic or foreign.

“guarantee” means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person:

(a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise), or

(b) entered into for the purpose of assuring in any other manner the obligee against loss in respect thereof (in whole or in part);

provided, however, that the term “guarantee” shall not include:

(1) endorsements for collection or deposit in the ordinary course of business, or

(2) a contractual commitment by one Person to invest in another Person for so long as such Investment is reasonably expected to constitute a Permitted Investment under clause (a), (b) or (c) of the definition of “Permitted Investment.”

 

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The term “guarantee” used as a verb has a corresponding meaning. The term “guarantor” shall mean any Person Guaranteeing any obligation.

“Guarantee” means the Guarantee of the Notes by each of the Guarantors pursuant to Article 9 and in the form of the Guarantee attached as Exhibit B and any additional Guarantee of the Notes to be executed by any Subsidiary of the Company pursuant to Section 4.18.

“Guarantor” means Xinyuan Real Estate and any Subsidiary of the Company that becomes a Guarantor pursuant to Section 4.18 or who otherwise executes and delivers a supplemental indenture (in form satisfactory to the Trustee) to the Trustee providing for a Guarantee; provided that any Person constituting a Guarantor as described above shall cease to constitute a Guarantor when its respective Guarantee is released in accordance with the terms of this Indenture.

“Hedging Obligation” of any Person means any obligation of such Person pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement or any other similar agreement or arrangement.

“Holder” or “holder” as applied to any Note, or other similar terms, means any Person in whose name at the time a particular Note is registered on the Register maintained by the Registrar.

“Incur” means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, guarantee or become liable in respect of such Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Debt or obligation on the balance sheet of such Person (and “Incurrence” and “Incurred” shall have meanings correlative to the foregoing); provided, however, that a change in GAAP that results in an obligation of such Person that exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of such Debt; provided further, however, that any Debt or other obligations of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary; and provided further, however, that solely for purposes of determining compliance with Section 4.09, amortization of debt discount shall not be deemed to be the Incurrence of Debt, provided that in the case of Debt sold at a discount, the amount of such Debt Incurred shall at all times be the aggregate principal amount at Stated Maturity.

“Indenture” means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented.

“Independent Financial Advisor” means an investment banking firm of international standing or any third party appraiser of international standing, provided that such firm or appraiser is not an Affiliate of the Company.

 

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“Intangible Assets” shall mean as of the date of any determination thereof the total amount of all assets of the Company and its Subsidiaries classified as goodwill, patents, trade names, trademarks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, deferred assets other than prepaid insurance and prepaid taxes, the excess of cost of shares acquired over book value of related assets and such other assets as are properly classified as “intangible assets” in accordance with GAAP.

“Intercreditor Agreement” means that certain Intercreditor Agreement dated the Issue Date between the Trustee and the trustee for the Floating Rate Notes.

“Interest” means, when used with reference to the Notes, any interest payable under the terms of the Notes, including Additional Interest.

“Investment” by any Person means any direct or indirect loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of such Person), advance or other extension of credit or capital contribution (by means of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person.

“Issue Date” means April 13, 2007.

“Legal Holiday” means a Saturday, a Sunday or a day on which banking institutions in the PRC, Hong Kong, the city in which the Corporate Trust Office of the Trustee is located or any other place of payment on the Notes are authorized by law, regulation or executive order to remain closed.

“Lien” means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction).

“Material Adverse Effect” means a material adverse effect on (a) the property, business, operations, financial condition, liabilities, capitalization or prospects of the Company and its Subsidiaries, taken as a whole, (b) the ability of any such Person to perform its payment obligations or any of its material obligations under any of the Security Documents to which such Person is a party, (c) the validity or enforceability of any of the Security Documents, (d) the material rights and remedies of the Trustee or the Collateral Agent under any of the Security Documents or (e) the timely payment of any principal or premium of, or interest on, or performance or compliance with any of the obligations under, any of the Notes or this Indenture.

 

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“Minimum Consolidated Interest Expense Coverage Ratio” means a Consolidated Interest Expense Coverage Ratio greater than 4.0 to 1.00.

“MOFCOM” means the Ministry of Commerce of the PRC.

“Moody’s” means Moody’s Investors Service, Inc. or any successor to the rating agency business thereof.

“Mr. Zhang” means Mr. ZHANG Yong, a resident of Zhengzhou in Henan Province, PRC.

“Net Available Cash” from any Asset Sale means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of such Asset Sale or received in any other non-cash form), in each case net of:

(a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Cayman Islands national, provincial, foreign and local taxes required to be accrued as a liability under the GAAP, as a consequence of such Asset Sale,

(b) all payments made on or in respect of any Debt that is secured by any Property subject to such Asset Sale, in accordance with the terms of any Lien upon such Property, or which must by its terms, or in order to obtain a necessary consent to such Asset Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale,

(c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Sale, and

(d) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with the GAAP, against any liabilities directly arising from the disposal of the Property in such Asset Sale and retained by the Company or any of its Subsidiaries after such Asset Sale.

“Notes” has the meaning specified in the preamble to this Indenture.

“Obligations” means the Notes, the Guarantees and all other obligations of any obligor under this Indenture, the Notes, the Guarantees and the Security Documents.

“Officers’ Certificate” means a certificate, in form and substance satisfactory to the Trustee, signed by two Officers (the list of Officers and the specimen signatures of whom shall be provided to the Trustee from time to time) of the Company and which certificate meets the requirements of Section 17.05 hereof and is delivered to the Trustee.

 

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“Opinion of Counsel” means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or other counsel reasonably acceptable to the Trustee.

“Outstanding”, when used with reference to Notes and subject to the provisions of Section 12.04, means, as of any particular time, all Notes authenticated and delivered by the Trustee under this Indenture, except:

(a) Notes theretofore canceled by the Trustee or delivered to the Trustee for cancellation;

(b) Notes, or portions thereof, (i) for the redemption of which monies in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or (ii) that shall have been otherwise defeased in accordance with Article 11;

(c) Notes in lieu of which, or in substitution for which, other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.06; and

(d) Notes converted into Common Shares (or for which payment has been given in lieu of fractional shares) pursuant to Article 15 and Notes deemed not outstanding pursuant to Article 3.

“Performance Warrants” shall mean (i) that certain Warrant dated August 25, 2006, issued by the Company to Blue Ridge China Partners, L.P., and (ii) that certain Warrant dated August 25, 2006, issued by the Company to EI Fund II China, LLC.

“Performance Warrant Shares” shall mean any and all Common Shares, equity interests or rights, warrants, options or other securities exercisable for, or convertible into, Common Shares issued pursuant to the Performance Warrants.

“Permitted Debt” means:

(a) (i) Debt of the Company evidenced by the Notes and Debt of the Guarantors evidenced by Guarantees and (ii) Debt of the Company evidenced by the Convertible Notes and Debt of the Guarantors evidenced by the Convertible Note Guarantees, in the aggregate pursuant to this clause (a) up to $100.0 million;

(b) Debt of any PRC Subsidiary under Credit Facilities;

(c) Debt of the Company owing to and held by any Wholly Owned Subsidiary and Debt of any Subsidiary of the Company owing to and held by the Company or any Wholly Owned Subsidiary; provided, however, that any

 

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subsequent issue or transfer of Capital Stock or other event that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Debt (except to the Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Debt by the issuer thereof;

(d) Debt of any PRC Subsidiary of the Company outstanding on the date on which such Subsidiary is acquired by the Company or otherwise becomes a Subsidiary of the Company (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of transactions pursuant to which such Subsidiary became a Subsidiary of the Company or was otherwise acquired by the Company), provided that at the time such Subsidiary is acquired by the Company or otherwise becomes a Subsidiary of the Company and after giving effect to the Incurrence of such Debt, the Minimum Consolidated Interest Expense Coverage Ratio would have been complied with.

(e) Debt under Interest Rate Agreements entered into by the Company or a Guarantor for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company or such Guarantor and not for speculative purposes, provided that the obligations under such agreements are directly related to and do not exceed payment obligations on Debt otherwise permitted by the terms of this Section;

(f) Debt under Currency Exchange Protection Agreements entered into by the Company or any of its Subsidiaries for the purpose of limiting currency exchange rate risks directly related to transactions entered into by the Company or such Subsidiary in the ordinary course of business and not for speculative purposes;

(g) Debt in connection with one or more standby letters of credit, performance bonds, return of money bonds or surety bonds issued by the Company or a Guarantor in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances or credit not exceeding $1.0 million in the aggregate at any time;

(h) Debt of any of the Company’s Subsidiaries outstanding on the Issue Date not otherwise described in clauses (a) through (g) above;

(i) Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clauses (a), (d) and (h) above (which shall not include the Shareholders’ Loan);

(j) Debt Incurred by any PRC Subsidiary for the purpose of financing (i) all or any part of the purchase price of assets, real or personal property (including

 

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the lease purchase price of land-use rights) or equipment to be used in the ordinary course of business by a Subsidiary of the Company in the Related Business, including such purchase through the acquisition of Capital Stock of any Person all or substantially all of the assets of which consist of real or personal property or equipment which will, upon such acquisition, become a Subsidiary of the Company or (ii) all or any part of the purchase price or the cost of development, construction or improvement of real or personal property (including the lease purchase price of the land-use rights) or equipment to be used in the ordinary course of business by a Subsidiary of the Company in the Related Business; provided, however that (A) the aggregate principal amount of such Debt shall not exceed such purchase price or cost and (B) such Debt shall be Incurred no later than 75 days after the acquisition of such property or completion of such development, construction or improvement;

(k) Pre-Registration Mortgage Guarantees by the Company or any Subsidiary that do not exceed 25% of the Total Tangible Assets of the Company in the aggregate at any one time outstanding;

(l) Debt Incurred by any Subsidiary constituting reimbursement obligations with respect to workers’ compensation claims or self-insurance obligations or bid, performance or surety bonds (in each case other than for an obligation for borrowed money) and in any such case Incurred in the ordinary course of business;

(m) Debt arising from the honoring by a bank or other financial institution of a check, draft or similar instrument drawn against insufficient funds in the ordinary course of business, provided, however, that such Debt is extinguished within five Business Days of Incurrence; and

(n) (i) guarantees by the WFOE or any PRC Subsidiary of Debt of any PRC Subsidiary that was permitted to be Incurred by any provision of Section 4.09 or (ii) guarantees by any Subsidiary of the Company of Debt of another Subsidiary of the Company that was permitted to be incurred under clause (e) or (f) of this definition.

“Permitted Holders” means Mr. Zhang and Ms. YANG Yuyan, a resident of Zhengzhou in Henan Province, PRC, and their respective estates, ancestors and lineal descendants, the legal representatives of any of the foregoing and the trustees of any bona fide trusts of which the foregoing are the sole beneficiaries or the grantors, or any Person of which the foregoing “beneficially owns” (as defined in Rule 13d-3 under the Exchange Act), individually or collectively with any of the foregoing, at least 80% of the total voting power of the Voting Stock of such Person.

“Permitted Investment” means any Investment by the Company or any of its Subsidiaries in:

(a) the Company or any of its Subsidiaries engaged in a Related Business;

 

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(b) any Person that will, upon the making of such Investment, become a Subsidiary of the Company, provided that the primary business of such Subsidiary is a Related Business;

(c) any Person if as a result of such Investment such Person is merged or consolidated with or into, or transfers or conveys all or substantially all its Property to, the Company or a Subsidiary of the Company, provided that such Person’s primary business is a Related Business;

(d) Cash Equivalents;

(e) receivables owing to the Company or any of its Subsidiaries, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or such Subsidiary deems reasonable under the circumstances;

(f) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business not exceeding $100,000 in the aggregate at any time;

(g) loan and advances to employees made in the ordinary course of business consistent with past practices of the Company or such Subsidiary, as the case may be, provided that such loans and advances do not exceed $100,000 in the aggregate at any one time outstanding;

(h) stock, obligations or other securities received in settlement of debts created in the ordinary course of business and owing to the Company or one of its Subsidiaries or in satisfaction of judgments;

(i) any Person to the extent such Investment represents the non-cash portion of the consideration received in connection with (A) an Asset Sale consummated in compliance with Section 4.12 or (B) any disposition of Property not constituting an Asset Sale;

(j) Hedging Obligations by the Company or any Guarantor that are otherwise permitted to be incurred under this Indenture, and which were entered into for financial management of interest rates, foreign currency exchange rates and are directly related to transactions entered into by such Person in the ordinary course of its business, and not for speculative purposes;

(k) any Investment pursuant to Pre-Registration Mortgage Guarantees or Contractor Guarantees (other than to any Affiliate of the Company that is not a

 

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Wholly Owned Subsidiary) by the Company or any Subsidiary that do not exceed 25% of the Total Tangible Assets of the Company in the aggregate at any one time outstanding;

(l) advances to contractors or suppliers (other than an Affiliate of the Company) for the acquisition of assets or consumables or services in ordinary course of business that are recorded as deposits or prepaid expenses on the Company’s consolidated balance sheet not exceeding $100,000 in the aggregate at any time;

(m) deposits of pre-sale proceeds made in order to secure the completion and delivery of pre-sold properties and issuance of the related land use title in ordinary course of business;

(n) deposits made in order to secure the performance of the Company or any of its Subsidiaries in connection with the acquisition, construction, development or improvement of real property or land-use rights by the Company or any Subsidiaries in the ordinary course of business; and

(o) other Investments made for Fair Market Value that do not exceed $1.0 million in the aggregate outstanding at any one time.

“Permitted Junior Securities” means Common Shares of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in Article 16 with respect to the Notes to the payment of all Senior Debt which may at the time be outstanding; provided that (i) the Senior Debt is assumed by the new corporation, if any, resulting from any reorganization or readjustment, and (ii) the rights of the holders of Senior Debt (other than leases which are not assumed by the Company or the new corporation, as the case may be) are not, without the consent of such holders, altered by such reorganization or readjustment.

“Permitted Liens” means:

(a) Liens in favor of the Company, any Guarantor or any Wholly Owned Subsidiary;

(b) Liens securing, or created for the benefit of securing, the Notes, the Guarantees, the Floating Rate Notes and the Floating Rate Note Guarantees (provided, however, that any such Liens securing the Notes or Guarantees are provided subsequent and junior to Liens securing the Floating Rate Notes and the Floating Rate Note Guarantees);

(c) Liens to secure Debt permitted to be Incurred under clause (b) of the definition of “Permitted Debt” and other obligations thereunder, provided that any such Lien is limited to the accounts receivable and inventory of the PRC Subsidiary;

 

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(d) Liens for taxes, assessments or governmental charges or levies on the Property of the Company or any of its Subsidiaries if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision that shall be required in conformity with GAAP shall have been made therefor;

(e) Liens imposed by law, such as carriers’, warehousemen’s and mechanics’ Liens and other similar Liens, on the Property of the Company or any of its Subsidiaries arising in the ordinary course of business and securing payment of obligations that are not more than 60 days past due or are being contested in good faith and by appropriate proceedings, provided that any reserve or other appropriate provision that shall be required in conformity with GAAP shall have been made therefor;

(f) Liens on the Property of the Company or any of its Subsidiaries Incurred in the ordinary course of business to secure performance of obligations with respect to statutory or regulatory requirements, performance or return-of-money bonds, surety bonds or other obligations of a like nature and Incurred in a manner consistent with industry practice, in each case which are not Incurred in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of Property or any other Debt and which do not in the aggregate impair in any material respect the use of Property in the operation of the business of the Company or any of its Subsidiaries;

(g) Liens on Property at the time the Company or any of its Subsidiaries acquired such Property, including any acquisition by means of a merger or consolidation with or into the Company or any of its Subsidiaries; provided, however, that any such Lien may not extend to any other Property of the Company or any of its Subsidiaries; provided further, that such Liens shall not have been Incurred in anticipation of or in connection with the transaction or series of transactions pursuant to which such Property was acquired by the Company or any of its Subsidiaries;

(h) Liens on the Property of a Person at the time such Person becomes a Subsidiary of the Company; provided, however, that any such Lien may not extend to any other Property of the Company or any other Subsidiary of the Company that is not a direct Subsidiary of such Person; provided further, that any such Lien was not Incurred in anticipation of or in connection with the transaction or series of transactions pursuant to which such Person became a Subsidiary of the Company;

 

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(i) pledges or deposits by the Company or any of its Subsidiaries under workers’ compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of Property or any other Debt or for the payment of Debt) or leases to which the Company or any of its Subsidiaries is party, or deposits to secure public or statutory obligations of the Company, or deposits for the payment of rent, in each case Incurred in the ordinary course of business;

(j) utility easements, building restrictions and such other encumbrances or charges against real Property as are of a nature generally existing with respect to properties of a similar character;

(k) Liens existing on the Issue Date not otherwise described in clauses (a) through (j) above;

(l) Liens on the Property of the Company or any of its Subsidiaries to secure any Refinancing, in whole or in part, of any Debt secured by Liens referred to in clause (g), (h) or (k) above; provided, however, that any such Lien shall be limited to all or part of the same Property that secured the original Lien (together with improvements and accessions to such Property), and the aggregate principal amount of Debt (and other obligations thereunder) that is secured by such Lien shall not be increased to an amount greater than the sum of:

 

(1)

the outstanding principal amount, or, if greater, the committed amount, of the Debt (and other obligations thereunder) secured by Liens described under clause (g), (h) or (k) above, as the case may be, at the time the original Lien became a Permitted Lien under this Indenture, and

 

(2)

an amount necessary to pay any fees and expenses, including premiums and defeasance costs, incurred by the Company or such Subsidiary in connection with such Refinancing;

(m) Liens encumbering property or assets under construction in the ordinary course of business arising from progress or partial payments by a customer of the Company or its Subsidiary relating to such property or assets;

(n) Liens (including extensions and renewals thereof) upon real property acquired after the Issue Date; provided that (i) such Lien is created solely for the purpose of securing Debt Incurred under clause (j) of the definition of “Permitted Debt” and such Lien is created prior to, at the time of or within 60 days after the later of the acquisition or the completion of construction, (ii) the principal amount of the Debt secured by such Lien shall not exceed 100% of such cost and (iii) such Lien shall not extend to or cover any property or assets other than such item of property and any improvements on such item;

 

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(o) Liens on deposits of pre-sale proceeds made in order to secure the completion and delivery of pre-sold properties and issuance of the related land use title in ordinary course of business and not securing Debt of the Company or any Subsidiary;

(p) Liens on deposits made in order to secure the performance of the Company or any of its Subsidiary in connection with the acquisition of real property or land-use rights by the Company or any Subsidiary in the ordinary course of business and not securing Debt of the Company or any Subsidiary;

(q) Liens to secure cash collateral in respect of Hedging Obligations pursuant to which Merrill Lynch Capital Services, Inc. or any of its Affiliates is the counterparty; provided that such Liens in the aggregate shall not initially exceed $10.0 million;

(r) Liens arising from the rendering of a final judgment or order against the Company or any of its Subsidiaries that does not give rise to an Event of Default; and

(s) easements, rights-of-way, municipal and zoning ordinances or other restrictions as to the use of properties in favor of governmental agencies or utility companies that do not materially adversely affect the value of such properties or materially impair the use for the purposes of which such properties are held by the Company or any of its Subsidiaries.

“Permitted Refinancing Debt” means any Debt that Refinances any other Debt, including any successive Refinancings, so long as:

 

(i)

such refinancing Debt is used to refinance the entire outstanding principal amount of the Notes, or

(ii) (a) such Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of:

(1) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced, and

(2) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing,

 

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(b) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being Refinanced,

(c) the Stated Maturity of such Debt is no earlier than the Stated Maturity of the Debt being Refinanced,

(d) the new Debt shall not be senior in right of payment to the Debt that is being Refinanced, and

(e) the new Debt, the proceeds of which are used to Refinance the Notes or any Debt that is pari passu with or subordinate to the Notes or a Guarantee, shall only be permitted if (A) in case the Notes are refinanced in part or the Debt to be Refinanced is pari passu with the Notes or a Guarantee, such new Debt, by its terms or by terms of any agreement or instrument pursuant to which such new Debt is outstanding, is expressly made pari passu with, or subordinate in right of payment to, the remaining Notes or such Guarantee, or (B) in case the Debt to be Refinanced is subordinated in right of payment to the Notes or a Guarantee, such new Debt, by its terms or by the terms of any agreement or instrument to which such new Debt is issued or remains outstanding, is expressly made subordinate in right of payment to the Notes or such Guarantee at least to the extent that the Debt to be Refinanced is subordinated to the Notes or the Guarantee;

provided, however, that Permitted Refinancing Debt shall not include the Debt of any Subsidiary that is not a Guarantor, if such Debt is used to Refinance Debt of the Company or a Subsidiary.

“Person” means a corporation, an association, a partnership, a limited liability company, an individual, a joint venture, a joint stock company, a trust, an unincorporated organization or a government or an agency or a political subdivision thereof.

“PRC Subsidiary” means any Subsidiary of the Company incorporated in the PRC.

“Predecessor Note” of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note, and, for the purposes of this definition, any Note authenticated and delivered under Section 2.06 in exchange for a mutilated Note or in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note that it replaces.

“Preferred Stock” means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of any other class of Capital Stock issued by such Person.

 

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“Preferred Stock Dividends” means all dividends or other distributions with respect to Preferred Stock of the Company’s Subsidiaries held by Persons other than the Company or any of its Wholly Owned Subsidiaries.

Pre-Registration Mortgage Guarantees” means any Guarantee by the Company or any Subsidiary in the ordinary course of business of secured loans of purchasers of properties from the Company or any Subsidiary; provided that any such Guarantee shall be released in full on or before the perfection of security interest in such properties under applicable law in favor of the relevant lender.

“pro forma” means, with respect to any calculation made or required to be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of Regulation S-X promulgated under the Securities Act, as interpreted in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, or otherwise a calculation made in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, as the case may be.

“Property” means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including intellectual property rights and Capital Stock in, and other securities of, any other Person. For purposes of any calculation required pursuant to this Indenture, the value of any Property shall be its Fair Market Value.

“Qualifying IPO” means a public offering of Common Shares of the Company that results in (i) at least 15% of the Company’s issued and outstanding share capital being publicly held by Persons other than any Affiliate of the Company, the Permitted Holders or other Persons who, prior to the date of such public offering, held Common Shares of the Company, (ii) the gross proceeds of which are not less than $80.0 million and (iii) listing of the Common Shares on Nasdaq’s Capital Market, Global Market or Global Select Market or any other internationally recognized market outside the PRC other than in the Republic of Singapore.

“Refinance” means, in respect of any Debt, to refinance, extend, renew, refund or Repay (in whole or in part), or to issue other Debt, in exchange or replacement for (in whole or in part), such Debt. “Refinanced” and “Refinancing” shall have correlative meanings.

“Related Business” means real estate acquisition, development, sales, leasing and management, landscaping, brokerage and other services related to the aforementioned businesses, in each case commensurate with the activities of the PRC Subsidiaries on the Issue Date.

“Repay” means, in respect of any Debt, to repay, prepay, repurchase, redeem, legally defease or otherwise retire such Debt. “Repayment” and “Repaid” shall have correlative meanings. For purposes of Section 4.12 and the definitions of “Consolidated

 

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Interest Expense Coverage Ratio,” Debt shall be considered to have been Repaid only to the extent the related loan commitment, if any, shall have been permanently reduced in connection therewith.

“Representative” means (a) the indenture trustee or other trustee, agent or representative for holders of Senior Debt or (b) with respect to any Senior Debt that does not have any such trustee, agent or other representative, (i) in the case of such Senior Debt issued pursuant to an agreement providing for voting arrangements as among the holders or owners of such Senior Debt, any holder or owner of such Senior Debt acting with the consent of the required persons necessary to bind such holders or owners of such Senior Debt and (ii) in the case of all other such Senior Debt, the holder or owner of such Senior Debt.

“Responsible Officer” shall mean, when used with respect to the Trustee, any officer in the Corporate Trust Office of the Trustee.

“Restricted Payment” means:

(a) any dividend or distribution (whether made in cash, securities or other Property) declared or paid on or with respect to any shares of Capital Stock of the Company or any of its Subsidiaries (including any payment in connection with any merger or consolidation with or into the Company or any of its Subsidiaries), except for any dividend or distribution that is made solely to the Company or any of its Subsidiaries (and, if such Subsidiary is not a Wholly Owned Subsidiary, to the other shareholders of such Subsidiary on a pro rata basis or on a basis that results in the receipt by the Company or any of its Subsidiaries of dividends or distributions of greater value than it would receive on a pro rata basis) or any dividend or distribution payable solely in shares of Capital Stock (other than Disqualified Stock) of the Company;

(b) the purchase, repurchase, redemption, acquisition or retirement for value of any Capital Stock of the Company or any of its Subsidiaries (other than from the Company or any of its Wholly-Owned Subsidiaries) or any securities exchangeable for or convertible into any such Capital Stock, including the exercise of any option to exchange any Capital Stock (other than for or into Capital Stock of the Company that is not Disqualified Stock);

(c) the purchase, repurchase, redemption, acquisition or retirement for value, prior to the date for any scheduled maturity, sinking fund or amortization or other installment payment, of any Subordinated Obligation (other than the purchase, repurchase or other acquisition of any Subordinated Obligation purchased in anticipation of satisfying a scheduled maturity, sinking fund or amortization or other installment obligation, in each case due within one year of the date of acquisition); or

(d) any Investment (other than Permitted Investments) in any Person.

 

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“Regulation S Legend” means the legend labeled as such and that is set forth in Exhibit A hereto.

“RMB” means the lawful currency of the PRC.

“Rule 144” means Rule 144 as promulgated under the Securities Act.

“Rule 144A” means Rule 144A as promulgated under the Securities Act.

“S&P” means Standard & Poor’s Ratings Services, a division of McGraw Hill, Inc., or any successor to the rating agency business thereof.

“SAFE” means the State Administration of Foreign Exchange of the PRC.

“SAIC” means the PRC State Administration for Industry and Commerce.

“Sale and Leaseback Transaction” means any direct or indirect arrangement relating to Property now owned or hereafter acquired whereby the Company or any of its Subsidiaries transfers such Property to another Person and the Company or any of its Subsidiaries leases it from such Person.

“Securities Act” means the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time.

“Security Documents” means each of the following instruments and documents in favor of the Collateral Agent for the benefit of the holders of the Notes, the Guarantees and all other obligations of any obligor under this Indenture, the Notes, the Guarantees and the Security Documents, whenever incurred, and also for the benefit of the present and future holders of all other Obligations and any document perfecting such security interests pursuant to the terms of Article 10 hereof: (i) a first equitable mortgage in respect of shares in Xinyuan Real Estate (ii) a second equitable mortgage in respect of shares in Xinyuan Real Estate, (iii) the WFOE Share Pledge, (iv) a pledge agreement of rights in a loan from Xinyuan Real Estate to the WFOE, and (v) any one or more security agreements, pledge agreements, collateral assignments, mortgages, deeds of trust or other grants or transfers for security executed and delivered by the Company, any Person beneficially owning Capital Stock issued by the Company, or any other Obligor creating a Lien upon Capital Stock issued by the Company or upon property owned or to be acquired by the Company or such other Obligor.

“Senior Debt” of the Company means:

(a) all obligations consisting of the principal, premium, if any, and accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not such post-filing interest is allowed in such proceeding) and Additional Amounts in respect of:

(1) Debt of the Company for borrowed money, and

 

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(2) Debt of the Company evidenced by notes, debentures, bonds or other similar instruments permitted under this Indenture for the payment of which the Company is responsible or liable;

(b) all Capital Lease Obligations of the Company and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by the Company;

(c) all obligations of the Company

(1) for the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction,

(2) under Hedging Obligations, or

(3) issued or assumed as the deferred purchase price of Property and all conditional sale obligations of the Company and all obligations under any title retention agreement permitted under this Indenture; and

(d) all obligations of other Persons of the type referred to in clauses (a), (b) and (c) for the payment of which the Company is responsible or liable as Guarantor;

provided, however, that Senior Debt shall not include:

(A) Debt of the Company that is by its terms subordinate in right of payment to the Notes, including any Subordinated Obligations;

(B) any Debt Incurred in violation of the provisions of this Indenture;

(C) accounts payable or any other obligations of the Company to trade creditors created or assumed by the Company in the ordinary course of business in connection with the obtaining of materials or services (including Guarantees thereof or instruments evidencing such liabilities);

(D) any liability any state, national, provincial, local or other taxes owed or owing by the Company;

(E) any obligation of the Company to any of its Subsidiaries; or

(F) any obligations with respect to any Capital Stock of the Company.

To the extent that any payment of Senior Debt (whether by or on behalf of the Company as proceeds of security or enforcement or any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to a trustee, receiver or other similar party under any bankruptcy, insolvency, receivership or similar

 

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law, then if such payment is recovered by, or paid over to, such trustee, receiver or other similar party, the Senior Debt or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payment had not occurred.

“Senior Debt” of any Guarantor has a correlative meaning.

“Significant Subsidiary” means, as of any date of determination, a Subsidiary of the Company that would constitute a “significant subsidiary” as such term is defined under Rule 1-02(w) of Regulation S-X of the Commission as in effect on the date of this Indenture.

“Stated Maturity” means, with respect to any installment of interest or principal on any series of Debt (including, without limitation, a scheduled repayment or a scheduled sinking fund payment), the date on which the payment of interest or principal was scheduled to be paid in the original documentation governing such Debt, and will not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment hereof.

“Subordinated Obligation” means any Debt of the Company or any Guarantor (whether outstanding on the Issue Date or thereafter Incurred) that is subordinate or junior in right of payment to the Notes or the applicable Guarantee pursuant to a written agreement to that effect.

“Subsidiary” with respect to any Person, means (i) any corporation of which the outstanding Capital Stock having a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, through one or more intermediaries, by such Person or (ii) any other Person of which a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, through one or more intermediaries, owned by such Person.

“Surviving Person” means the surviving Person formed by a merger, consolidation or amalgamation and, for purposes of Section 5.01, a Person to whom all or substantially all of the Property of the Company or a Guarantor is sold, transferred, assigned, leased, conveyed or otherwise disposed.

“Taxes” means any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the Governmental Authorities.

“Termination of Trading” will be deemed to have occurred if, (i) at any time after a Qualifying IPO, the Common Shares (or other common stock, depositary receipts, Common Shares or other certificates representing common equity interests into which the Notes are then convertible) is neither listed for trading on a United States national or regional securities exchange nor approved for trading on any of the Nasdaq’s Capital Market, Global Market or Global Select Market.

 

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“Total Tangible Assets” means, as of any date, the total consolidated assets of the Company and its Subsidiaries, minus (a) any minority interest in any Person that is not a Wholly Owned Subsidiary of the Company, if such minority interest would be reflected at such date on a consolidated balance sheet of the Company and its Subsidiaries and (b) any securities issued by the Company held as treasury securities, and (c) all Intangible Assets, measured in accordance with GAAP for the most recent quarterly or semi-annually period for which consolidated financial statements of the Company (which the Company shall use its best efforts to compile in a timely manner) are available (which may be internal consolidated financial statements). Total Tangible Assets shall be calculated after giving pro forma effect to include the cumulative value of all of the real property the acquisition, development, construction or improvement of which requires or required the Incurrence of Debt and calculation of Total Tangible Assets thereunder, as measured by the purchase price or cost providing such Debt.

“Trust Indenture Act” means the U.S. Trust Indenture Act of 1939, as amended, as it was in force at the date of this Indenture, except as provided in Section 8.03 and Section 15.06; provided that if the Trust Indenture Act of 1939 is amended after the date hereof, the term “Trust Indenture Act” shall mean, to the extent required by such amendment, the Trust Indenture Act of 1939 as so amended.

“Trustee” means the Person named as the “Trustee” in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Trustee” shall mean such successor Trustee.

“Voting Stock” of any Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof.

“WFOE” means Xinyuan (China) Real Estate Co., Ltd., a wholly foreign-owned limited liability company organized and existing under the laws of the PRC.

“WFOE Share Pledge” means that certain Share Pledge to be entered into by the Guarantor and relating to the equity interests owned by the Guarantor in the WFOE.

“Wholly Owned Subsidiary” means, at any time, a Subsidiary all the Voting Stock of which (except directors’ qualifying shares) is at such time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries.

“Working Capital Ratio” means, the ratio of (a) the sum of current assets of the Company and its Subsidiaries on a consolidated basis to (b) the sum of the current liabilities of the Company and its Subsidiaries on a consolidated basis.

“Xinyuan Real Estate” means Xinyuan Real Estate, Ltd., a company incorporated with limited liability in the Cayman Islands all of whose Capital Stock is owned by the Company as of the Issue Date.

 

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Section 1.02. Other Definitions.

 

Term		Defined in Section
“Additional Interest Notice”		4.33
“Adjustment Event”		15.05
“Affiliate Transaction”		4.14
“Allocable Excess Proceeds”		4.12
“Asset Sale Offer”		4.12
“Authentication Order”		2.04
“Benefited Party”		9.01
“Change of Control Offer”		4.17
“Company Repurchase Notice”		3.07
“Company Repurchase Notice Date”		3.07
“Conversion Date”		15.02
“Conversion Notice”		15.02
“Conversion Rate”		15.04
“Current Market Price”		15.05
“Defaulted Interest”		2.03
“Designated Event Expiration Time”		3.05
“Designated Event Notice”		3.05
“Designated Event Offer”		4.37
“Designated Event Repurchase Date”		3.05
“Designated Event Repurchase Notice”		3.05
“Determination Date”		15.05
“Distributed Property”		15.05
“Event of Default”		6.01
“Excess Proceeds”		4.12
“Excessive Additional Amounts		3.02
“Ex-Dividend Date”		15.05
“Expiration Time”		15.05
“Future Guarantor”		9.03
“Future Subsidiary Pledgor”		10.02
“Global Note”		2.02
“Guarantor Pledgor”		10.02
“Non-electing share”		15.06
“Non-Payment Default”		16.02
“Security Register”		2.05
“Security Registrar”		2.05
“Offer Amount”		3.02
“Offer Period”		3.02
“Offer to Purchase”		3.02
“Payment Blockage Notice”		16.02
“Payment Default”		16.02
“Purchase Date”		3.02

 

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“Purchase Price”		3.02
“Purchased Shares”		15.05
“Record Date”		15.05
“Relevant Taxing Jurisdiction”		4.35
“Repurchase Date”		3.06
“Repurchase Notice”		3.06
“Restricted Note”		2.05
“Secured Party”		10.01
“Trading Day”		15.05
“Trigger Event”		15.05

Section 1.03. Rules of Construction.

(a) Unless the context otherwise requires:

(i) a term has the meaning assigned to it;

(ii) an accounting term not otherwise defined herein has the meaning assigned to it in accordance with GAAP;

(iii) “or” is not exclusive;

(iv) words in the singular include the plural, and in the plural include the singular;

(v) all references in this instrument to “Articles,” “Sections” and other subdivisions are to the designated Articles, Sections and subdivisions of this instrument as originally executed;

(vi) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.

(vii) “including” means “including without limitation;”

(viii) provisions apply to successive events and transactions;

(ix) “$” means the lawful currency of the United States of America; and

(x) references to sections of or rules under the Securities Act or the Exchange Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the Commission from time to time thereunder.

 

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ARTICLE II

ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES

Section 2.01. Designation Amount and Issue of Notes. The Notes shall be designated as “2% Convertible Subordinated Notes due 2012”. Notes not to exceed the aggregate principal amount of $25 million upon the execution of this Indenture, or from time to time thereafter, may be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes to or upon the written order of the Company.

Section 2.02. Form of Notes. The Notes and the Trustee’s certificate of authentication to be borne by such Notes shall be substantially in the form set forth in Exhibit A. The terms and provisions contained in the form of Note attached as Exhibit A hereto shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby.

Any of the Notes may have such letters, numbers or other marks of identification and such notations, legends, endorsements or changes as the officers executing the same may approve (execution thereof to be conclusive evidence of such approval) and as are not inconsistent with the provisions of this Indenture, or as may be required by the Common Depositary in order for the Notes to be tradable on Euroclear and Clearstream or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities exchange or automated quotation system on which the Notes may be listed, or to conform to usage, or to indicate any special limitations or restrictions to which any particular Notes are subject.

So long as the Notes are eligible for book-entry settlement with Euroclear, Clearstream or the Common Depositary, or unless otherwise required by law, or otherwise contemplated by Section 2.05(a), all of the Notes will be represented by one or more Notes in global form registered in the name of the Common Depositary or the nominee of the Common Depositary (a “Global Note”). The transfer and exchange of beneficial interests in any such Global Note shall be effected through the Common Depositary in accordance with this Indenture and the applicable procedures of the Registrar. Except as provided in Section 2.05(a), beneficial owners of a Global Note shall not be entitled to have certificates registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and will not be considered holders of such Global Note (other than in an enforcement by such owner of a beneficial interest to exchange such beneficial interest for Notes in certificated form).

Any Global Note shall represent such of the outstanding Notes as shall be specified therein and shall provide that it shall represent the aggregate amount of outstanding Notes from time to time endorsed thereon and that the aggregate amount of outstanding Notes represented thereby may from time to time be increased or reduced to

 

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reflect redemptions, repurchases, conversions, transfers or exchanges permitted hereby. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Registrar in such manner and upon instructions given by the holder of such Global Notes in accordance with this Indenture. Payment of principal of and Interest and premium, if any, on any Global Note shall be made to the holder of such Note.

Section 2.03. Date And Denomination Of Notes; Payments Of Interest. The Notes shall be issuable in registered form without coupons in denominations of $100,000 principal amount and multiples thereof. Each Note shall be dated the date of its authentication and shall bear Interest from the date specified on the face of the form of Note attached as Exhibit A hereto. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months.

The Person in whose name any Note (or its Predecessor Note) is registered on the Register at the close of business on any record date with respect to any interest payment date shall be entitled to receive the Interest payable on such interest payment date, except that the Interest payable upon redemption or repurchase will be payable to the Person to whom principal is payable pursuant to such redemption or repurchase (unless the redemption date or the repurchase date, as the case may be, falls after a record date and on or prior to the corresponding interest payment date, in which case the semi-annual payment of Interest becoming due on such interest payment date shall be payable to the holders of such Notes registered as such on the applicable record date).

Notwithstanding the foregoing, if any Note (or portion thereof) is converted into Common Shares during the period after a record date for the payment of Interest to, but excluding, the next succeeding interest payment date, holders of such Note at the close of business on the record date shall receive Interest payable on such Note (or portion thereof) up to and excluding such corresponding interest payment date notwithstanding the conversion. Such Note (or portion thereof), upon surrender for conversion, shall be accompanied by funds equal to the amount of Interest payable on such Note so converted; provided that no such payment shall be made (i) if the Company has specified a redemption date that is after a record date but on or prior to the next succeeding interest payment date, (ii) if the Company has specified a Designated Event Repurchase Date that is after a record date but on or prior to the next succeeding interest payment date or (iii) to the extent of any overdue Interest at the time of conversion with respect to such Note. Interest shall be payable at the office or agency of the Company, which shall initially be an office of the Trustee. The Company shall pay Interest (i) on any Notes in certificated form by (x) check mailed to the address of the Person entitled thereto as it appears in the Register (or upon written notice, by wire transfer in immediately available funds, if such Person is entitled to Interest on aggregate principal in excess of $2 million) or (y) by transfer to an account maintained by such person in the United States or (ii) on any Global Note by wire transfer of immediately available funds to the account of the Paying Agent or the Trustee. The term “record date” with respect to any interest payment date shall mean the April 1 and October 1 preceding the applicable April 15 or October 15 interest payment date, respectively.

 

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Notwithstanding the foregoing, any Interest on any Note which is payable, but is not punctually paid or duly provided for, on any April 15 or October 15 (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Noteholder on the relevant record date by virtue of his having been such Noteholder, and such Defaulted Interest shall be paid by the Company, at its election in each case, as provided in clause (1) or (2) below:

(1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Note and the date of the proposed payment (which shall be not less than twenty-five (25) days after the receipt by the Trustee of such notice, unless the Trustee shall consent to an earlier date), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit on the Business Day immediately prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date (with the consent of the Company) for the payment of such Defaulted Interest which shall be not more than fifteen (15) days and not less than ten (10) days prior to the date of the proposed payment, and not less than ten (10) days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first-class postage prepaid, to each holder at such holder’s address as it appears in the Security Register, not less than ten (10) days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on such special record date and shall no longer be payable pursuant to the following clause (2) of this Section 2.03.

(2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange or automated quotation system on which the Notes may be listed or designated for issuance, and upon such notice as may be required by such exchange or automated quotation system, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee.

Section 2.04. Execution of Notes. The Notes shall be signed in the name and on behalf of the Company by the manual signature of its Chief Executive Officer or President and attested by the manual signature of its Secretary. Only such Notes as shall bear thereon a certificate of authentication

 

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substantially in the form set forth on the form of Note attached as Exhibit A hereto, manually executed by the Trustee (or an authenticating agent appointed by the Trustee as provided by Section 17.09), shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee (or such an authenticating agent) upon any Note executed by the Company shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture.

In case any officer of the Company who shall have signed any of the Notes shall cease to be such officer before the Notes so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Company, such Notes nevertheless may be authenticated and delivered or disposed of as though the person who signed such Notes had not ceased to be such officer of the Company, and any Note may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Note, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer.

Section 2.05. Exchange and Registration of Transfer of Notes; Restrictions on Transfer. (a) The Company shall cause to be kept at the Corporate Trust Office a register (the register maintained in such office and in any other office or agency of the Company designated pursuant to Section 4.02 being herein sometimes collectively referred to as the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. The Security Register shall be in written form or in any form capable of being converted into written form within a reasonably prompt period of time. The Trustee is hereby appointed “Security Registrar” for the purpose of registering Notes and transfers of Notes as herein provided. The Company may appoint one or more co-registrars in accordance with Section 4.02.

Upon surrender for registration of transfer of any Note to the Security Registrar or any co-registrar, and satisfaction of the requirements for such transfer set forth in this Section 2.05, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denominations and of a like aggregate principal amount and bearing such restrictive legends as may be required by this Indenture.

Notes may be exchanged for other Notes of any authorized denominations and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at any such office or agency maintained by the Company pursuant to Section 4.02. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Notes that the Noteholder making the exchange is entitled to receive bearing registration numbers not contemporaneously outstanding.

 

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All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange.

All Notes presented or surrendered for registration of transfer or for exchange, redemption, repurchase or conversion shall (if so required by the Company or the Security Registrar) be duly endorsed, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company, and the Notes shall be duly executed by the Noteholder thereof or such holder’s attorney duly authorized in writing.

No service charge shall be made to any holder for any registration of transfer or exchange of Notes, but the Company may require payment by the holder of a sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes.

Neither the Company nor the Trustee nor any Security Registrar shall be required to exchange or register a transfer of (a) any Notes or portions thereof for a period of fifteen (15) days next preceding any selection of Notes to be redeemed, (b) any Notes or portions thereof surrendered for conversion pursuant to Article 15 or (c) any Notes or portions thereof tendered for repurchase (and not withdrawn) pursuant to Section 3.05.

(b) The following provisions shall apply only to Global Notes:

(i) Each Global Note authenticated under this Indenture shall be registered in the name of the Common Depositary or a nominee thereof and delivered to the Common Depositary or a nominee thereof, and each such Global Note shall constitute a single Note for all purposes of this Indenture.

(ii) Notwithstanding any other provision in this Indenture, no Global Note may be exchanged in whole or in part for Notes registered, and no transfer of a Global Note in whole or in part may be registered, in the name of any Person other than the Common Depositary or a nominee thereof unless (A) the Common Depositary has notified the Company that it is unwilling or unable to continue as Common Depositary for such Global Note and a successor depositary has not been appointed by the Company within ninety (90) days, (B) an Event of Default has occurred and the maturity of the Notes has been accelerated in accordance with Section 6.01 and any Noteholder shall have given written notice to the Company requesting the issuance of definitive Notes or (C) the Company, in its sole discretion, notifies the Trustee in writing that it no longer wishes to have all the Notes represented by Global Notes; provided that beneficial interests in a Global Note may be exchanged for definitive certificated Notes upon request by or on behalf of the Common Depositary in accordance with customary procedures. Any Global Note exchanged pursuant to clause (A) or (B) above shall be so exchanged in whole and not in part and any Global Note exchanged pursuant to clause (C) above may be exchanged in whole or from time to time in

 

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part as directed by the Company. Any Note issued in exchange for a Global Note or any portion thereof shall be a Global Note; provided that any such Note so issued that is registered in the name of a Person other than the Common Depositary or a nominee thereof shall not be a Global Note.

(iii) Notes issued in exchange for a Global Note or any portion thereof pursuant to clause (ii) above shall be issued in definitive, fully registered form, without interest coupons, shall have an aggregate principal amount equal to that of such Global Note or portion thereof to be so exchanged, shall be registered in such names and be in such authorized denominations as the Common Depositary shall designate and shall bear any legends required hereunder. Any Global Note to be exchanged in whole shall be surrendered by the Common Depositary to the Trustee, as Security Registrar. With regard to any Global Note to be exchanged in part, either such Global Note shall be so surrendered for exchange or, if the Trustee is acting as Common Depositary or its nominee with respect to such Global Note, the principal amount thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Trustee. Upon any such surrender or adjustment, the Trustee shall authenticate and make available for delivery the Note issuable on such exchange to or upon the written order of the Common Depositary or an authorized representative thereof.

(iv) In the event of the occurrence of any of the events specified in clause (ii) above, the Company will promptly make available to the Trustee a reasonable supply of certificated Notes in definitive, fully registered form, without interest coupons.

(v) At such time as all interests in a Global Note have been redeemed, repurchased, converted, canceled or exchanged for Notes in certificated form, such Global Note shall, upon receipt thereof, be canceled by the Trustee in accordance with standing procedures and instructions existing of the Common Depositary. At any time prior to such cancellation, if any interest in a Global Note is redeemed, repurchased, converted, canceled or exchanged for Notes in certificated form, the principal amount of such Global Note shall, in accordance with the standing procedures and instructions existing of the Common Depositary, be appropriately reduced, and an endorsement shall be made on such Global Note, by the Trustee, at the direction of the Trustee, to reflect such reduction.

(c) The transfer restrictions set forth below shall apply to the Notes, whether in the form of a Global Note or a Certificated Note.

Until the date that is two years after the last original issue date of the Notes, any certificate evidencing such Note (and all securities issued in exchange therefor or in substitution thereof) and any share certificate representing Common Shares issued upon conversion of any Note shall bear the Regulation S Legend, unless (1) such Note or such Common Shares have been sold pursuant to a registration statement that has been

 

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declared effective under the Securities Act (and which continues to be effective at the time of such transfer) or pursuant to Rule 144 under the Securities Act or any similar provision then in force, or such Common Shares have been issued upon conversion of Notes that have been transferred pursuant to a registration statement that has been declared effective under the Securities Act or pursuant to Rule 144 under the Securities Act or any similar provision then in force, (2) such Note or such Common Shares are eligible for resale pursuant to Rule 144(k) under the Securities Act (or any successor provision) or (3) otherwise agreed by the Company in writing, with written notice thereof to the Trustee.

Every Note that bears or is required under this Section 2.05(c) to bear the Regulation S Legend (the “Restricted Notes”) shall be subject to the restrictions on transfer set forth in this Section 2.05(c) (including those set forth in the Regulation S Legend) unless such restrictions on transfer shall be waived by written consent of the Company, and the holder of each such Restricted Note, by such Noteholder’s acceptance thereof, agrees to be bound by all such restrictions on transfer. As used in this Section 2.05(c), the term “transfer” encompasses any sale, pledge, loan, transfer or other disposition whatsoever of any Restricted Note or any interest therein.

Any Note (or security issued in exchange or substitution therefor) as to which such restrictions on transfer shall have expired in accordance with their terms or as to conditions for removal of the Regulation S Legend have been satisfied may, upon surrender of such Note for exchange to the Security Registrar in accordance with the provisions of this Section 2.05, be exchanged for a new Note or Notes, of like tenor and aggregate principal amount, which shall not bear the Regulation S Legend. If the Restricted Note surrendered for exchange is represented by a Global Note bearing a Regulation S Legend, the principal amount of the Global Note so legended shall be reduced by the appropriate principal amount and the principal amount of a Global Note without the Regulation S Legend shall be increased by an equal principal amount. If a Global Note without the Regulation S Legend is not then outstanding, the Company shall execute and the Trustee shall authenticate and deliver a Global Note without the Regulation S Legend to the Common Depositary.

Any such Common Shares as to which such restrictions on transfer shall have expired in accordance with their terms or as to which the conditions for removal of the foregoing legend set forth therein have been satisfied may, upon surrender of the certificates representing such Common Shares for exchange in accordance with the procedures of the transfer agent for the Common Shares, be exchanged for a new certificate or certificates for a like number of Common Shares, which shall not bear the Regulation S Legend.

(d) Any Note or Common Share issued upon the conversion of a Note that is purchased or owned by the Company or any Subsidiary thereof may not be resold by the Company or such Subsidiary unless registered under the Securities Act or resold pursuant to an exemption from the registration requirements of the Securities Act in a transaction which results in such Notes or Common Shares, as the case may be, no longer being “restricted securities” (as defined under Rule 144).

 

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(e) The Company shall use its best efforts to prevent any Affiliate who is not a Subsidiary from reselling any Note or Common Shares issued upon the conversion of a Note, except for the resale of such Notes or Common Shares pursuant to an effective registration statement or resales of such Notes or Common Shares to the Company or a Subsidiary.

(f) The Trustee shall have no responsibility or obligation to any other Person with respect to the accuracy of the books or records, or the acts or omissions, of the Common Depositary or its nominee or of any participant or member thereof, with respect to any ownership interest in the Notes or with respect to the delivery to any other Person (other than the Common Depositary) of any notice (including any notice of redemption or repurchase) or the payment of any amount, under or with respect to such Notes. All notices and communications to be given to the holders of the Notes and all payments to be made to holders of the Notes under the Notes shall be given or made only to or upon the order of the registered holders of the Notes (which shall be the Common Depositary or its nominee in the case of a Global Note). The rights of beneficial owners in any Global Note shall be exercised only through the Common Depositary subject to the customary procedures of the Common Depositary.

The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof.

Section 2.06. Mutilated, Destroyed, Lost or Stolen Notes. In case any Note shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its written request the Trustee or an authenticating agent appointed by the Trustee shall authenticate and make available for delivery, a new Note, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Note, or in lieu of and in substitution for the Note so destroyed, lost or stolen. In every case, the applicant for a substituted Note shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company, to the Trustee and, if applicable, to such authenticating agent evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof.

 

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Following receipt by the Trustee or such authenticating agent, as the case may be, of satisfactory security or indemnity and evidence, as described in the preceding paragraph, the Trustee or such authenticating agent may authenticate any such substituted Note and make available for delivery such Note. Upon the issuance of any substituted Note, the Company may require the payment by the holder of a sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Note which has matured or is about to mature or has been called for redemption or has been tendered for repurchase upon a Designated Event (and not withdrawn) or has been surrendered for repurchase on a Repurchase Date (and not withdrawn) or is to be converted into Common Shares shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Note, pay or authorize the payment of or convert or authorize the conversion of the same (without surrender thereof except in the case of a mutilated Note), as the case may be, if the applicant for such payment or conversion shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or in connection with such substitution, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company, the Trustee and, if applicable, any paying agent or conversion agent evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof.

Every substitute Note issued pursuant to the provisions of this Section 2.06 by virtue of the fact that any Note is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note shall be found at any time, and shall be entitled to all the benefits of (but shall be subject to all the limitations set forth in) this Indenture equally and proportionately with any and all other Notes duly issued hereunder. To the extent permitted by law, all Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment or conversion or redemption or repurchase of mutilated, destroyed, lost or stolen Notes and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment or conversion or redemption or repurchase of negotiable instruments or other securities without their surrender.

Section 2.07. Temporary Notes. Pending the preparation of Notes in certificated form, the Company may execute and the Trustee or an authenticating agent appointed by the Trustee shall, upon the written request of the Company, authenticate and deliver temporary Notes. Temporary Notes shall be issuable in any authorized denomination, and substantially in the form of the Notes in certificated form, but with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Company. Every such temporary Note shall be executed by the Company and authenticated by the Trustee or such authenticating agent upon the same conditions and in substantially the same manner, and with the same effect, as the Notes in certificated form. Without unreasonable delay, the Company will execute and

 

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deliver to the Trustee or such authenticating agent Notes in certificated form and thereupon any or all temporary Notes may be surrendered in exchange therefor, at each office or agency maintained by the Company pursuant to Section 4.02 and the Trustee or such authenticating agent shall authenticate and make available for delivery in exchange for such temporary Notes an equal aggregate principal amount of Notes in certificated form. Such exchange shall be made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits and subject to the same limitations under this Indenture as Notes in certificated form authenticated and delivered hereunder.

Section 2.08. Cancellation of Notes. All Notes surrendered for the purpose of payment, redemption, repurchase, conversion, exchange or registration of transfer shall, if surrendered to the Company or any paying agent or any Security Registrar or any conversion agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee, shall be promptly canceled by it, and no Notes shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall dispose of such canceled Notes in accordance with its customary procedures. If the Company shall acquire any of the Notes, such acquisition shall not operate as a redemption, repurchase or satisfaction of the indebtedness represented by such Notes unless and until the same are delivered to the Trustee for cancellation.

Section 2.09. ISIN Numbers. The Company in issuing the Notes may use “ISIN” numbers (if then generally in use), and, if so, the Trustee shall use “ISIN” numbers in notices of redemption or repurchases as a convenience to holders of the Notes; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption or a repurchase and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption or repurchase shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the “ISIN” numbers.

ARTICLE III

REDEMPTION AND REPURCHASE OF NOTES

Section 3.01. Redemption of Notes. Except as provided in Section 3.02, the Company may not elect to redeem any Notes prior to maturity of the Notes.

Section 3.02. Redemption for Tax Reasons.

(a) The Notes may be redeemed, at the option of the Company or a Surviving Person with respect to the Company, as a whole but not in part, upon giving not less than 30 days’ nor more than 60 days’ notice to the Holders and upon reasonable notice in advance of such notice to Holders to the Trustee (which notice shall be irrevocable), at a

 

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redemption price equal to 100% of the principal amount thereof, together with accrued and unpaid interest (including any Additional Amounts), if any, to the date fixed by the Company or the Surviving Person, as the case may be, for redemption (the “Tax Redemption Date”) if, as a result of:

(i) any change in, or amendment to, laws (or any regulations or rulings promulgated thereunder) affecting taxation; or

(ii) any change in the existing official position or the stating of an official position regarding the application or interpretation of such laws, regulations or rulings (including a holding, judgment or order by a court of competent jurisdiction),

which change or amendment becomes effective on or after (i) with respect to the Company or any Guarantor, the Issue Date, or (ii) with respect to any Future Guarantor or Surviving Person, the date such Future Guarantor or Surviving Person becomes a Future Guarantor or Surviving Person, with respect to any payment due or to become due under the Notes, any Guarantee, or this Indenture, the Company, a Surviving Person or a Guarantor, as the case may be, is, or on the next Interest Payment Date would be, required to pay Additional Amounts, and such requirement cannot be avoided by the taking of reasonable measures by the Company, a Surviving Person or a Guarantor, as the case may be; provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Company, a Surviving Person or a Guarantor, as the case may be, would be obligated to pay such Additional Amounts if a payment in respect of the Notes were then due.

(b) Prior to the mailing of any notice of redemption for Notes pursuant to the foregoing, the Company, a Surviving Person or a Guarantor, as the case may be, will deliver to the Trustee:

(i) an Officers’ Certificate stating that such change or amendment referred to in the prior paragraph has occurred, describing the facts related thereto and stating that such requirement cannot be avoided by the Company, a Surviving Person or a Guarantor, as the case may be, taking reasonable measures available to it; and

(ii) an Opinion of Counsel or a written opinion of a tax consultant who is acceptable to the Trustee, either of recognized standing, in form and substance satisfactory to the Trustee, stating that the requirement to pay such Additional Amounts results from such change or amendment referred to in the prior paragraph.

The Trustee shall accept such certificate and opinion as sufficient evidence of the satisfaction of the conditions precedent described above, in which event it shall be conclusive and binding on the Holders.

 

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(c) Any Notes that are redeemed will be cancelled.

Section 3.03. Payment of Notes Called For Redemption by the Company. If notice of redemption has been given as provided in Section 3.02, the Notes or portion of Notes with respect to which such notice has been given shall, unless converted into Common Shares pursuant to the terms hereof, become due and payable on the date fixed for redemption and at the place or places stated in such notice at the applicable redemption price, together with Interest accrued to (but excluding) the redemption date, and on and after said date (unless the Company shall default in the payment of such Notes at the redemption price, together with Interest accrued to said date) Interest on the Notes or portion of Notes so called for redemption shall cease to accrue and, after the close of business on the Business Day immediately preceding the redemption date (unless the Company shall default in the payment of such Notes at the redemption price, together with Interest accrued to said date) such Notes shall cease to be convertible into Common Shares and, except as provided in Section 7.05 and Section 11.04, to be entitled to any benefit or security under this Indenture, and the holders thereof shall have no right in respect of such Notes except the right to receive the redemption price thereof and unpaid Interest to (but excluding) the redemption date. On presentation and surrender of such Notes at a place of payment in said notice specified, the said Notes shall be paid and redeemed by the Company at the applicable redemption price, together with Interest accrued thereon to, but excluding, the redemption date; provided that if the redemption date falls after a record date and on or prior the corresponding interest payment date, then the Interest payable on such interest payment date shall be paid to the holders of record of such Notes on the applicable record date instead of the holders surrendering such Notes for redemption on such date.

Notwithstanding the foregoing, the Trustee shall not redeem any Notes or mail any notice of redemption (i) during the continuance of a default in payment of Interest or premium, if any, on the Notes and (ii) if the principal amount of the Notes has been accelerated. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid or duly provided for, bear interest from the redemption date at a rate set forth in the Note and such Note shall remain convertible into Common Shares until the principal and Interest shall have been paid or duly provided for.

Section 3.04. Conversion Arrangement on Call for Redemption. In connection with any redemption of Notes, the Company may arrange for the purchase and conversion of any Notes by an agreement with one or more investment banks or other purchasers to purchase such Notes by paying to the Trustee in trust for the holders of the Notes, on or before the date fixed for redemption, an amount not less than the applicable redemption price, together with Interest accrued to, but excluding, the date fixed for redemption, of such Notes. Notwithstanding anything to the contrary contained in this Article 3, the obligation of the Company to pay the redemption price of such Notes, together with Interest accrued to, but excluding, the date fixed for redemption, shall be

 

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deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into, a copy of which will be filed with the Trustee prior to the date fixed for redemption, any Notes not duly surrendered for conversion by the holders thereof may, at the option of the Company, be deemed, to the fullest extent permitted by law, acquired by such purchasers from such holders and (notwithstanding anything to the contrary contained in Article 15) surrendered by such purchasers for conversion, all as of immediately prior to the close of business on the date fixed for redemption (and the right to convert any such Notes shall be extended through such time), subject to payment of the above amount as aforesaid. At the direction of the Company, the Trustee shall hold and dispose of any such amount paid to it in the same manner as it would monies deposited with it by the Company for the redemption of Notes. Without the Trustee’s prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Notes shall increase or otherwise affect any of the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture.

Section 3.05. Repurchase at Option of Holders Upon a Designated Event. (a) If there shall occur a Designated Event at any time after a Qualifying IPO and prior to maturity of the Notes, then each Noteholder shall have the right, at such holder’s option and subject to Article 16, to require the Company to repurchase all of such holder’s Notes, or any portion thereof that is an integral multiple of $100,000 principal amount, on the date (the “Designated Event Repurchase Date”) specified by the Company that is not less than twenty (20) Business Days and not more than thirty-five (35) Business Days after the date of the Designated Event Notice (as defined in Section 3.05(b)) of such Designated Event at a cash repurchase price equal to 100% of the principal amount thereof, together with accrued Interest, if any, to but excluding the Designated Event Repurchase Date; provided that if such Designated Event Repurchase Date falls after a record date and on or prior to the corresponding interest payment date, then the full amount of Interest payable on such interest payment date shall be paid to the holders of record of the Notes on the applicable record date instead of the holders surrendering the Notes for repurchase on such Designated Event Repurchase Date. Repurchases of Notes under this Section 3.05 shall be made, at the option of the holder thereof, upon:

(i) delivery to the Trustee (or other paying agent appointed by the Company) by a holder of a duly completed notice (the “Designated Event Repurchase Notice”) in the form set forth on the reverse of the Note prior to the close of business on the Designated Event Repurchase Date; and

(ii) delivery or book-entry transfer of the Notes to the Trustee (or other paying agent appointed by the Company) at any time after delivery of the Designated Event Repurchase Notice (together with all necessary endorsements) at the Corporate Trust Office of the Trustee (or other paying agent appointed by the Company) as provided in Section 4.02 or at any other office of the paying

 

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agent, such delivery being a condition to receipt by the holder of the repurchase price therefor; provided that such repurchase price shall be so paid pursuant to this Section 3.05 only if the Note so delivered to the Trustee (or other paying agent appointed by the Company) shall conform in all respects to the description thereof in the related Designated Event Repurchase Notice.

The Company shall purchase from the holder thereof, pursuant to this Section 3.05, a portion of a Note, only if the principal amount of such portion is $100,000 or a whole multiple of $100,000. Provisions of this Indenture that apply to the purchase of all of a Note also apply to the purchase of such portion of such Note.

Any purchase by the Company contemplated pursuant to the provisions of this Section 3.05 shall be consummated by the delivery of the consideration to be received by the holder promptly following the later of the Designated Event Repurchase Date and the time of the book-entry transfer or delivery of the Note.

Notwithstanding anything herein to the contrary, any holder delivering to the Trustee (or other paying agent appointed by the Company) the Designated Event Repurchase Notice contemplated by this Section 3.05 shall have the right to withdraw such Designated Event Repurchase Notice at any time prior to the third Business Day immediately prior to the Designated Event Expiration Time by delivery of a written notice of withdrawal to the Trustee (or other paying agent appointed by the Company) in accordance with Section 3.05(c) below, which notice shall be received by the Trustee (or other paying agent appointed by the Company) no later than on the third Business Day immediately prior to the Designated Event Expiration Time.

The Trustee (or other paying agent appointed by the Company) shall promptly notify the Company of the receipt by it of any Designated Event Repurchase Notice or written notice of withdrawal thereof.

(b) On or before the tenth day after the occurrence of a Designated Event, the Company or at its written request (which must be received by the Trustee at least five (5) Business Days prior to the date the Trustee is requested to give notice as described below, unless the Trustee shall agree in writing to a shorter period), the Trustee, in the name of and at the expense of the Company, shall give notice in accordance with Section 17.03 to all holders of record on the date of the Designated Event a notice (the “Designated Event Notice”) of the occurrence of such Designated Event and of the repurchase right at the option of the holders arising as a result thereof. If the Company shall give such notice, the Company shall also deliver a copy of the Designated Event Notice to the Trustee at such time as it is mailed to holders of the Notes. Concurrently with the mailing of any Designated Event Notice, the Company shall issue a press release announcing such Designated Event referred to in the Designated Event Notice, the form and content of which press release shall be determined by the Company in its sole discretion. The failure to issue any such press release or any defect therein shall not affect the validity of the Designated Event Notice or any proceedings for the repurchase of any Note which any Noteholder may elect to have the Company repurchase as provided in this Section 3.05.

 

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Each Designated Event Notice shall specify the circumstances constituting the Designated Event, the Designated Event Repurchase Date, the price at which the Company shall be obligated to repurchase Notes, that the holder must exercise the repurchase right on or prior to the close of business on the Business Day immediately preceding the Designated Event Repurchase Date (the “Designated Event Expiration Time”), that the holder shall have the right to withdraw any Notes surrendered prior to the third Business Day prior to the Designated Event Expiration Time, a description of the procedure which a Noteholder must follow to exercise such repurchase right and to withdraw any surrendered Notes, the place or places where the holder is to surrender such holder’s Notes, the amount of Interest accrued on each Note to the Designated Event Repurchase Date and the ISIN number or numbers of the Notes (if then generally in use) and include a form of Designated Event Repurchase Notice.

No failure of the Company to give the foregoing notices and no defect therein shall limit the holders’ repurchase rights or affect the validity of the proceedings for the repurchase of the Notes pursuant to this Section 3.05.

(c) A Designated Event Repurchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the office of the Trustee (or other paying agent appointed by the Company) in accordance with the Designated Event Repurchase Notice at any time prior to the Designated Event Expiration Time, specifying:

(i) the certificate number, if any, of the Note in respect of which such notice of withdrawal is being submitted, or the Common Depositary information if the Note in respect of which such notice of withdrawal is being submitted is represented by a Global Note,

(ii) the principal amount of the Note with respect to which such notice of withdrawal is being submitted, and

(iii) the principal amount, if any, of such Note that remains subject to the original Designated Event Repurchase Notice and that has been or will be delivered for purchase by the Company.

A written notice of withdrawal of a Designated Event Repurchase Notice may be in the form set forth in the preceding paragraph or may be in the form of a conditional withdrawal contained in a Designated Event Repurchase Notice pursuant to the terms of Section 3.05(a).

(d) On the Business Day immediately prior to the Designated Event Repurchase Date, the Company will deposit with the Trustee (or other paying agent appointed by the Company or if the Company is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 4.04) an amount of money sufficient to repurchase on the Designated Event Repurchase Date all the Notes to be repurchased on such date at the appropriate repurchase price, together with accrued Interest to, but excluding, the Designated Event Repurchase Date; provided that if such payment is made

 

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on the Designated Event Repurchase Date it must be received by the Trustee or paying agent, as the case may be, by 10:00 a.m. Hong Kong time, on the Business Day immediately prior to such date. Subject to receipt of funds or Notes by the Trustee (or other paying agent appointed by the Company), payment for Notes surrendered for repurchase (and not withdrawn) prior to the Designated Event Expiration Time will be made promptly (but in no event more than five (5) Business Days) following the later of (x) the Designated Event Repurchase Date with respect to such Note (provided the holder has satisfied the conditions in this Section 3.05) and (y) the time of delivery of such Note to the Trustee (or other paying agent appointed by the Company) by the holder thereof in the manner required by this Section 3.05) by mailing checks for the amount payable to the holders of such Notes entitled thereto as they shall appear in the Security Register.

If the Trustee (or other paying agent appointed by the Company) holds money sufficient to repurchase on the Designated Event Repurchase Date all the Notes or portions thereof that are to be purchased as of the Designated Event Repurchase Date, then on or after the Designated Event Repurchase Date (i) the Notes will cease to be outstanding, (ii) Interest on the Notes will cease to accrue, and (iii) all other rights of the holders of such Notes will terminate, whether or not book-entry transfer of the Notes has been made or the Notes have been delivered to the Trustee or paying agent, other than the right to receive the repurchase price upon delivery of the Notes.

(e) In the case of a reclassification, change, consolidation, merger, combination, sale or conveyance to which Section 15.06 applies, in which the Common Shares of the Company are changed or exchanged as a result into the right to receive stock, securities or other property or assets (including cash), which includes Common Shares of the Company or shares of common stock of another Person that are, or upon issuance will be, traded on a United States national securities exchange or approved for trading on an established automated over-the-counter trading market in the United States and such shares constitute at the time such change or exchange becomes effective in excess of 50% of the aggregate Fair Market Value of such stock, securities or other property or assets (including cash) (as determined by the Company, which determination shall be conclusive and binding), then the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture modifying the provisions of this Indenture relating to the right of holders of the Notes to cause the Company to repurchase the Notes following a Designated Event, including without limitation the applicable provisions of this Section 3.05 and the definitions of Common Shares and Designated Event, as appropriate, as determined in good faith by the Company (which determination shall be conclusive and binding), to make such provisions apply to such other Person if different from the Company and the common stock issued by such Person (in lieu of the Company and the Common Shares of the Company).

(f) The Company will comply with the provisions of Rule 13e-4 and any other tender offer rules under the Exchange Act (including, without limitation, filing a Schedule TO or other schedule) to the extent then applicable in connection with the repurchase rights of the holders of Notes in the event of a Designated Event.

 

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Section 3.06. Repurchase of Notes by the Company at Option of the Holder. Unless the Company has elected to redeem all of the Notes in accordance with Section 3.02, and subject to Article 16, Notes shall be purchased by the Company pursuant to the terms of the Notes at the option of the holder thereof on October 15, 2010 (the “Repurchase Date”), for cash, at a repurchase price of 120% of the principal amount thereof, plus any accrued and unpaid Interest to, but excluding, the Repurchase Date, subject to the provisions of Section 3.07(a); provided that no Notes may be repurchased by the Company pursuant to this Section 3.06 if the principal amount of the Notes has been accelerated and such acceleration has not been rescinded on or prior to the Repurchase Date. Repurchases of Notes under this Section 3.06 shall be made, at the option of the holder thereof, upon:

(a) delivery to the Trustee (or other paying agent appointed by the Company) by a holder of a duly completed notice (the “Repurchase Notice”) in the form set forth on the reverse of the Note during the period beginning at any time from the opening of business on the date that is 20 Business Days prior to the Repurchase Date until the close of business on the date that is two Business Days prior to the Repurchase Date; and

(b) delivery or book-entry transfer of the Notes to the Trustee (or other paying agent appointed by the Company) at any time after delivery of the Repurchase Notice (together with all necessary endorsements) at the Corporate Trust Office or any other office of the Trustee in Hong Kong (or other paying agent appointed by the Company) as provided in Section 4.02, such delivery being a condition to receipt by the holder of the repurchase price therefor; provided that such repurchase price shall be so paid pursuant to this Section 3.06 only if the Note so delivered to the Trustee (or other paying agent appointed by the Company) shall conform in all respects to the description thereof in the related Repurchase Notice.

The Company shall purchase from the holder thereof, pursuant to this Section 3.06, a portion of a Note, only if the principal amount of such portion is $100,000 or a whole multiple of $100,000. Provisions of this Indenture that apply to the purchase of all of a Note also apply to the purchase of such portion of such Note.

Any purchase by the Company contemplated pursuant to the provisions of this Section 3.06 shall be consummated by the delivery of the consideration to be received by the holder promptly following the later of the Repurchase Date and the time of the book-entry transfer or delivery of the Note.

Notwithstanding anything herein to the contrary, any holder delivering to the Trustee (or other paying agent appointed by the Company) a Repurchase Notice contemplated by this Section 3.06 shall have the right to withdraw such Repurchase Notice at any time prior to the third Business Day immediately preceding the Repurchase Date by delivery of a written notice of withdrawal to, and received by, the Trustee (or other paying agent appointed by the Company) in accordance with Section 3.08 no later than on the third Business Day immediately preceding the Repurchase Date. The Company is not obligated under this Section 3.06 to repurchase Notes listed in such written notice of withdrawal.

 

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The Trustee (or other paying agent appointed by the Company) shall promptly notify the Company of the receipt by it of any Repurchase Notice or written notice of withdrawal thereof.

Section 3.07. Company Repurchase Notice.

(a) The Notes to be repurchased on any Repurchase Date pursuant to Section 3.06 will be paid for in cash.

Unless the Company has elected to redeem all of the Notes in accordance with Section 3.02, at least three Business Days before the Company Repurchase Notice Date, the Company shall deliver an Officers’ Certificate to the Trustee specifying:

(i) the information required by Section 3.07(b) in the Company Repurchase Notice, and

(ii) whether the Company desires the Trustee to give the Company Repurchase Notice required by Section 3.07(b).

(b) Unless the Company has elected to redeem all of the Notes in accordance with Section 3.02, in connection with any repurchase of Notes, the Company shall, no less than 20 Business Days prior to the Repurchase Date (the “Company Repurchase Notice Date”), give notice to holders at their addresses shown in the Security Register setting forth information specified in this Section 3.07(b) (the “Company Repurchase Notice”). The Company will also give notice to beneficial owners as required by applicable law.

The Company Repurchase Notice shall:

(i) state the repurchase price and the Repurchase Date to which the Company Repurchase Notice relates;

(ii) include a form of Repurchase Notice;

(iii) state the name and address of the Trustee (or other paying agent appointed by the Company);

(iv) state that Notes must be surrendered to the Trustee (or other paying agent appointed by the Company) to collect the repurchase price;

(v) if the Notes are then convertible, state that Notes as to which a Repurchase Notice has been given may be converted only if the Repurchase Notice is withdrawn in accordance with the terms of this Indenture; and

 

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(vi) state the ISIN number of the Notes.

The Company Repurchase Notice may be given by the Company or, at the Company’s request, the Trustee shall forward such Company Repurchase Notice in the Company’s name and at the Company’s expense.

(c) The Company will comply with the provisions of Rule 13e-4 and any other tender offer rules under the Exchange Act (including, without limitation, filing a Schedule TO or other schedule) to the extent then applicable in connection with the repurchase rights of the holders of Notes.

Section 3.08. Effect of Repurchase Notice.

Upon receipt by the Trustee (or other paying agent appointed by the Company) of the Repurchase Notice specified in Section 3.06, the holder of the Note in respect of which such Repurchase Notice was given shall (unless such Repurchase Notice is validly withdrawn) thereafter be entitled to receive solely the repurchase price with respect to such Note. Such repurchase price shall be paid to such holder, subject to receipt of funds or Notes by the Trustee (or other paying agent appointed by the Company), promptly following the later of (x) the Repurchase Date with respect to such Note (provided the holder has satisfied the conditions in Section 3.06) and (y) the time of delivery of such Note to the Trustee (or other paying agent appointed by the Company) by the holder thereof in the manner required by Section 3.06. Notes in respect of which a Repurchase Notice has been given by the holder thereof may not be converted pursuant to Article 15 hereof on or after the date of the delivery of such Repurchase Notice unless such Repurchase Notice has first been validly withdrawn.

A Repurchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the office of the Trustee (or other paying agent appointed by the Company) in accordance with the Repurchase Notice at any time prior to the close of the third Business Day immediately preceding the Repurchase Date (which Repurchase Notice shall be received by the Trustee no later than on the third Business Day immediately preceding the Repurchase Date), specifying:

(i) the certificate number, if any, of the Note in respect of which such notice of withdrawal is being submitted, or the Common Depositary information if the Note in respect of which such notice of withdrawal is being submitted is represented by a Global Note,

(ii) the principal amount of the Note with respect to which such notice of withdrawal is being submitted, and

(iii) the principal amount, if any, of such Note which remains subject to the original Repurchase Notice and which has been or will be delivered for repurchase by the Company.

 

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Section 3.09. Deposit of Repurchase Price.

(a) Prior to 10:00 a.m. (Hong Kong time) on the Business Day immediately prior to the Repurchase Date, the Company shall deposit with the Trustee (or other paying agent appointed by the Company; or, if the Company or a Subsidiary or an Affiliate of either of them is acting as the paying agent, shall segregate and hold in trust as provided in Section 4.04) an amount of cash (in immediately available funds if deposited on such Business Day), sufficient to pay the aggregate repurchase price of all the Notes or portions thereof that are to be purchased as of the Repurchase Date.

(b) If the Trustee or other paying agent appointed by the Company, or the Company or a Subsidiary or Affiliate of either of them, if such entity is acting as the paying agent, holds cash sufficient to pay the aggregate repurchase price of all the Notes, or portions thereof that are to be repurchased as of the Repurchase Date, on or after the Repurchase Date (i) the Notes will cease to be outstanding, (ii) Interest on the Notes will cease to accrue, and (iii) all other rights of the holders of such Notes will terminate, whether or not book-entry transfer of the Notes has been made or the Notes have been delivered to the Trustee or paying agent, other than the right to receive the repurchase price upon delivery of the Notes.

Section 3.10. Notes Repurchased in Part. Upon presentation of any Note repurchased pursuant to Section 3.05 or Section 3.06, as the case may be, only in part, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Note or Notes, of any authorized denomination, in aggregate principal amount equal to the unrepurchased portion of the Notes presented.

Section 3.11. Repayment to the Company. The Trustee (or other paying agent appointed by the Company) shall return to the Company any cash or money that remains unclaimed as provided in Section 11.04, held by them for the payment of the repurchase price pursuant to Section 3.05 or Section 3.06, as the case may be; provided that to the extent that the aggregate amount of cash or money deposited by the Company pursuant to Section 3.05(d) or Section 3.09, as the case may be, exceeds the aggregate repurchase price of the Notes or portions thereof which the Company is obligated to purchase as of the Designated Event Repurchase Date or the Repurchase Date, as the case may be, then, unless otherwise agreed in writing with the Company, promptly after the Business Day following the Designated Event Repurchase Date or the Repurchase Date, as the case may be, the Trustee shall return any such excess to the Company.

ARTICLE IV

PARTICULAR COVENANTS OF THE COMPANY

Section 4.01. Payment of Principal, Premium and Interest. The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any (including the redemption price upon

 

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redemption or the repurchase price upon repurchase, in each case pursuant to Article 3), and Interest (including post-petition interest in any proceeding under any Bankruptcy Law), on each of the Notes at the places, at the respective times and in the manner provided herein and in the Notes.

Section 4.02. Maintenance of Office or Agency. The Company will maintain an office or agency in Hong Kong, where the Notes may be surrendered for registration of transfer or exchange or for presentation for payment or for conversion, redemption or repurchase and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency not designated or appointed by the Trustee. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office.

The Company may also from time to time designate co-registrars and one or more offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Company will give prompt written notice of any such designation or rescission and of any change in the location of any such other office or agency.

The Company hereby initially designates the Trustee as paying agent, Security Registrar and conversion agent and the Corporate Trust Office shall be considered as an office or agency of the Company for each of the aforesaid purposes.

So long as the Trustee is the Security Registrar, the Trustee agrees to mail, or cause to be mailed, the notices set forth in Section 7.10(a) and the third paragraph of Section 7.11. If co-registrars have been appointed in accordance with this Section, the Trustee shall mail such notices only to the Company and the holders of Notes it can identify from its records.

Section 4.03. Appointments to Fill Vacancies in Trustee’s Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 7.10, a Trustee, so that there shall at all times be a Trustee hereunder.

Section 4.04. Provisions as to Paying Agent. (a) If the Company shall appoint a paying agent other than the Trustee, or if the Trustee shall appoint such a paying agent, the Company will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 4.04:

(1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or Interest on the Notes (whether such sums have been paid to it by the Company or by any other obligor on the Notes) in trust for the benefit of the holders of the Notes;

 

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(2) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Notes) to make any payment of the principal of and premium, if any, or Interest on the Notes when the same shall be due and payable; and

(3) that at any time during the continuance of an Event of Default, upon request of the Trustee, it will forthwith pay to the Trustee all sums so held in trust.

(a) The Company shall, on the Business Day immediately prior to each due date of the principal of, premium, if any, or Interest on the Notes, deposit with the paying agent a sum (in funds which are immediately available on the due date for such payment) sufficient to pay such principal, premium, if any, or Interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of any failure to take such action; provided that if such deposit is made on the Business Day immediately prior to the due date, such deposit shall be received by the paying agent by 10:00 a.m. Hong Kong time, on such date.

(b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of, premium, if any, or Interest on the Notes, set aside, segregate and hold in trust for the benefit of the holders of the Notes a sum sufficient to pay such principal, premium, if any, or Interest so becoming due and will promptly notify the Trustee of any failure to take such action and of any failure by the Company (or any other obligor under the Notes) to make any payment of the principal of, premium, if any, or Interest on the Notes when the same shall become due and payable.

(c) Anything in this Section 4.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by the Company or any paying agent hereunder as required by this Section 4.04, such sums to be held by the Trustee upon the trusts herein contained and upon such payment by the Company or any paying agent to the Trustee, the Company or such paying agent shall be released from all further liability with respect to such sums.

(d) Anything in this Section 4.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 4.04 is subject to Section 11.03 and Section 11.04.

The Trustee shall not be responsible for the actions of any other paying agents (including the Company if acting as its own paying agent) and shall have no control of any funds held by such other paying agents.

 

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Section 4.05. Existence. Subject to Article 5, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence and rights (charter and statutory); provided that the Company shall not be required to preserve any such right if the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the holders of the Notes.

Section 4.06. Maintenance of Properties. The Company will cause all properties used or useful in the conduct of its business or the business of any Significant Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as is consistent with the Company’s past practice and is in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided that nothing in this Section 4.06 shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the holders of the Notes.

Section 4.07. Payment of Taxes and Other Claims. The Company will pay or discharge, or cause to be paid or discharged, before the same may become delinquent, (i) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, (ii) all claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon the property of the Company or any Subsidiary and (iii) all stamp taxes and other duties, if any, which may be imposed by the Cayman Islands or any political subdivision thereof or therein in connection with the issuance, transfer, exchange, conversion, redemption or repurchase of any Notes or with respect to this Indenture other than pursuant to Section 2.06; provided that, in the case of clauses (i) and (ii), the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim (A) if the failure to do so will not, in the aggregate, have a material adverse impact on the Company and its Subsidiaries, taken as a whole, or (B) if the amount, applicability or validity is being contested in good faith by appropriate proceedings.

Section 4.08. Reports.

(a) So long as any of the Notes remain outstanding and prior to a Qualifying IPO, the Company shall file with the Trustee and upon the request of the Holders furnish to the Holders all of the following:

(i) As soon as they are available but in any event within 120 calendar days (or 90 calendar days if the Company’s Common Shares are listed on any international securities exchange or are approved for quotation on any system for automated dissemination of securities prices, or if the Company is otherwise required by law or regulation to publicly file information on a periodical basis with a securities regulatory authorities) after the end of the fiscal year of the Company, copies of its financial statements (on a consolidated basis) in respect of such fiscal year (including a statement of income, balance sheet and cash flow statement) audited by a member firm of an internationally-recognized firm of independent accountants in accordance with GAAP, together with an unqualified audit report in respect thereof;

 

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(ii) As soon as they are available, but in any event within 75 calendar days after the end of each of the first, second and third Fiscal Quarters of the Company, copies of its unaudited financial statements (on a consolidated basis) in respect of the respective period (including a statement of income, balance sheet and cash flow statement) prepared on a basis consistent with the audited financial statements of the Company; provided that the Company shall make commercially reasonable efforts to furnish such financial statements within 45 calendar days after the end of each such Fiscal Quarter; and provided further that the financial statements delivered after the end of the second Fiscal Quarter shall cover the six-month period then ended; and

(iii) All public filings with the relevant trading market and regulatory authorities in connection with the Qualifying IPO and thereafter.

(b) So long as any of the Notes remains outstanding, the Company will provide to the Trustee (i) within (x) 45 days after the close of the second Fiscal Quarter of the Company and (y) within the time period described in Section 4.08(a)(i) after the close of the Company’s fiscal year (which is ended December 31), an Officers’ Certificate stating the Consolidated Interest Expense Coverage Ratio, the Consolidated Subsidiary Debt to Consolidated Total Tangible Assets Ratio, the Consolidated Net Worth, the Cash Balance and the Working Capital Ratio, each as of the end of the six month period ending on the end of the second Fiscal Quarter or fiscal year, as the case may be, and showing in reasonable detail the calculation of such ratios and amounts, including the arithmetic computations of each component of such ratios and amounts; and (ii) as soon as possible and in any event within 14 days after the Company becomes aware of the occurrence of a Default, an Officers’ Certificate setting forth the details of the Default, and the action that the Company proposes to take with respect thereto.

(c) For as long as any Notes are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, during any period in which the Company is neither subject to Section 13 or 15(d) of the Exchange Act, nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, the Company shall supply (i) to any Holder or Beneficial Owner of a Note or (ii) upon their request to a prospective

 

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purchaser of a Note or beneficial interest therein designated by such holder or owner, the information specified in, and meeting the requirements of Rule 144A(d)(4) under the Securities Act.

(d) The Company shall notify the Trustee in writing within five (5) Business Days prior to filing a registration statement or other filing with any stock exchange for a Qualifying IPO, and shall notify the Trustee of the consummation of the Qualifying IPO on the date that of consummation thereof.

Section 4.09. Incurrence of Additional Debt. Prior to the Qualifying IPO, the Company shall not, and shall not permit any of its Subsidiaries to, Incur, directly or indirectly, any Debt unless, after giving effect to the application of the proceeds thereof, no Default or Event of Default would occur as a consequence of such Incurrence or be continuing following such Incurrence and such Debt is Permitted Debt.

Notwithstanding anything to the contrary contained in this Section,

(a) the Company shall not, and shall not permit any Subsidiary to, Incur any Debt pursuant to this covenant if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations unless such Debt shall be subordinated to the Notes or the applicable Guarantee, as the case may be, to at least the same extent as such Subordinated Obligations and such Incurrence otherwise complies with the Indenture;

(b) the Company shall not permit any of its Subsidiaries that is not a Guarantor to Incur any Debt pursuant to this covenant if the proceeds thereof are used, directly or indirectly, to Refinance any Debt of the Company or any Guarantor; and

(c) accrual of interest, accretion or amortization of original issue discount and the payment of interest or dividends in the form of additional Debt, will be deemed not to be an Incurrence of Debt for purposes of this Section.

For purposes of determining compliance with this Section, in the event that an item of Debt meets the criteria of more than one of the categories of Permitted Debt described in clauses (a) through (n) of the definition of “Permitted Debt”, the Company shall, in its sole discretion, classify (or later reclassify in whole or in part, in its sole discretion) such item of Debt in any manner that complies with this Section.

Section 4.10. Restricted Payments. Prior to the Qualifying IPO, the Company shall not make, and shall not permit any of its Subsidiaries to make, directly or indirectly, any Restricted Payment prior to a Qualifying IPO, and thereafter shall not make any Restricted Payment if at the time of, and after giving effect to, such proposed Restricted Payment,

 

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(a) a Default or Event of Default shall have occurred and be continuing, or

(b) the Minimum Consolidated Interest Expense Coverage Ratio is not complied with, or

(c) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made since the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value at the time of such Restricted Payment) would exceed an amount equal to the sum of:

(1) 50% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from the date of initial receipt by the Company of proceeds from the sale of Common Shares in the Qualifying IPO to the end of the most recent Fiscal Quarter ending at least 45 days prior to the date of such Restricted Payment (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit), plus

(2) 100% of the Capital Stock Sale Proceeds, plus

(3) the sum of:

(A) the aggregate net cash proceeds received by the Company or any Subsidiary from the issuance or sale after the Issue Date of convertible or exchangeable Debt that has been converted into or exchanged for Capital Stock (other than Disqualified Stock) of the Company, and

(B) the aggregate amount by which Debt (other than Subordinated Obligations) of the Company or any Subsidiary is reduced on the Company’s consolidated balance sheet on or after the Issue Date upon the conversion or exchange of any Debt (other than Subordinated Obligations) issued or sold on or prior to the Issue Date that is convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Company,

excluding, in the case of clause (A) or (B):

(x) any such Debt issued or sold to the Company or a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any such Subsidiary for the benefit of their employees, and

(y) the aggregate amount of any cash, securities (other than such Capital Stock) or other Property distributed by the Company or any of its Subsidiaries upon any such conversion or exchange, plus

 

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(4) an amount equal to the net reduction in Investments made after the Issue Date and counted as a Restricted Payment in any Person other than the Company or any of its Subsidiaries resulting from dividends, repayments of loans or advances or other transfers of Property, in each case to the Company or any of its Subsidiaries from such Person.

Notwithstanding the foregoing limitation, the Company may:

(a) pay dividends on its Capital Stock within 60 days of the declaration thereof if, on the declaration date, such dividends could have been paid in compliance with the Indenture; provided, however, that at the time of such payment of such dividend, no Default or Event of Default shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments;

(b) purchase, repurchase, redeem, legally defease, acquire or retire for value Capital Stock of the Company or Subordinated Obligations in exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any such Subsidiary for the benefit of their employees) of the Company (or options, warrants or other rights to acquire such Capital Stock (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company) of the Company, other than Debt that is convertible into or exchangeable for Capital Stock); provided, however, that

(1) such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded from the calculation of the amount of Restricted Payments and

(2) the Capital Stock Sale Proceeds from such exchange or sale shall be excluded from the calculation pursuant to clause (c)(2) above; and

(c) purchase, repurchase, redeem, legally defease, acquire or retire for value any Subordinated Obligations in exchange for, or out of the proceeds of the substantially concurrent sale of, Permitted Refinancing Debt; provided, however, that such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded from the calculation of the amount of Restricted Payments.

Section 4.11. Limitation on Liens. The Company shall not, and shall not permit any Subsidiary to, directly or indirectly, Incur, assume or permit to exist any Lien on the Collateral (other than Liens incurred pursuant to the Security Documents).

 

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Prior to the Qualifying IPO, the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, Incur or suffer to exist, any Lien (other than Permitted Liens or Liens securing Senior Debt) upon any of its Property (including Capital Stock of any of its Subsidiaries), whether owned at the Issue Date or thereafter acquired, or any interest therein or any income or profits therefrom, and if such Liens secure Subordinated Obligations, the Notes and the Guarantees will be secured by such Lien on an equally and ratably basis.

Section 4.12. Asset Sales. Prior to the Qualifying IPO, the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, consummate any Asset Sale unless:

(a) no Default or Event of Default shall have occurred and be continuing;

(b) the Company or such Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Property subject to such Asset Sale;

(c) at least 75% of the consideration paid to the Company or such Subsidiary in connection with such Asset Sale is in the form of cash or Cash Equivalents or the assumption by the purchaser of liabilities of the Company or any of its Subsidiaries (other than contingent liabilities or liabilities that are by their terms subordinated to the Notes or the applicable Guarantee) as a result of which the Company and its Subsidiaries are no longer obligated with respect to such liabilities; and

(d) the Company delivers an Officers’ Certificate to the Trustee certifying that such Asset Sale complies with the foregoing clauses (a), (b) and (c).

The Net Available Cash (or any portion thereof) from Asset Sales may be applied by the Company or any of its Subsidiaries, to the extent the Company or such Subsidiary elects (or is required by the terms of any Debt):

(a) to repay Senior Debt of the Company or any Subsidiary that is a Guarantor (excluding, in any such case, any Debt owed to the Company or an Affiliate of the Company), or

(b) to reinvest in Additional Assets (including by means of an Investment in Additional Assets by any Subsidiary of the Company with Net Available Cash received by the Company or another Subsidiary of the Company).

 

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Any Net Available Cash from an Asset Sale not applied in accordance with the preceding paragraph within 120 days from the date of the receipt of such Net Available Cash shall constitute “Excess Proceeds”.

When the aggregate amount of Excess Proceeds exceeds $5.0 million (taking into account income earned on such Excess Proceeds, if any), the Company will be required to make an offer to repurchase (the “Asset Sale Offer”) the Notes, which offer shall be in the amount of the Allocable Excess Proceeds (rounded to the nearest $100,000), on a pro rata basis according to principal amount, at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest if any to the Purchase Date (subject to the right of holders of record on the relevant Regular Record Date to receive interest due on the relevant Interest Payment Date), in accordance with the procedures (including prorating in the event of oversubscription) set forth in Section 3.09. To the extent that any portion of the amount of Net Available Cash remains after compliance with the preceding sentence and provided that all holders of Notes have been given the opportunity to tender their Notes for repurchase in accordance with Section 3.09, the Company or such Subsidiary may use such remaining amount for any purpose permitted by this Indenture, and the amount of Excess Proceeds will be reset to zero.

The term “Allocable Excess Proceeds” shall mean the product of:

(a) the Excess Proceeds and

(b) a fraction,

(1) the numerator of which is the aggregate principal amount of the Notes outstanding on the date of the Asset Sale Offer, and

(2) the denominator of which is the sum of the aggregate principal amount of the Notes outstanding on the date of the Asset Sale Offer and the aggregate principal amount (or accreted value, if applicable) of other Debt of the Company outstanding on the date of the Asset Sale Offer that is pari passu in right of payment with the Notes and subject to terms and conditions in respect of Asset Sales similar in all material respects to this Section and requiring the Company to make an offer to repurchase such Debt at substantially the same time as the Asset Sale Offer.

Section 4.13. Restrictions on Distributions from Subsidiaries. Prior to the Qualifying IPO, the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any of its Subsidiaries to:

(a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock owned by, or pay any Debt or other obligation owed, to the Company or any other Subsidiary of the Company,

 

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(b) make any loans or advances to the Company or any other Subsidiary of the Company, or

(c) transfer any of its Property to the Company or any other Subsidiary of the Company.

The foregoing limitations will not apply:

(1) with respect to clauses (a), (b) and (c), to restrictions:

(A) in effect on the Issue Date (including, without limitation, restrictions pursuant to the Notes, this Indenture, the Convertible Notes and the indenture relating thereto),

(B) relating to Debt of any Subsidiary of the Company and existing at the time it became a Subsidiary of the Company if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which such Subsidiary became a Subsidiary of the Company or was acquired by the Company,

(C) that result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (1)(A) or (B) above or in clause (2)(A) or (B) below, provided such restrictions are not less favorable to the holders of Notes than those under the agreements evidencing the Debt so Refinanced, and

(2) with respect to clause (c) only, to restrictions:

(A) relating to Debt that is permitted to be Incurred and secured without also securing the Notes or the applicable Guarantee pursuant to Section 4.09 and Section 4.11 that limit the right of the debtor to dispose of the Property securing such Debt,

(B) encumbering Property at the time such Property was acquired by the Company or any of its Subsidiaries, so long as such restrictions relate solely to the Property so acquired and were not created in connection with or in anticipation of such acquisition,

(C) resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements that restrict assignment of such agreements or rights thereunder,

 

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(D) customary restrictions contained in asset sale agreements limiting the transfer of such Property pending the closing of such sale, or

(E) with respect to any PRC Subsidiary and imposed pursuant to an agreement that has been entered into for the Incurrence of Debt permitted under clause (j) of the definition of “Permitted Debt” if, as determined by the Board of Directors, the encumbrances or restrictions are (i) customary for such types of agreements and (ii) would not, at the time agreed to, be expected to materially and adversely affect the ability of the Company to make any required payment on the Notes and any extension, refinancings, renewals or replacements of any of the foregoing agreements; provided that the encumbrances and restrictions in any such extension, refinancings, renewal or replacement, taken as a whole, are no more restrictive in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced.

Section 4.14. Affiliate Transactions. Prior to the Qualifying IPO, the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an “Affiliate Transaction”), unless:

(a) the terms of such Affiliate Transaction are:

(1) set forth in writing,

(2) in the best interest of the Company or such Subsidiary, as the case may be, and

(3) no less favorable to the Company or such Subsidiary, as the case may be, than those that could be obtained in a comparable arm’s-length transaction with a Person that is not an Affiliate of the Company,

(b) if such Affiliate Transaction involves aggregate payments or value in excess of $3.0 million, the Board of Directors (including a majority of the disinterested members of the Board of Directors) approves such Affiliate Transaction and, in its good faith judgment, believes that such Affiliate Transaction complies with clauses (a)(2) and (3) of this paragraph as evidenced by a Board Resolution promptly delivered to the Trustee, and

 

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(c) if such Affiliate Transaction involves aggregate payments or value in excess of $10.0 million, the Company obtains a written opinion from an Independent Financial Advisor to the effect that the consideration to be paid or received in connection with such Affiliate Transaction is fair, from a financial point of view, to the Company and its Subsidiaries.

Notwithstanding the foregoing limitation, the Company or any of its Subsidiaries may enter into or suffer to exist the following:

(a) any transaction or series of transactions between the Company and one or more of its Wholly-Owned Subsidiaries or between two or more of its Wholly-Owned Subsidiaries in the ordinary course of business;

(b) any Restricted Payment permitted to be made pursuant to Section 4.10 or any Permitted Investment;

(c) the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and employees of the Company or any of its Subsidiaries, so long as the Board of Directors in good faith shall have approved the terms thereof and deemed the services theretofore or thereafter to be performed for such compensation to be fair consideration therefor and the payments made in the ordinary course of business and consistent with past practices of the Company or such Subsidiary; and

(d) loans and advances to employees made in the ordinary course of business and consistent with the past practices of the Company or such Subsidiary, as the case may be, provided that such loans and advances do not exceed $500,000 in the aggregate at any one time outstanding.

Section 4.15. Issuance or Sale of Capital Stock of Subsidiaries. Prior to the Qualifying IPO, the Company shall not, and shall not permit any of its Subsidiaries to:

(a) sell, pledge, hypothecate or otherwise dispose of any shares of Capital Stock of any of its Subsidiaries, or

(b) permit any Subsidiary of the Company to, directly or indirectly, issue or sell or otherwise dispose of any shares of its Capital Stock,

other than, in the case of either (a) or (b):

(1) directors’ qualifying shares or Capital Stock which is required by applicable law to be held by a Person other than the Company or a Wholly Owned Subsidiary,

(2) to the Company or a Wholly Owned Subsidiary, or

 

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(3) a disposition of 100% of the shares of Capital Stock of such Subsidiary; provided, however, that, in the case of this clause (3),

(A) such disposition is effected in compliance with Section 4.12, and

(B) upon consummation of such disposition and execution and delivery of a supplemental indenture in form satisfactory to the Trustee, such Subsidiary shall be released from any Guarantee previously made by such Subsidiary.

Section 4.16. Maintenance of Consolidated Tangible Net Worth. Prior to the Qualifying IPO, the Company shall not, on the Issue Date (after giving effect to the issuance of the Notes) or at any time, permit its Consolidated Tangible Net Worth to be less than the Consolidated Tangible Net Worth Threshold. The “Consolidated Tangible Net Worth Threshold” shall be equal to $60.0 million from the Issue Date through December 31, 2007; $95.0 million from January 1, 2008 through December 31, 2008; $145.0 million from January 1, 2009 through December 31, 2009; and $195.0 million thereafter.

Section 4.17. Repurchase at the Option of Holders Following a Change of Control.

(i) Upon the occurrence of a Change of Control at any time prior to the Qualifying IPO, the Company shall, within 7 days thereafter notify the Trustee and the Holders of such Change of Control, and within 30 days of a Change of Control, make an offer (the “Change of Control Offer”) pursuant to the procedures set forth in Section 3.09. Each Holder shall have the right to accept such offer and require the Company to repurchase all or any portion (equal to $100,000 or an integral multiple thereof) of such Holder’s Notes pursuant to the Change of Control Offer at a purchase price, in cash equal to (x) 105% of the then outstanding principal amount of the Notes, plus accrued and unpaid interest, if any, on the Notes repurchased, to the Purchase Date if such Change of Control occurs prior to the Qualifying IPO or (y) 101% of the then outstanding principal amount of the Notes, plus accrued and unpaid interest, if any, on the Notes repurchased, to the Purchase Date if such Change of Control occurs after the Qualifying IPO.

(ii) The Company shall not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in this Indenture applicable to a Change of Control Offer made by the Company and purchases all Notes properly tendered and not withdrawn under such Change of Control Offer.

 

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Section 4.18. Future Guarantors. The Company shall cause each Person that becomes a Subsidiary following the Issue Date to execute and deliver to the Trustee a Guarantee at the time such Person becomes a Subsidiary; provided that no PRC Subsidiary shall be required to execute a Guarantee unless there has been after the Issue Date a change in PRC law or interpretation in PRC law that permits such Guarantees without approval of PRC Governmental Authority, and provided further that the refusal of any PRC Governmental Authority, acting solely in its own discretion, to register or approve such Guarantee (if required by PRC law) shall not be deemed as a Default or Event of Default hereunder.

Section 4.19. Business Activities. Prior to the Qualifying IPO, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, engage in any business other than a Related Business.

Section 4.20. Sale and Leaseback Transactions. Prior to the Qualifying IPO, the Company shall not, and shall not permit any of its Subsidiaries to, enter into any Sale and Leaseback Transaction with respect to any Property unless:

(a) the Company or such Subsidiary would be entitled to:

(1) Incur Debt in an amount equal to the Attributable Debt with respect to such Sale and Leaseback Transaction pursuant to Section 4.09 and

(2) create a Lien on such Property securing such Attributable Debt without also securing the Notes or the applicable Guarantee pursuant to Section 4.11 and

(b) such Sale and Leaseback Transaction is effected in compliance with Section 4.12.

Section 4.21. Impairment of Security Interest. The Company shall not, and shall not permit any of its Subsidiaries to, take or omit to take any action that might or would have the result of materially impairing the security interest with respect to the Collateral for the benefit of the Trustee and the holders of the Notes, and the Company shall not, and shall not permit any of its Subsidiaries to, grant to any Person other than the Collateral Agent, for the benefit of the Trustee, the holders of the Notes, the trustee for the Floating Rate Notes, the holders of the Floating Rate Notes and the other beneficiaries described in the Security Documents, any interest whatsoever in any of the Collateral.

Section 4.22. Amendment to Security Documents. The Company shall not, and shall not permit any of its Subsidiaries to, amend, waive or otherwise modify, or permit or consent to any amendment, waiver or other modification, the Security Documents in any way that would be adverse to the holders of the Notes.

 

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Section 4.23. Use of Proceeds. The Company will use the net proceeds from the sale of the Notes to (i) repay to (x) Blue Ridge China Partners, L.P. and (y) EI Fund II China, LLC the Shareholders’ Loan in its entirety and (ii) after giving effect to the application of such net proceeds, the Company will use the remaining net proceeds from the sale of the Notes to be paid to the account of Xinyuan Real Estate for further credit to the account of the WFOE to be used for (A) Capital Expenditures, in particular, the acquisition of land-use rights in the cities of Suzhou, Hefei, Jinan and Zhengzhou in the PRC, and other cities in the PRC consistent with the Company’s development strategy and that is suitable for residential development comparable in nature to residential development that has been completed by the Company prior to the Issue Date, (B) working capital and (C) general corporate purposes, all in accordance with and subject to the Account Agreement and pending the application of all of such net proceeds in such manner, to invest the portion of such net proceeds not yet so applied in Cash Equivalents. Following the application of net proceeds in such manner, any remaining net proceeds may be applied for general corporate purposes not otherwise prohibited by the terms of this Indenture.

Section 4.24. Maintenance of Insurance. The Company shall, and shall cause its Subsidiaries to, maintain insurance policies covering such risks, in such amounts and with such terms as are normally carried by similar companies engaged in a similar business to the Related Business in the PRC.

Section 4.25. Qualifying IPO. The Company shall make such filings, registrations or qualifications and take all other necessary action and will use its commercially reasonable efforts to obtain such consents, approvals and authorizations, if any, and satisfy all conditions that may be required in connection with listing the Company’s Common Shares in a Qualifying IPO and shall use its commercially reasonable efforts to complete a Qualifying IPO by no later than October 15, 2009 and maintain such listing continuously thereafter.

Section 4.26. Enforcement of Loan Rights. If at any time there has been and is existing an Event of Default, the Company shall cause Xinyuan Real Estate to immediately exercise all of its rights to require immediate repayment of all amounts outstanding pursuant to that certain loan agreement between Xinyuan Real Estate and the WFOE, whether pursuant to contract or statute.

Section 4.27. Government Approvals and Licenses; Compliance with Law. The Company shall, and shall cause its Subsidiaries to, (a) obtain and maintain in full force and effect all Governmental Approvals, authorizations, consents, permits, concessions and licenses as are necessary to engage in a Related Business, (b) preserve and maintain good and valid title to its properties and assets (including land-use rights) free and clear of any Liens other than Permitted Liens and (c) comply with all laws, regulations, orders, judgments and decrees of any governmental body, except to the extent that failure so to obtain, maintain, preserve and comply would reasonably not be expected to have a Material Adverse Effect.

 

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Section 4.28. Maintenance of Financial Ratios.

The Company shall:

(a) maintain an average daily Cash Balance of no less than (x) $10.0 million during the last 30 days of each Fiscal Quarter in the fiscal year ending December 31, 2007, (y) $20.0 million during the last 30 days of each Fiscal Quarter in the fiscal year ending December 31, 2008 and (z) $30.0 million during (1) the last 30 days of each Fiscal Quarter thereafter and (2) the fifteen calendar days preceding stated maturity of the Notes.

(b) maintain at all times a Consolidated Subsidiary Debt to Consolidated Total Tangible Asset Ratio of no more than 0.25 to 1.00.

(c) maintain at all times a Working Capital Ratio of no less than 1.20 to 1.00 before the date of initial receipt by the Company of proceeds from the sale of Common Shares in the Qualifying IPO, and 1.33 to 1.00 thereafter.

Section 4.29. Ranking of Notes. The Notes and all other obligations of the Company and the Guarantors under this Indenture are and at all times shall remain direct and secured obligations of the Company and each Guarantor ranking pari passu as against the assets of the Company and each Guarantor with all other Notes from time to time issued and outstanding hereunder, without any preference among themselves and subordinate in right and priority of payment to all other present and future unsecured Senior Debt (actual or contingent) of the Company and each Guarantor (except as otherwise required by law).

Section 4.30. Capital Expenditure.

The Company shall not make or Incur, or permit to be made or incurred, Capital Expenditure during each of the fiscal years set forth below, in aggregate, in excess of the maximum amount set forth for such fiscal year:

 

Fiscal Year Ending		Maximum Capital Expenditures ($ in millions)
2007		1.5
2008		1.5
2009		1.5
2010		1.5

 

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Section 4.31. Additional Amounts. All payments of principal of, and premium (if any) and interest on the Notes or under the Guarantees will be made without withholding or deduction for, or on account of, any present or future Taxes, unless such withholding or deduction is required by law or by regulation or governmental policy having the force of law. In the event that any such withholding or deduction is so required, the Company or the applicable Guarantor, as the case may be, will pay such withholding or deduction which is required by law or by regulation or governmental policy having the force of law, and will pay additional amounts (“Additional Amounts”) as will result in receipt by the holder of each Note or the Guarantees, as the case may be, of such amounts as would have been received by such holder had no such withholding or deduction been required, except that no Additional Amounts shall be payable:

(a) for or on account of:

(i) any Tax that would not have been imposed but for:

(A) the existence of any present or former connection between the holder or beneficial owner of such Note or Guarantee, as the case may be, and the Governmental Authority imposing the Tax other than merely holding such Note or the receipt of payments thereunder or under a Guarantee, including, without limitation, such holder or beneficial owner being or having been a national, domiciliary or resident of the jurisdiction of such Governmental Authority or treated as a resident thereof or being or having been physically present or engaged in a business therein or having or having had a permanent establishment therein;

(B) the presentation of such Note (in cases in which presentation is required) more than 30 days after the later of the date on which the payment of the principal of, premium, if any, and interest on, such Note became due and payable pursuant to the terms thereof or was made or duly provided for, except to the extent that the holder thereof would have been entitled to such Additional Amounts if it had presented such Note for payment on any date within such 30-day period;

(C) the failure of the holder or beneficial owner to comply with a timely request of the Company or any Guarantor addressed to the holder or beneficial owner, as the case may be, to provide information concerning such

 

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holder’s or beneficial owner’s nationality, residence, identity or connection with any Governmental Authority, if and to the extent that due and timely compliance with such request would have reduced or eliminated any withholding or deduction as to which Additional Amounts would have otherwise been payable to such holder;

(D) the presentation of such Note (in cases in which presentation is required) for payment in a jurisdiction in which the Company, a Surviving Person, or a Guarantor is resident for tax purposes, unless such Note could not have been presented for payment elsewhere;

(ii) any estate, inheritance, gift, sale, transfer, personal property or similar Tax;

(iii) any withholding or deduction that is imposed or levied on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or

(iv) any combination of Taxes referred to in the preceding clauses (i) and (ii); or

(b) with respect to any payment of the principal of, or premium, if any, or interest on, such Note or any payment under any Guarantee to a holder, if the holder is a fiduciary, partnership or person other than the sole beneficial owner of any payment to the extent that the beneficiary or settlor with respect to the fiduciary, or a member of the partnership, or the beneficial owner would not have been entitled to such Additional Amounts had that beneficiary, settler, partner or beneficial owner been the holder thereof.

Whenever there is mentioned in any context the payment of principal of, and any premium or interest on, any Note or under any Guarantee, such mention shall be deemed to include payment of Additional Amounts provided for in this Indenture to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof.

Section 4.32. Limitation on Layering of Debt. Prior to the Qualifying IPO, the Company shall not, and shall not permit any Guarantor to, Incur, directly or indirectly, any Debt that is subordinate or junior in right of payment to any Senior Debt unless such Debt is pari passu with or is expressly subordinated in right of payment to the Notes pursuant to subordination provisions substantially similar to those contained in this Indenture. In addition, prior to the Qualifying IPO, no Guarantor shall Guarantee, directly or indirectly, and Debt of the Company that is subordinate or junior in right of payment to any Senior Debt

 

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unless such Guarantee ranks pari passu with, or is expressly subordinate in right of payment to, the Guarantee of such Guarantor pursuant to subordination provisions substantially similar to those contained in this Indenture.

Section 4.33. Compliance Certificate.

(a) The Company and the Guarantor shall deliver to the Trustee, within the time period required for annual report to be delivered pursuant to Section 4.08(a)(i), an Officers’ Certificate stating that a review of the activities of the Company, the Guarantors and their respective Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company, the Guarantors and their respective Subsidiaries have kept, observed, performed and fulfilled their obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge the Company, the Guarantors and their respective Subsidiaries have kept, observed, performed and fulfilled each and every covenant contained in this Indenture and are not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of, premium, if any, or interest on the Notes is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto.

(b) The Company shall deliver to the Trustee, as soon as possible and in any event no later than 30 days after the occurrence thereof, written notice in the form of an Officers’ Certificate of any event that with the giving of notice and/or the lapse of time would become an Event of Default, its status and what action the Company is taking or proposes to take with respect thereto.

Any notice required to be given under this Section 4.33 shall be delivered to a Responsible Officer of the Trustee at its Corporate Trust Office.

Section 4.34. Stay, Extension and Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or Interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

 

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Section 4.35. Additional Interest and Delivery of WFOE Share Pledge. The Company shall use its reasonable best efforts to deliver to the Collateral Agent (i) within 30 days after the WFOE’s obtaining the extension of its business license but in no event shall be later than October 30, 2007, an Officers’ Certificate attaching thereto written evidence that the Company or its agent has submitted the WFOE Share Pledge to the local counterpart of the MOFCOM for the Province of Henan in the PRC and (ii) within fifteen calendar days following the receipt of MOFCOM approval as described in the foregoing clause (i), an Officers’ Certificate attaching thereto written evidence that the Company or its agent has submitted the WFOE Share Pledge to the local counterpart of the SAFE for approval (if required) and the SAIC for registration with the SAIC. If the Company fails to deliver to the Collateral Agent the above-mentioned Officer’s Certificate with the required written evidence attached thereto, the Company is required to pay Additional Interest to holders of Notes, and the Company will provide written notice (“Additional Interest Notice”) to the Trustee and the holders of the Company’s obligation to pay Additional Interest no later than fifteen (15) days prior to the proposed payment date for the payment of the Additional Interest, and the Additional Interest Notice shall set forth the amount of Additional Interest to be paid by the Company on such payment date and manner of calculation thereof. The Trustee shall not at any time be under any duty or responsibility to any holder of Notes to determine or verify the Additional Interest, or with respect to the nature, extent or calculation of the amount of Additional Interest when made, or with respect to the method employed in such calculation of the Additional Interest.

Section 4.36. Payments for Consent. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to or for the benefit of any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Notes unless such consideration is offered to be paid and is paid to all Holders that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement.

Section 4.37. Repurchase Upon Designated Event. Subject to the provisions in Article 16, upon the occurrence of a Designated Event, the Company shall, within 7 days thereafter notify the Trustee and the holders of such Designated Event, and within 30 days of a Designated Event, make an offer (the “Designated Event Offer”) pursuant to the procedures set forth in Section 3.05. Each holder shall have the right to accept such offer and require the Company to repurchase all or any portion (equal to $100,000 or an integral multiple of $100,000) of such holder’s Notes pursuant to the Designated Event Offer at a purchase price, in cash pursuant to the procedures set forth in Section 3.05.

 

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Section 4.38. Cash Management. The Company shall cause each of its PRC Subsidiaries (other than the WFOE), to the extent permissible under applicable laws or regulations, to maintain only a minimum level of Cash Balance for its respective operations that is appropriate and desirable in accordance with good business practice in maximizing the interests of the Company, as shareholder of the WFOE, and shall transfer any cash and Cash Equivalents in excess of such amounts to the WFOE on the 30^th day of each month.

ARTICLE V

CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE

Section 5.01. Company May Consolidate on Certain Terms.

(a) At any time prior to a Qualifying IPO, the Company shall not merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all of its Property in any one transaction or series of transactions unless:

(i) the Company shall be the Surviving Person in such merger, consolidation or amalgamation, or the Surviving Person (if other than the Company) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia or the Cayman Islands;

(ii) the Surviving Person (if other than the Company) expressly assumes, by supplemental indenture in form satisfactory to the Trustee, executed and delivered to the Trustee by such Surviving Person, the due and punctual payment of the principal of, and premium, if any, Additional Amounts and interest on, all the Notes, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be performed by the Company, and such supplemental indenture shall provide for the applicable conversion rights set forth in Section 15.06;

(iii) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all of the Property of the Company, such Property shall have been transferred as an entirety or virtually as an entirety to one Person;

(iv) immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (iv) and clauses (v) and (vi) below, any Debt that becomes, or is anticipated to become, an obligation of the Surviving Person or any Subsidiary of the Company as a result of such transaction or series of transactions as having been Incurred by the Surviving Person or such Subsidiary at the time of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing;

 

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(v) immediately after giving effect to such transaction or series of transactions on a pro forma basis:

(1) the Company or the Surviving Person, as the case may be, would be in compliance with the Minimum Consolidated Interest Expense Coverage Ratio; and

(2) the Company or the Surviving Person, as the case may be, would have a Consolidated Interest Expense Coverage Ratio that is not lower than the Consolidated Interest Expense Coverage Ratio of the Company immediately prior to such transaction;

(vi) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Surviving Person shall have a Consolidated Net Worth in an amount which is not less than the Consolidated Net Worth of the Company immediately prior to such transaction or series of transactions;

(vii) the Company shall deliver, or cause to be delivered, to the Trustee, an Officers’ Certificate and an Opinion of Counsel, each stating that such transaction or series of transactions and the supplemental indenture, if any, in respect thereto comply with this covenant and that all conditions precedent herein provided for relating to such transaction or series of transactions have been satisfied; and

(viii) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the holders will not recognize income, gain or loss for federal income tax purposes as a result of such transaction and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred.

The foregoing provisions (other than clause (iv)) shall not apply to any transaction or series of transactions which constitute an Asset Sale if the Company has complied with Section 4.12.

(b) At any time prior to a Qualifying IPO, the Company shall not permit any Guarantor to merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company or such Guarantor) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its Property in any one transaction or series of transactions unless:

(i) the Surviving Person (if not such Guarantor) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation, company (including a

 

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limited liability company) or partnership organized and existing under the laws of the United States of America, any State thereof or the District of Columbia or the Cayman Islands;

(ii) the Surviving Person (if other than such Guarantor) expressly assumes, by supplemental indenture in form satisfactory to the Trustee, executed and delivered to the Trustee by such Surviving Person, the due and punctual performance and observance of all the obligations of such Guarantor under its Guarantee;

(iii) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or a substantial part of all the Property of such Guarantor, such Property shall have been transferred as an entirety or virtually as an entirety to one Person;

(iv) immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (iv) and clauses (v) and (vi) below, any Debt that becomes, or is anticipated to become, an obligation of the Surviving Person, the Company or any of its Subsidiaries as a result of such transaction or series of transactions as having been Incurred by the Surviving Person, the Company or such Subsidiary at the time of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing;

(v) immediately after giving effect to such transaction or series of transactions on a pro forma basis:

(1) the Company would be in compliance with the Minimum Consolidated Interest Expense Coverage Ratio, and

(2) the Company would have a Consolidated Interest Expense Coverage Ratio which is not lower than the Consolidated Interest Expense Coverage Ratio of the Company immediately prior to such transaction; and

(vi) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Company shall have a Consolidated Net Worth in an amount which is not less than the Consolidated Net Worth of the Company immediately prior to such transaction or series of transactions;

(vii) the Company shall deliver, or cause to be delivered, to the Trustee, an Officers’ Certificate and an Opinion of Counsel, each stating that such transaction or series of transactions and the supplemental indenture, if any, in respect thereto comply with this covenant and that all conditions precedent herein provided for relating to such transaction or series of transactions have been satisfied; and

 

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(viii) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the holders will not recognize income, gain or loss for federal income tax purposes as a result of such transaction and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred.

The foregoing provisions (other than clause (iv)) shall not apply to any transaction or series of transactions which constitute an Asset Sale if the Company has complied with Section 4.12.

Subject to the provisions of Section 5.02, at any time after a Qualifying IPO, the Company shall not consolidate or merge with or into any other Person or Persons (whether or not affiliated with the Company), nor shall the Company or its successor or successors be a party or parties to successive consolidations or mergers, nor shall the Company sell, convey, transfer or lease all or substantially all of the property and assets of the Company to any other Person (whether or not affiliated with the Company), unless: (i) the Company is the surviving Person, or the resulting, surviving or transferee Person is a corporation organized and existing under the laws of the United States of America, any state thereof or the District of Columbia or the Cayman Islands; (ii) upon any such consolidation, merger, sale, conveyance, transfer or lease, the due and punctual payment of the principal of and premium, if any, and Interest on all of the Notes, according to their tenor and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by the Company, shall be expressly assumed, by supplemental indenture satisfactory in form and substance to the Trustee, executed and delivered to the Trustee by the Person (if other than the Company and other than a Person who is a successor to the Company’s obligations hereunder and under the Note by operation of law) formed by such consolidation, or into which the Company shall have been merged, or by the Person that shall have acquired or leased such property, and such supplemental indenture shall provide for the applicable conversion rights set forth in Section 15.06; and (iii) immediately after giving effect to the transaction described above, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing.

Section 5.02. Successor to be Substituted. In case of any such consolidation, merger, sale, conveyance, transfer or lease and upon the assumption by the successor Person, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and Interest on all of the Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Company, such successor Person shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of this first part. Such successor Person thereupon may cause to be signed, and may issue either in its own name or in the name of the Company any or all of the Notes, issuable hereunder that theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor Person instead of the Company and subject to all

 

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the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver, or cause to be authenticated and delivered, any Notes that previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Notes that such successor Person thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Notes so issued shall in all respects have the same legal rank and benefit under this Indenture as the Notes theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Notes had been issued at the date of the execution hereof. In the event of any such consolidation, merger, sale, conveyance, transfer or lease, the Person named as the “Company” in the first paragraph of this Indenture or any successor that shall thereafter have become such in the manner prescribed in this Article 5 may be dissolved, wound up and liquidated at any time thereafter and such Person shall be released from its liabilities as obligor and maker of the Notes and from its obligations under this Indenture.

In case of any such consolidation, merger, sale, conveyance, transfer or lease, such changes in phraseology and form (but not in substance) may be made in the Notes thereafter to be issued as may be appropriate.

Section 5.03. Opinion of Counsel to be Given to Trustee. The Trustee shall receive an Officers’ Certificate and an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance, transfer or lease and any such assumption complies with the provisions of this Article 5.

ARTICLE VI

REMEDIES OF THE TRUSTEE AND HOLDERS OF THE NOTES ON AN EVENT OF DEFAULT

Section 6.01. Events Of Default. If one or more of the following Events of Default (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall have occurred and be continuing:

(a) default in the payment of any installment of Interest upon any of the Notes as and when the same shall become due and payable, and continuance of such default for a period of fifteen (15) days, whether or not such payment is permitted under Article 16 hereof; provided that if such payment is not made by reason of having been prohibited by PRC Governmental Authorities, then such failure to make such payment shall be an Event of Default only if such failure continues for a period of 30 days; or

(b) default in the payment of the principal of or premium, if any, on any of the Notes as and when the same shall become due and payable either at maturity or in connection with any redemption or repurchase, by acceleration or otherwise, whether or not such payment is permitted under Article 16 hereof; or

 

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(c) failure to duly observe or perform any other of the covenants or agreements on the part of the Company in the Notes or in this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section 6.01 specifically dealt with) continued for a period of forty-five (45) days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Trustee (upon the instruction of the Holders in accordance with Section 6.02), or the holders of at least twenty-five percent (25%) in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 12.04; or

(d) a default under any Debt by the Company or any of its Subsidiaries that results in acceleration of the maturity of such Debt, or failure to pay any such Debt when due, in an aggregate amount greater than $3.0 million or its foreign currency equivalent at the time; or

(e) one or more final judgments or orders for the payment of money are rendered against the Company or any Subsidiary and are not paid or discharged, and there is a period of 60 consecutive days following entry of the final judgment or order that causes the aggregate amount of all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed US$3 million (or its foreign currency equivalent at the time) (in excess of amounts which the Company’s or the Subsidiary’s insurance carriers have agreed to pay under applicable policies) during which a stay of enforcement, by reason of a pending appeal or otherwise, is not in effect; or

(f) failure by the Company to deliver Common Shares upon conversion of the Notes within the time period specified in Section 15.02, and such failure continues for a period of ten (10) days; or

(g) the Company, any of its Significant Subsidiaries (or any group of Subsidiaries that, when taken together, would constitute a Significant Subsidiary) pursuant to or within the meaning of any Bankruptcy Law:

(A) commences a voluntary case or gives notice of intention to make a proposal under any Bankruptcy Law;

(B) consents to the entry of an order for relief against it in an involuntary case or consents to its dissolution or winding up;

(C) consents to the appointment of a receiver, interim receiver, receiver and manager, liquidator, trustee or custodian of it or for all or substantially all of its property;

(D) makes a general assignment for the benefit of its creditors; or

 

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(E) admits in writing its inability to pay its debts as they become due or otherwise admits its insolvency; or

(h) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:

(A) is for relief against the Company, any of its Significant Subsidiaries (or any group of Subsidiaries that, when taken together, would constitute a Significant Subsidiary) in an involuntary case; or

(B) appoints a receiver, interim receiver, receiver and manager, liquidator, trustee or custodian of the Company, any of its Significant Subsidiaries (or any group of Subsidiaries that, when taken together, would constitute a Significant Subsidiary) for all or substantially all of the property of the Company, any of its Significant Subsidiaries (or any group of Subsidiaries that, when taken together, would constitute a Significant Subsidiary); or

(C) orders the liquidation of the Company, any of its Significant Subsidiaries (or any group of Subsidiaries that, when taken together, would constitute a Significant Subsidiary);

and such order or decree remains unstayed and in effect for 60 consecutive days;

(i) any default by the Company or Future Guarantor Pledgor or any other Person that pledges Collateral on behalf of the holders in any of its obligations under the Security Documents; the security interest under the Security Documents shall, at any time, cease to be in full force and effect for any reason other than the satisfaction in full of all obligations under the Indenture and discharge of the Indenture or any security interest created thereunder shall be declared invalid or unenforceable or the Company or any Guarantor shall assert that any such security interest is invalid or unenforceable; or

(j) the Company or any Future Guarantor Pledgor or any other Person that pledges Collateral on behalf of the holders denies or disaffirms its obligations under any Security Document or, other than in accordance with this Indenture and the Security Documents, any Security Document ceases to be or is not in full force and effect or the Trustee ceases to have a second priority interest in the Collateral at any time Floating Rate Notes are outstanding; or

(k) the WFOE ceases to be a Wholly Owned Subsidiary of the Company; or

(l) (i) the confiscation, expropriation or nationalization by any Governmental Authority of any Property of the Company or any of its Subsidiaries that is material to the operation of the Related Business; or (ii) if such revocation or repudiation could reasonably be expected to have a Material Adverse Effect, the revocation or repudiation

 

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by any Governmental Authority of any previously granted Governmental Approval to any PRC Subsidiary; or (iii) the imposition or introduction of material and discriminatory taxes, tariffs, royalties, customs or excise duties imposed on any PRC Subsidiary, or the material and discriminatory withdrawal or suspension of privileges or specifically granted rights of a fiscal nature, or (iv) the Company or any of its Subsidiary is prevented from exercising normal control over all or any material part of its property, assets or revenues; or

(m) default in the Company’s obligation to provide a Designated Event Notice upon a Designated Event as provided in Section 3.05.

then, and in each and every such case (other than an Event of Default specified in Section 6.01(g) or Section 6.01(h)), unless the principal of all of the Notes shall have already become due and payable, the Trustee acting on the written instruction of the Holders of not less than twenty-five percent (25%) in aggregate principal amount of the Notes then outstanding hereunder determined in accordance with Section 12.04, by notice in writing to the Company, may declare the principal of and premium, if any, on all the Notes and the Interest accrued thereon to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Notes contained to the contrary notwithstanding. If an Event of Default specified in Section 6.01(g) or Section 6.01(h) occurs, the principal of all the Notes and the Interest accrued thereon shall be immediately and automatically due and payable without necessity of further action. This provision, however, is subject to the conditions that if, at any time after the principal of the Notes shall have been so declared due and payable, and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of Interest upon all Notes and the principal of and premium, if any, on any and all Notes which shall have become due otherwise than by acceleration (with interest, including post-petition interest in any proceeding under any Bankruptcy Law, on overdue installments of Interest (to the extent that payment of such interest is enforceable under applicable law) and on such principal and premium, if any, at the rate borne by the Notes, to the date of such payment or deposit) and amounts due to the Trustee pursuant to Section 7.06, and if any and all defaults under this Indenture, other than the nonpayment of principal of and premium, if any, and accrued Interest on Notes which shall have become due by acceleration, shall have been cured or waived pursuant to Section 6.07, then and in every such case the holders of a majority in aggregate principal amount of the Notes then outstanding, by written notice to the Company and to the Trustee, may waive all Defaults or Events of Default and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent Default or Event of Default, or shall impair any right consequent thereon. The Company shall notify in writing a Responsible Officer of the Trustee, promptly upon becoming aware thereof, of any Event of Default.

 

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The amount that shall come due following the acceleration of a Note shall be the Acceleration Amount. The “Acceleration Amount” shall be equal to 120% of the principal amount thereof plus accrued and unpaid Interest to the Acceleration Date.

In the case of an Event of Default with respect to the Notes occurring by reason of any willful action or inaction taken or not taken by the Company or on the Company’s behalf with the intention or effect of avoiding payment of the premium that the Company would have been required to pay at maturity or if the Company had then elected to redeem the Notes pursuant to Section 3.06 hereof, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Notes.

Whenever in this Indenture there is a reference, in any context, to the principal of any Note as of any time, such reference shall be deemed to include reference to the Acceleration Amount payable in respect of such Note to the extent that such Acceleration Amount is, was or would be so payable at such time, and express mention of the Acceleration Amount in any provision of this Indenture shall not be construed as excluding the Acceleration Amount in those provisions of this Indenture when such express mention is not made.

In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such waiver or rescission and annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the holders of Notes, and the Trustee shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the holders of Notes, and the Trustee shall continue as though no such proceeding had been taken.

Section 6.02. Payments of Notes on Default; Suit therefor. The Company covenants that in case default shall be made in the payment of (a) any installment of Interest upon any of the Notes as and when the same shall become due and payable, and such default shall have continued for a period of fifteen (15) days, whether or not such payment is permitted under Article 16 hereof; provided that if such payment is not made by reason of having been prohibited by PRC Governmental Authorities, then only if such default continues for a period of 30 days, or (b) the payment of the principal of or premium, if any, on any of the Notes as and when the same shall have become due and payable, whether at maturity of the Notes or in connection with any redemption or repurchase, by or under this Indenture, by declaration (subject to Section 6.01) or otherwise, then, upon demand of the Trustee acting on the written instruction of the Holders of not less than 25% in aggregate principal amount of the Notes then outstanding, the Company will pay to the Trustee, for the benefit of the holders of the Notes, the whole amount that then shall have become due and payable on all such Notes for principal and premium, if any, or Interest, as the case may be, with interest (including post-petition interest in any proceeding under any Bankruptcy Law) upon the overdue principal and premium, if any, and (to the extent that payment

 

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of such interest is enforceable under applicable law) upon the overdue installments of Interest (including post-petition interest in any proceeding under any Bankruptcy Law) at the rate set forth in the Notes for overdue payments of principal and Interest and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee, its agents, attorneys and counsel, and all other amounts due the Trustee under Section 7.06. Until such demand by the Trustee, the Company may pay the principal of and premium, if any, and Interest on the Notes to the registered holders, whether or not the Notes are overdue.

If the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Notes and collect in the manner provided by law out of the property of the Company or any other obligor on the Notes wherever situated the monies adjudged or decreed to be payable.

If there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Notes under any applicable Bankruptcy Law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Company or such other obligor, the property of the Company or such other obligor, or in the case of any other judicial proceedings relative to the Company or such other obligor upon the Notes, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 6.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal, premium, if any, and Interest owing and unpaid in respect of the Notes, and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and of the holders of the Notes allowed in such judicial proceedings relative to the Company or any other obligor on the Notes, its or their creditors, or its or their property, and to collect and receive any monies or other property payable or deliverable on any such claims, and to distribute the same after the deduction of any amounts due the Trustee under Section 7.06, and to take any other action with respect to such claims, including participating as a member of any official committee of creditors, as it reasonably deems necessary or advisable, and, unless prohibited by law or applicable regulations, any receiver, assignee or trustee in bankruptcy or reorganization, liquidator, custodian or similar official is hereby authorized by each of the holders of the Notes to make such payments to the Trustee, and, if the Trustee shall consent to the making of such payments directly to the holders of the Notes, to pay to the Trustee any amount due it for reasonable compensation, expenses, advances

 

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and disbursements, including counsel fees and expenses incurred by it up to the date of such distribution. To the extent that such payment of reasonable compensation, expenses, advances and disbursements out of the estate in any such proceedings shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, monies, securities and other property which the holders of the Notes may be entitled to receive in such proceedings, whether in liquidation or under any plan of reorganization or arrangement or otherwise.

All rights of action and of asserting claims under this Indenture, or under any of the Notes, may be enforced by the Trustee without the possession of any of the Notes, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the holders of the Notes.

In any proceedings brought by the Trustee (and in any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Notes, and it shall not be necessary to make any holders of the Notes parties to any such proceedings.

Section 6.03. Application of Monies Collected By Trustee. Any monies or property collected by the Trustee pursuant to this Article 6 shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such monies or property, upon presentation of the several Notes, and either (i) stamping thereon the payment, if only partially paid, or (ii) upon surrender thereof, if fully paid:

FIRST: To the payment of all amounts due the Trustee, the Agents or their respective agents and attorneys under Section 7.06, including payment of all compensation, expenses and liabilities incurred, and all advances made, by the Trustee and (where applicable), the Agents and the costs and expenses of collection in connection with this Indenture, the Security Documents or the Notes, including the collection or distribution of such amounts held or realized or in connection with expenses incurred in enforcing its remedies under the Security Documents and preserving the Collateral and all amounts for which the Trustee is entitled to indemnification under the Security Documents;

SECOND: Subject to the provisions of Article 16, in case the principal of the outstanding Notes shall not have become due and be unpaid, to the payment of Interest on the Notes in default in the order of the maturity of the installments of such Interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of Interest (including post-petition interest in any proceeding under any Bankruptcy Law) at the rate borne by the Notes, such payments to be made ratably to the Persons entitled thereto;

 

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THIRD: Subject to the provisions of Article 16, in case the principal of the outstanding Notes shall have become due, by declaration or otherwise, and be unpaid to the payment of the whole amount then owing and unpaid upon the Notes for principal and premium, if any, and Interest, with interest (including post-petition interest in any proceeding under any Bankruptcy Law) on the overdue principal and premium, if any, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest (including post-petition interest in any proceeding under any Bankruptcy Law) at the rate borne by the Notes, and in case such monies shall be insufficient to pay in full the whole amounts so due and unpaid upon the Notes, then to the payment of such principal and premium, if any, and interest without preference or priority of principal and premium, if any, over interest, or of interest over principal and premium, if any, or of any installment of interest over any other installment of Interest, or of any Note over any other Note, ratably to the aggregate of such principal and premium, if any, and accrued and unpaid Interest; and

FOURTH: Subject to the provisions of Article 16, to the payment of the remainder, if any, to the Company or the Guarantors or any other Person lawfully entitled thereto.

Section 6.04. Proceedings by Holders of the Notes. No holder of any Note shall have any right by virtue of or by reference to any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture, or for the appointment of a receiver, trustee, liquidator, custodian or other similar official, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than twenty-five percent (25%) in aggregate principal amount of the Notes then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable security or indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 6.07; it being understood and intended, and being expressly covenanted by the taker and holder of every Note with every other taker and holder and the Trustee, that no one or more holders of Notes shall have any right in any manner whatever by virtue of or by reference to any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Notes, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Notes (except as otherwise provided herein). For the protection and enforcement of this Section 6.04, each and every Noteholder and the Trustee shall be entitled to such relief as can be given either at law or in equity.

 

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Notwithstanding any other provision of this Indenture and any provision of any Note, the right of any holder of any Note to receive payment of the principal of and premium, if any (including the redemption price upon redemption pursuant to Article 3), and accrued Interest on such Note, on or after the respective due dates expressed in such Note or in the event of redemption, or to institute suit for the enforcement of any such payment on or after such respective dates against the Company shall not be impaired or affected without the consent of such holder.

Anything in this Indenture or the Notes to the contrary notwithstanding, the holder of any Note, without the consent of either the Trustee or the holder of any other Note, in its own behalf and for its own benefit, may enforce, and may institute and maintain any proceeding suitable to enforce, its rights of conversion as provided herein.

Section 6.05. Proceedings By Trustee. If an Event of Default has occurred and is continuing, the Trustee may, in its discretion, proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as are necessary to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law.

Section 6.06. Remedies Cumulative And Continuing. Except as provided in Section 2.06, all powers and remedies given by this Article 6 to the Trustee or to the holders of the Notes shall, to the extent permitted by law, be deemed cumulative and not exclusive of any thereof or of any other powers and remedies available to the Trustee or the holders of the Notes, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any holder of any of the Notes to exercise any right or power accruing upon any Default or Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or any acquiescence therein, and, subject to the provisions of Section 6.04, every power and remedy given by this Article 6 or by law to the Trustee or to the holders of the Notes may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the holders of the Notes.

Section 6.07. Direction of Proceedings and Waiver of Defaults By Majority of Holders of the Notes. The holders of a majority in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 12.04 shall have the right to direct the time, method and place of

 

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conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided that (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action which is not inconsistent with such direction, (c) the Trustee may decline to take any action that would benefit some Noteholder to the detriment of other holders of the Notes and (d) the Trustee may decline to take any action that would involve the Trustee in personal liability. The holders of a majority in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 12.04 may, on behalf of the holders of all of the Notes, waive any past Default or Event of Default hereunder and its consequences except (i) a default in the payment of Interest or premium, if any, on, or the principal of, the Notes, (ii) a failure by the Company to convert any Notes into Common Shares, (iii) a default in the payment of the redemption price pursuant to Article 3, (iv) a default in the payment of the repurchase price pursuant to Article 3 or (v) a default in respect of a covenant or provisions hereof which under Article 8 cannot be modified or amended without the consent of the holders of each or all of the Notes then outstanding or affected thereby. Upon any such waiver, the Company, the Trustee and the holders of the Notes shall be restored to their former positions and rights hereunder. Whenever any Default or Event of Default hereunder shall have been waived as permitted by this Section 6.07, said Default or Event of Default shall for all purposes of the Notes and this Indenture be deemed to have been cured and to be not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon.

Section 6.08. Notice of Defaults. If the Trustee receives notice of any Default or Event of Default from the Company, the Trustee shall notify the Holders of the Default or Event of Default within 30 days after receipt thereof in accordance with Section 17.03. Except in the case of a Default or Event of Default in payment of principal of, premium, if any, or interest on any Note, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders.

Section 6.09. Undertaking To Pay Costs. All parties to this Indenture agree, and each holder of any Note by its acceptance thereof shall be deemed to have agreed, that any court may, in its discretion, require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided that the provisions of this Section 6.09 (to the extent permitted by law) shall not apply to any suit instituted by the Trustee, to any suit instituted by any

 

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Noteholder, or group of holders of the Notes, holding in the aggregate more than ten percent in principal amount of the Notes at the time outstanding determined in accordance with Section 12.04, or to any suit instituted by any Noteholder for the enforcement of the payment of the principal of or premium, if any, or Interest on any Note on or after the due date expressed in such Note or to any suit for the enforcement of the right to convert any Note in accordance with the provisions of Article 15.

ARTICLE VII

THE TRUSTEE

Section 7.01. Duties and Responsibilities of Trustee. The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (which has not been cured or waived), the Trustee may at its discretion take proceedings against either or both the Company or the Guarantor to enforce payment of the Notes after the Notes have become due and payable or to declare the Notes due and payable, provided that the Trustee shall not be under any obligation to do any of the foregoing unless it shall have been so requested in writing by the holders of not less than 25% in principal amount of the Notes then outstanding and it shall have been indemnified to its satisfaction.

No provision of this Indenture shall be construed to relieve the Trustee or any Agent from liability for its own grossly negligent action, fraud or willful misconduct, except that:

(a) Prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred:

(i) the duties and obligations of the Trustee and the Agents shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and

(ii) in the absence of fraud, gross negligence or willful misconduct on the part of the Trustee or any Agent, the Trustee and the Agents may conclusively rely as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee or such Agent and conforming to the requirements of this Indenture.

(b) The Trustee shall not be liable for any error of judgment by any officer or employee of the Trustee assigned by the Trustee to administer its corporate trust matters.

 

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(c) The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the written direction of the holders of not less than a majority in principal amount of the Notes at the time outstanding determined as provided in Section 12.04 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture.

(d) Whether or not therein provided, every provision of this Indenture relating to the conduct or affecting the liability of, or affording protection to, the Trustee shall be subject to the provisions of this Section.

(e) The Trustee shall not be liable in respect of any payment (as to the correctness of amount, entitlement to receive or any other matters relating to payment) or notice effected by the Company or any paying agent or any records maintained by any co-registrar with respect to the Notes.

(f) If any party fails to deliver a notice relating to an event the fact of which, pursuant to this Indenture, requires notice to be sent to the Trustee, the Trustee may conclusively rely on its failure to receive such notice as reason to act as if no such event occurred.

(g) The Trustee shall not be deemed to have knowledge of any Event of Default hereunder unless it shall have been notified in writing of such Event of Default by the Company or the holders of at least 25% in aggregate principal amount of the Notes.

(h) The Agents may rely upon and shall not be liable for acting or refraining from acting upon any written notice, instruction or request furnished to it hereunder and believed by it to be genuine and to have been signed or presented by the proper party or parties. The Agents shall be under no duty to inquire into or investigate the validity, accuracy or content of any such document.

(i) In the event that any Agent shall be uncertain as to its duties or rights hereunder or shall receive instructions, claims or demands from the Company, in its opinion, conflict with any of the provisions of this Indenture, it shall be entitled to refrain from taking any action until it is directed in writing by a final order or judgment of a court of competent jurisdictions.

(j) Notwithstanding anything to the contrary contained in this Indenture, none of the Agents shall be obliged to act or omit to act in accordance with any instruction, direction or request delivered to them by the Company unless such instruction, direction or request is delivered to such Agents in writing. Each of the Agents may, in connection with its services hereunder rely upon the terms of any notice, communication or other document believed by it to be genuine.

 

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(k) If the Paying Agent shall make payment in respect of any of the Notes before it has received or has been made available to its order the amount so paid, the Company shall from time to time on demand pay to the Paying Agent, in addition to the amount which should have been paid hereunder, interest on such shortfall calculated on a 360 day year basis and the actual number of days elapsed and at the rate per annum which is the aggregate of two per cent per annum and the rate per annum specified by the Paying Agent as reflecting its cost of funds for the time being in relation to the unpaid amount.

(l) No Agent shall be under any liability for interest on any moneys at any time received by it pursuant to any of the provisions of this Indenture and applied by it in accordance with the provisions hereof, except as otherwise provided hereunder or agreed in writing.

(m) The Company hereby unconditionally and irrevocably covenants and undertakes to indemnify and hold harmless each Agent, its directors, officers, employees and agents (each an “indemnified party”) in full at all times against all losses, liabilities, actions, proceedings, claims, demands, penalties, damages, costs, expenses disbursements, and other liabilities whatsoever (the “Losses”), including without limitation the costs and expenses of legal advisors and other experts, which may be incurred, suffered or brought against such indemnified party as a result or in connection with (a) their appointment or involvement hereunder or the exercise of any of their powers or duties hereunder or the taking of any acts in accordance with the terms of this Indenture or its usual practice; (b) this Indenture and any other documents in connection with the sale of the Notes or pursuant to this Indenture, or (c) any instruction or other direction upon which any Agent may rely under this Indenture, as well as the costs and expenses incurred by an indemnified party of defending itself against or investigating any claim or liability with respect of the foregoing provided that this indemnity shall not apply in respect of an indemnified party to the extent but only to the extent that any such Losses incurred or suffered by or brought against such indemnified party arises directly from the fraud, willful misconduct or gross negligence of such indemnified party. The parties hereto acknowledge that the foregoing indemnities shall survive the resignation or removal of any Agent or the termination of this Indenture.

(n) Notwithstanding any other term or provision of this Indenture to the contrary, no Agent shall be liable for special, punitive, indirect or consequential loss or damage of any kind whatsoever including but not limited to loss of profits, whether or not foreseeable, and regardless of whether the claim for such loss or damage is made in negligence, for breach of contract, breach of trust, breach of fiduciary obligation or otherwise. The provisions of this Section shall survive the termination or expiry of this Indenture or the resignation or removal of such Agent.

(o) Each Agent may execute any of its powers and perform any of its duties hereunder directly or through delegates or attorneys and may consult with counsel, accountants and other skilled persons to be reasonably selected and retained by it. Each Agent shall not be liable for the acts of such delegates or attorneys, or for anything done, suffered or omitted by it in accordance with the advice or opinion of any such counsel, accountants or other skilled persons.

 

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(p) Each Agent may engage and consult, at the expense of the Company with any legal adviser and professional adviser selected by it and rely upon any advice so obtained and each of the Agents and each of their respective directors, officers, employees and duly appointed agents shall be protected and shall not be liable in respect of any action taken, or omitted to be done or suffered to be taken, in accordance with such advice.

(q) Each Agent shall not be liable for any action taken or omitted by it except to the extent that a court of competent jurisdiction determines that such Agent’s gross negligence or willful misconduct was the primary cause of any loss to the Company.

(r) At the request of the Agents, the parties to this Indenture may from time to time during the continuance of this Indenture review the commissions agreed initially with a view to determining whether the parties can mutually agree upon any changes to the commissions.

(s) Any corporation into which any Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Agent shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of any Agent, shall be the successor to such Agent hereunder without the execution or filing of any papers or any further act on the part of any of the parties hereto.

(t) Any Agent may resign at any time on giving not less than 45 days prior written notice to the Company without assigning any reason and without being responsible for any costs, charges and expenses occasioned by such retirement. The Company hereby covenants that in the event of any Agent giving notice under this Section it shall use its best endeavors to procure a new Agent to be appointed and if the Company has not procured the appointment of a new Agent within 15 days after the expiration of such written notice, such Agent shall petition any court of competent jurisdiction for its resignation provided that it has notified the Company prior to it doing so. If such petition is granted, such Agent shall notify all transaction parties in writing of its resignation.

(u) Each Agent may take and instruct any delegate to take any action which it in its sole discretion considers appropriate so as to comply with any applicable law, regulation, request of a public or regulatory authority or any HSBC Group policy which relates to the prevention of fraud, money laundering, terrorism or other criminal activities or the provision of financial and other services to sanctioned persons or entities. Such action may include but is not limited to the interception and investigation of transactions on the depositor’s accounts (particularly those involving the international transfer of funds) including the source of the intended recipient of fund paid into or out of the depositor’s accounts. In certain circumstances, such action may delay or prevent the

 

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processing of the depositor’s instructions, the settlement of transactions over the depositor’s accounts or such Agent’s performance of its obligations under this Indenture. Where possible, such Agent will endeavor to notify the depositor of the existence of such circumstances. Neither the Agent nor any delegate will be liable for any loss (whether direct or consequential and including, without limitation, loss of profit or interest) caused in whole or in part by any actions which are taken by such Agent or any delegate pursuant to this Section. For the purposes of this Section, the “HSBC Group” means HSBC Holdings plc its subsidiaries and associated companies.

Section 7.02. Reliance on Documents, Opinions, Etc. Except as otherwise provided in Section 7.01:

(a) the Trustee may conclusively rely and shall be protected in acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, note, coupon or other paper or document (whether in its original or facsimile form) believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties;

(b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers’ Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the Secretary of the Company;

(c) the Trustee shall engage and consult, at the expense of the Company with any legal adviser and professional adviser selected by it and rely upon any advice so obtained and each of its respective directors, officers, employees and duly appointed agents shall be protected and shall not be liable in respect of any action taken, or omitted to be done or suffered to be taken, in accordance with such advice;

(d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the holders of the Notes pursuant to the provisions of this Indenture, unless such holders of the Notes shall have offered to the Trustee reasonable security or indemnity satisfactory to it against the costs, expenses and liabilities which may be incurred therein or thereby;

(e) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document; the Trustee, however, in the case of any document which is specifically required to be furnished to the Trustee pursuant to any provision hereof, shall examine the document to determine whether it conforms to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculation or other facts stated therein);

 

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(f) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it with due care hereunder;

(g) the Trustee shall not be liable for any action taken or omitted by it except to the extent that a court of competent jurisdiction determines that the Trustee’s gross negligence or willful misconduct was the primary cause of any loss to the Holders;

(h) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and each agent, custodian and other Person employed to act hereunder;

(i) the Trustee may request that the Company deliver an Officers’ Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers’ Certificate may be signed by any person authorized to sign an Officers’ Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded;

(j) any permissive right or authority granted to the Trustee shall not be construed as a mandatory duty;

(k) each party shall be solely responsible for making and continuing to make its own independent appraisal of and investigation into the financial condition, creditworthiness, condition, affairs, status and nature of the Company and the Guarantor, and the Trustee shall not at any time have any responsibility for the same and each party shall not rely on the Trustee in respect thereof;

(l) the Company and the Guarantor each covenant with the Trustee that each will comply with and perform and observe all the provisions of this Indenture, the Notes, the Security Documents or any other document in connection with the sale of the Notes or pursuant to this Indenture which are expressed to be binding on either of the Company and the Guarantor. Until the Trustee has actual knowledge or express notice to the contrary, the Trustee shall be entitled to assume no Event of Default and that each of the Company and the Guarantor are observing and performing all of their respective obligations;

(m) no provision of this Indenture shall require the Trustee to do anything which may: (i) be illegal or contrary to applicable law or regulation; (ii) cause it to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties or in the exercise of any of its own rights or powers, if it shall have grounds for believing that repayment of such funds or satisfactory indemnity against such risk or the liability is not assured to it;

 

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(n) the Trustee shall not be responsible for any consolidation, amalgamation, merger, reconstruction or scheme of the Company or any sale or transfer of all or substantially all of the assets of the Company or any Guarantor or the form or substance of any plan relating thereto or the consequences thereof to any Holder;

(o) whenever in this Indenture or any other document in connection with the sale of the Notes or pursuant to this Indenture or by law, the Trustee shall have discretion or permissive power it may decline to exercise the same in the absence of approval by the Holders. Save as expressly provided in this Indenture, the Trustee will have absolute and unfettered discretion as to the exercise of its functions and will not be responsible for any loss, liability, cost, claim, action, demand, damages, expense or inconvenience which may result from their exercise or non–exercise, so long as the Trustee exercises the standard of care applicable to managing its own assets and properties;

(p) any Trustee being a banker, lawyer, broker or other person engaged in any profession or business shall be entitled to charge and be paid all usual professional and other charges for business transacted and acts done by him or his partner or firm on matters arising in connection with this Indenture, the Notes and the Security Documents and any incurred charges in addition to disbursements for all other work and business done and all time spent by him or his partner or firm on matters arising in connection with this Indenture, the Notes and the Security Documents, including matters which might or should have been attended to in person by a trustee not being a banker, lawyer, broker or other professional person.

Section 7.03. No Responsibility For Recitals, Etc. The Trustee shall not be responsible for recitals, statements, warranties or representations of any party contained in any transaction document or other document entered into in connection therewith and shall assume the accuracy and correctness thereof or for the execution, legality, effectiveness, adequacy, genuineness, validity or enforceability or admissibility in evidence of any such agreement or other document or any security constituted thereby or pursuant thereto.

Section 7.04. Trustee, Paying Agents, Conversion Agents or Registrar May Own Notes. The Trustee, any paying agent, any conversion agent or Security Registrar, in its individual or any other capacity, may become the owner or pledgee of Notes with the same rights it would have if it were not Trustee, paying agent, conversion agent or Security Registrar.

Section 7.05. Monies to Be Held in Trust. Subject to the provisions of Section 11.04, all monies received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as may be agreed in writing from time to time by the Company and the Trustee.

 

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Section 7.06. Compensation and Expenses of Trustee. The Company and each Guarantor shall, to the extent permissible by law, jointly and severally pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation for all services rendered by it hereunder in any capacity (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) as mutually agreed to from time to time in writing between the Company and the Trustee, and the Company and each Guarantor, jointly and severally, will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances reasonably incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all Persons not regularly in its employ). Each of the Company and the Guarantor hereby jointly and severally, unconditionally and irrevocably covenants and undertakes to indemnify and hold harmless the Trustee, its directors, officers, employees and agents (each an “indemnified party”) in full at all times against all losses, liabilities, actions, proceedings, claims, demands, penalties, damages, costs, expenses disbursements, and other liabilities whatsoever (the “Losses”), including without limitation the costs and expenses of legal advisors and other experts, which may be incurred, suffered or brought against such indemnified party as a result or in connection with (a) their appointment or involvement hereunder or the exercise of any of their powers or duties hereunder or the taking of any acts in accordance with the terms of this Indenture, the Notes and the Security Documents or its usual practice; (b) this Indenture, the Notes and the Security Documents and any other documents in connection with the sale of the Notes or pursuant to this Indenture, or (c) any instruction or other direction upon which the Trustee may rely under this Indenture, the Notes and the Security Documents, as well as the costs and expenses incurred by an indemnified party of defending itself against or investigating any claim or liability with respect of the foregoing provided that this indemnity shall not apply in respect of an indemnified party to the extent but only to the extent that any such Losses incurred or suffered by or brought against such indemnified party arises directly from the fraud, willful misconduct or gross negligence of such indemnified party. The parties hereto acknowledge that the foregoing indemnities shall survive the resignation or removal of the Trustee or the termination of this Indenture, the Notes and the Security Documents. Notwithstanding any other term or provision of this Indenture, the Notes and the Security Documents to the contrary, the Trustee shall not be liable for special, punitive, indirect or consequential loss or damage of any kind whatsoever including but not limited to loss of profits, whether or not foreseeable, and regardless of whether the claim for such loss or damage is made in negligence, for breach of contract, breach of trust, breach of fiduciary obligation or otherwise. The provisions of this Section shall survive the termination or expiry of this Indenture, the Notes and the Security Documents or the resignation or removal of the Trustee.

 

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When the Trustee and its agents and any authenticating agent incur expenses or render services after an Event of Default specified in Section 6.01(g) or Section 6.01(h) with respect to the Company occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy, insolvency or similar laws.

Section 7.07. Officers’ Certificate As Evidence. Except as otherwise provided in Section 7.01, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of fraud, gross negligence or willful misconduct on the part of the Trustee, be deemed to be conclusively proved and established by an Officers’ Certificate delivered to the Trustee.

Section 7.08. Resignation or Removal of Trustee.

(a) The Trustee may retire at any time on giving not less than 45 days prior written notice to the Company without assigning any reason and without being responsible for any costs, charges and expenses occasioned by such retirement. The Company hereby covenants that in the event of the Trustee giving notice under this Section it shall use its best endeavors to procure a new trustee to be appointed and if the Company has not procured the appointment of a new trustee within 30 days of the expiry of such written notice, the Trustee shall petition any court of competent jurisdiction for its resignation provided that it has notified the Company prior to it doing so. If such petition is granted, the Trustee shall notify all transaction parties in writing of its resignation.

(b) The holders of a majority in aggregate principal amount of the Notes at the time outstanding may at any time remove the Trustee and nominate a successor trustee which shall be deemed appointed as successor trustee unless, within ten (10) days after notice to the Company of such nomination, the Company objects thereto, in which case the Trustee so removed or any Noteholder, or if such Trustee so removed or any Noteholder fails to act, the Company, upon the terms and conditions and otherwise as provided in Section 7.10(a), may petition any court of competent jurisdiction for an appointment of a successor trustee.

(c) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 7.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 7.11.

(d) Notwithstanding the replacement of the Trustee pursuant to this Section, the Company’s obligations under Section 7.06 shall continue for the benefit of the retiring Trustee.

 

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Section 7.09. Eligibility; Disqualification. There shall at all times be a Trustee hereunder that is authorized under the laws of its jurisdiction of incorporation to exercise corporate trustee power, that is subject to supervision or examination by Governmental Authorities of its jurisdiction of incorporation and, in the case of any successor trustee, that has a combined capital and surplus of at least $50.0 million (or is a wholly-owned subsidiary of a bank or trust company, or of a bank holding company, the principal subsidiary of which is a bank or trust company having a combined capital and surplus of at least $50.0 million) as set forth in its most recent published annual report of condition.

Section 7.10. Acceptance by Successor Trustee. Any successor trustee appointed as provided in Section 7.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amount then due it pursuant to the provisions of Section 7.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property and funds held or collected by such trustee as such, except for funds held in trust for the benefit of holders of particular Notes, to secure any amounts then due it pursuant to the provisions of Section 7.06.

No successor trustee shall accept appointment as provided in this Section 7.11 unless, at the time of such acceptance, such successor trustee shall be qualified under the provisions of Section 7.08 and be eligible under the provisions of Section 7.09.

Upon acceptance of appointment by a successor trustee as provided in this Section 7.11, the Company (or the former trustee, at the written direction of the Company) shall mail or cause to be mailed notice of the succession of such trustee hereunder to the holders of Notes at their addresses as they shall appear on the Security Register. If the Company fails to mail such notice within ten (10) days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company.

Section 7.11. Succession By Merger. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor to the Trustee hereunder without the execution or filing of any papers or any further act on the part of any of the parties hereto.

 

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Section 7.12. Preferential Collection of Claims. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Notes), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of the claims against the Company (or any such other obligor).

Section 7.13. Trustee’s Application For Instructions From The Company. Any application by the Trustee for written instructions from the Company (other than with regard to any action proposed to be taken or omitted to be taken by the Trustee that affects the rights of the holders of the Notes or holders of Senior Debt under this Indenture) may, at the option of the Trustee, set forth in writing any action proposed to be taken or omitted by the Trustee under this Indenture and the date on or after which such action shall be taken or such omission shall be effective. The Trustee shall not be liable for any action taken by, or omission of, the Trustee in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than three (3) Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to any earlier date) unless prior to taking any such action (or the effective date in the case of an omission), the Trustee shall have received written instructions in response to such application specifying the action to be taken or omitted.

Notwithstanding anything to the contrary in this Indenture, the Notes or the Security Documents or in any other document in connection with the sale of the Notes pursuant to this Indenture, neither the Trustee nor any Agent shall in any event be liable for any failure or delay in the performance of its obligations hereunder if it is prevented from so performing its obligations by any existing or future law or regulation, any existing or future act of governmental authority, Act of God, flood, war whether declared or undeclared, terrorism, riot, rebellion, civil commotion, strike, lockout, other industrial action, general failure of electricity or other supply, aircraft collision, technical failure, accidental or mechanical or electrical breakdown, computer failure or failure of any money transmission system or any reason which is beyond the control of the Trustee.

ARTICLE VIII

SUPPLEMENTAL INDENTURES

Section 8.01. Supplemental Indentures Without Consent of Holders of the Notes. The Company, when authorized by the resolutions of the Board of Directors, and the Trustee may, from time to time, and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes:

(a) make provision with respect to the conversion rights of the holders of Notes pursuant to the requirements of Section 15.06 and the repurchase obligations of the Company pursuant to the requirements of Section 3.05 and Section 3.06;

 

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(b) subject to Article 16, to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Notes, any property or assets;

(c) to evidence the succession of another Person to the Company, or successive successions, and the assumption by the successor Person of the covenants, agreements and obligations of the Company pursuant to Article 5;

(d) to add to the covenants of the Company such further covenants, restrictions or conditions as the Board of Directors and the Trustee shall consider to be for the benefit of the holders of Notes, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided that in respect of any such additional covenant, restriction or condition, such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default;

(e) add additional Guarantees or additional obligors with respect to the Notes or release Guarantors from guarantees as permitted by the terms of this Indenture;

(f) further secure the Notes, or release all or any portion of the Collateral pursuant to the terms of the Security Documents;

(g) to provide for the issuance under this Indenture of Notes in coupon form (including Notes registrable as to principal only) and to provide for exchangeability of such Notes with the Notes issued hereunder in fully registered form and to make all appropriate changes for such purpose;

(h) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture that may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture that shall not materially adversely affect the interests of the holders of the Notes;

(i) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Notes;

(j) to increase, from time to time, the per annum interest rate on the Notes for any period;

 

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(k) to increase, from time to time, the Conversion Rate for any period; or

(l) to make any changes to Article 16 that would limit or terminate the benefits available to any holder of Senior Debt of the Company.

Upon the written request of the Company, accompanied by a copy of the resolutions of the Board of Directors certified by its Secretary authorizing the execution of any supplemental indenture, the Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations that may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder; provided that the Trustee shall not be obligated to, but may in its discretion, enter into any supplemental indenture that affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise.

Any supplemental indenture authorized by the provisions of this Section 8.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Notes at the time outstanding, notwithstanding any of the provisions of Section 8.02.

Section 8.02. Supplemental Indenture With Consent Of Holders of the Notes. With the consent (evidenced as provided in Article 12) of the holders of a majority in aggregate principal amount of the Notes at the time outstanding, the Company, when authorized by the resolutions of the Board of Directors, and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or any supplemental indenture or of modifying in any manner the rights of the holders of the Notes; provided that no such supplemental indenture shall

(a) extend the fixed maturity of any Note;

(b) reduce the rate or extend the time of payment of Interest thereon;

(c) reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption or repurchase thereof, or the time of such payment, whether pursuant to Section 3.06, 4.12, 4.17 or otherwise;

(d) change the obligation of the Company to repurchase any Note, or the time of such payment, upon the happening of a Designated Event in a manner adverse to the holders of Notes;

(e) impair the right of any Noteholder to institute suit for the payment thereof or of any Guarantee;

(f) make any change in any Guarantee that would adversely affect the Holders;

 

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(g) make the principal thereof or Interest or premium, if any, thereon payable in any coin or currency other than that provided in the Notes;

(h) impair the right to convert the Notes into Common Shares or reduce the number of Common Shares or any other property receivable by a Noteholder upon conversion subject to the terms set forth herein, including Section 15.05 and Section 15.06;

(i) modify any of the provisions of this Section 8.02 or Section 6.07, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the holder of each Note so affected;

(j) change any obligation of the Company to maintain an office or agency in the places and for the purposes set forth in Section 4.02;

(k) modify the obligation of the Company to deliver information required under Rule 144A to permit resales of the Notes or the Common Shares issuable upon conversion thereof, at such times that the Company is not subject to Section 13(a) or 15(d) of the Exchange Act, in a manner adverse to the holders;

(l) reduce the quorum or voting requirements set forth in Article 13;

(m) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplemental indenture;

(n) modify the provisions of this Indenture with respect to the subordination of Notes in a manner adverse to the holders of the Notes in any material respect, in each case, without the consent of the holder of each Note so affected;

(o) (A) release the security interest granted in favor of the holders of the Notes in the Collateral other than pursuant to the terms of the Security Documents, or

(B) release any other security interest that may have been granted in favor of the holders of the Notes other than pursuant to the terms of such security interest; or

(p) change the obligation of the Company to repurchase any Note at the option of a Noteholder on a Repurchase Date in a manner adverse to the holders of Notes.

Upon the written request of the Company, accompanied by a copy of the resolutions of the Board of Directors certified by its Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of holders of the Notes as aforesaid, the Trustee shall join with the Company and any Guarantor in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture.

 

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It shall not be necessary for the consent of the holders of the Notes under this Section 8.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof.

Section 8.03. Effect of Supplemental Indenture. Any supplemental indenture executed pursuant to the provisions of this Article 8 shall comply with the Trust Indenture Act, as then in effect, provided that this Section 8.03 shall not require such supplemental indenture or the Trustee to be qualified under the Trust Indenture Act prior to the time such qualification is in fact required under the terms of the Trust Indenture Act or this Indenture has been qualified under the Trust Indenture Act, nor shall it constitute any admission or acknowledgment by any party to such supplemental indenture that any such qualification is required prior to the time such qualification is in fact required under the terms of the Trust Indenture Act or this Indenture has been qualified under the Trust Indenture Act. Upon the execution of any supplemental indenture pursuant to the provisions of this Article 8, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Notes shall thereafter be determined, exercised and enforced hereunder, subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes.

Section 8.04. Notation on Notes. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article 8 may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may, at the Company’s expense, be prepared and executed by the Company, authenticated by the Trustee (or an authenticating agent duly appointed by the Trustee pursuant to Section 17.09) and delivered in exchange for the Notes then outstanding, upon surrender of such Notes then outstanding.

Section 8.05. Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee. Prior to entering into any supplemental indenture, the Trustee shall be provided with an Officers’ Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article 8 and is otherwise authorized or permitted by this Indenture.

 

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ARTICLE IX

GUARANTEES

Section 9.01. Guarantee. Subject to this Article 9, each Guarantor hereby unconditionally guarantees to each holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns: (a) the due and punctual payment of the principal of, premium, if any, and interest on the Notes, subject to any applicable grace period, whether at the stated maturity of the Notes, by acceleration, redemption or otherwise, the due and punctual payment of interest on the overdue principal of and premium, if any, and, to the extent permitted by law, interest, and the due and punctual performance of all other obligations of the Company to the holders or the Trustee under this Indenture or any other agreement with or for the benefit of the holders or the Trustee, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at the stated maturity of the Notes, by acceleration pursuant to Section 6.01, redemption or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantors shall be jointly and severally obligated to pay the same immediately. Each Guarantor agrees that this is a guarantee of payment and not a guarantee of collection.

Each Guarantor hereby agrees that its obligations with regard to its Guarantee shall be joint and several, unconditional, irrespective of the validity or enforceability of the Notes or the obligations of the Company under this Indenture, the absence of any action to enforce the same, the recovery of any judgment against the Company or any other obligor with respect to this Indenture, the Notes or the Obligations of the Company under this Indenture or the Notes, any action to enforce the same or any other circumstances (other than complete performance) which might otherwise constitute a legal or equitable discharge or defense of a Guarantor. Each Guarantor further, to the extent permitted by law, waives and relinquishes all claims, rights and remedies accorded by applicable law to guarantors and agrees not to assert or take advantage of any such claims, rights or remedies, including but not limited to: (a) any right to require any of the Trustee, the holders or the Company (each a “Benefited Party”), as a condition of payment or performance by such Guarantor, to (1) proceed against the Company, any other guarantor (including any other Guarantor) of the Obligations under the Guarantees or any other Person, (2) proceed against or exhaust any security held from the Company, any such other guarantor or any other Person, (3) proceed against or have resort to any balance of any deposit account or credit on the books of any Benefited Party in favor of the Company or any other Person, or (4) pursue any other remedy in the power of any Benefited Party whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of the Company including any defense based on or arising out of the lack of validity or the unenforceability of the Obligations under the Guarantees or any agreement or instrument relating thereto or by reason of the

 

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cessation of the liability of the Company from any cause other than payment in full of the Obligations under the Guarantees; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Benefited Party’s errors or omissions in the administration of the Obligations under the Guarantees, except behavior which amounts to bad faith; (e)(1) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of the Guarantees and any legal or equitable discharge of such Guarantor’s obligations hereunder, (2) the benefit of any statute of limitations affecting such Guarantor’s liability hereunder or the enforcement hereof, (3) any rights to set-offs, recoupments and counterclaims and (4) promptness, diligence and any requirement that any Benefited Party protect, secure, perfect or insure any security interest or lien or any property subject thereto; (f) notices, demands, presentations, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of the Guarantees, notices of Default under the Notes or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Obligations under the Guarantees or any agreement related thereto, and notices of any extension of credit to the Company and any right to consent to any thereof; (g) to the extent permitted under applicable law, the benefits of any “One Action” rule and (h) any defenses or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms of the Guarantees. Except to the extent expressly provided herein, including Section 9.05, each Guarantor hereby covenants that its Guarantee shall not be discharged except by complete performance of the obligations contained in its Guarantee and this Indenture.

If any holder or the Trustee is required by any court or otherwise to return to the Company, the Guarantors or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or the Guarantors, any amount paid by either to the Trustee or such holder, the Guarantee of such Guarantor, to the extent theretofore discharged, shall be reinstated in full force and effect.

Each Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. Each Guarantor further agrees that, as between the Guarantors, on the one hand, and the holders and the Trustee, on the other hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Section 6.01 hereof for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby and (y) in the event of any declaration of acceleration of such Obligations as provided in Section 6.01 hereof, such Obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Guarantee. The Guarantors shall have the right to seek contribution from any non-paying Guarantor so long as the exercise of such right does not impair the rights of the holders under the Guarantee.

 

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Section 9.02. Limitation on Guarantor Liability.

(a) Each Guarantor, and by its acceptance of Notes, each holder, hereby confirms that it is the intention of all such parties that the Guarantee of such Guarantor not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar U.S. federal or state law to the extent applicable to any guarantee. To effectuate the foregoing intention, the Trustee, the holders and the Guarantors hereby irrevocably agree that each Guarantor’s liability shall be that amount from time to time equal to the aggregate liability of such Guarantor under the guarantee, but shall be limited to the lesser of (x) the aggregate amount of the Company’s obligations under the Notes and this Indenture or (y) the amount, if any, which would not have (1) rendered the Guarantor “insolvent” (as such term is defined in Bankruptcy Law and in the Debtor and Creditor Law of the State of New York) or (2) left it with unreasonably small capital at the time its guarantee with respect to the Notes was entered into, after giving effect to the incurrence of existing debt immediately before such time; provided, however, it shall be a presumption in any lawsuit or proceeding in which a Guarantor is a party that the amount guaranteed pursuant to the guarantee with respect to the Notes is the amount described in clause (x) above unless any creditor, or representative of creditors of the Guarantor, or debtor in possession or trustee in bankruptcy of the Guarantor, otherwise proves in a lawsuit that the aggregate liability of the Guarantor is limited to the amount described in clause (y).

(b) In making any determination as to the solvency or sufficiency of capital of a Guarantor in accordance with the proviso of Section 9.02(a), the right of each Guarantor to contribution from other Guarantors and any other rights such Guarantor may have, contractual or otherwise, shall be taken into account.

Section 9.03. Execution and Delivery of Guarantee.

To evidence its Guarantee set forth in Section 9.01, each Guarantor hereby agrees that a notation of such Guarantee in substantially the form included in Exhibit B attached hereto shall be endorsed by an Officer of such Guarantor on each Note authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of such Guarantor by its President or one of its Vice Presidents.

Each Guarantor hereby agrees that its Guarantee set forth in Section 9.01 shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Guarantee.

If an Officer whose signature is on this Indenture or on the Guarantee no longer holds that office at the time the Trustee authenticates the Note on which a Guarantee is endorsed, the Guarantee shall be valid nevertheless.

The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Guarantee set forth in this Indenture on behalf of the Guarantors.

 

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The Company hereby agrees that it shall cause each Person that becomes obligated to provide a Guarantee pursuant to Section 4.18 (each, a “Future Guarantor”) to immediately execute a supplemental indenture in form and substance satisfactory to the Trustee, pursuant to which such Person provides the guarantee set forth in this Article 9 and otherwise assumes the obligations and accepts the rights of a Guarantor under this Indenture, in each case with the same effect and to the same extent as if such Person had been named herein as a Guarantor. The Company also hereby agrees to immediately cause each such new Guarantor to evidence its guarantee by endorsing a notation of such guarantee on each Note as provided in this Section.

Section 9.04. Guarantors May Consolidate, etc., on Certain Terms.

Except as otherwise provided in Section 9.05, no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the Surviving Person) another Person whether or not affiliated with such Guarantor unless:

(i) subject to Section 9.05, the Person formed by or surviving any such consolidation or merger (if other than a Guarantor or the Company) unconditionally assumes all the obligations of such Guarantor, pursuant to a supplemental indenture in form and substance satisfactory to the Trustee, under this Indenture, the Guarantee on the terms set forth herein or therein; and

(ii) the Guarantor complies with the requirements of Article 5 hereof.

In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form and substance to the Trustee, of the Guarantee endorsed upon the Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Guarantor, such successor Person shall succeed to and be substituted for the Guarantor with the same effect as if it had been named herein as a Guarantor. Such successor Person thereupon may cause to be signed any or all of the Guarantees to be endorsed upon all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Guarantees so issued shall in all respects have the same legal rank and benefit under this Indenture as the Guarantees theretofore and thereafter issued in accordance with the terms of this Indenture as though all of such Guarantees had been issued at the date of the execution hereof.

Except as set forth in Articles 4 and 5, and notwithstanding clauses (i) and (ii) above, nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of a Guarantor with or into the Company or another Guarantor, or shall prevent any sale or conveyance of the property of a Guarantor as an entirety or substantially as an entirety to the Company or another Guarantor.

 

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Section 9.05. Releases Following Merger, Consolidation or Sale of Assets, Etc.

In the event of a sale or other disposition of all or substantially all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the Capital Stock of any Guarantor, in each case to a Person that is not (either before or after giving effect to such transactions) the Company or a Subsidiary of the Company, then such Guarantor (in the event of a sale or other disposition, by way of merger, consolidation or otherwise, of all of the Capital Stock of such Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all or substantially all of the assets of such Guarantor) shall (subject to the other provisions of this Section 9.05) be released and relieved of any obligations under its Guarantee; provided that the net proceeds of such sale or other disposition shall be applied in accordance with the applicable provisions of this Indenture, including without limitation Section 4.12. Upon delivery by the Company to the Trustee of an Officers’ Certificate and an Opinion of Counsel to the effect that such sale or other disposition was made by the Company in accordance with the provisions of this Indenture, including without limitation Section 4.12, the Trustee shall execute any documents reasonably required in order to evidence the release of any Guarantor from its obligations under its Guarantee.

Any Guarantor not released from its obligations under its Guarantee shall remain liable for the full amount of principal of and interest on the Notes and for the other obligations of any Guarantor under this Indenture as provided in this Article 9.

ARTICLE X

COLLATERAL SECURITY

Section 10.01. Security Documents.

(a) The due and punctual payment of the principal of and interest on the Notes when and as the same shall be due and payable, whether on an Interest Payment Date, at maturity, by acceleration, repurchase, redemption or otherwise, and interest on the overdue principal of and interest on the Notes and performance of all other obligations of the Company to the holders or the Trustee under this Indenture and the Notes, according to the terms hereunder or thereunder, are secured as provided in the Security Documents which the Company has entered into simultaneously with the execution of this Indenture and which is attached as Exhibit C hereto. Each holder, by its acceptance thereof, consents and agrees to the terms of the Security Documents (including, without limitation, the provisions providing for foreclosure and release of Collateral) as the same may be in effect or may be amended from time to time in accordance with its terms and authorizes and directs the Trustee to enter into the Security Documents and to perform its obligations and exercise its rights thereunder as a Secured Party in accordance therewith. The Company will do or cause to be done all such acts and things as may be required by applicable law or may be necessary or proper, or as may be required by the provisions of the Security Documents, to assure and confirm to the Trustee the security interest in the Collateral contemplated hereby, by the Security Documents or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and of the Notes secured hereby, according to the intent and purposes herein expressed. The Company will take, and will cause its Subsidiaries to take, upon

 

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request of the Trustee, any and all actions required to cause the Security Documents to create and maintain, as security for the Obligations of the Company hereunder, a valid and enforceable perfected Lien in and on all the Collateral, in favor of the Trustee, as Secured Party, for the benefit of the holders, superior to and prior to the rights of all third Persons (other than holders of Senior Debt) and subject to no other Liens other than first priority Liens in favor of holders of the Floating Rate Notes.

(b) So long as no Default or Event of Default has occurred and is continuing, and subject to certain terms and conditions, the Company and the Guarantors will be entitled to receive all cash dividends, interest and other payments made upon or with respect to the Collateral pledged by them.

(c) So long as there has occurred no Event of Default, then the Company and the Guarantors shall have the right to exercise any voting and other consensual rights pertaining to the Collateral pledged by them.

(d) Upon the occurrence and during the continuance of a Default or Event of Default, all rights of the Company and the Guarantors to receive all cash dividends, interest and other payments made upon or with respect to the Collateral will cease and such cash dividends, interest and other payments will be paid to the Collateral Agent;

(e) Upon the occurrence and during the continuance of an Event of Default:

(i) all rights of the Company and the Guarantors to exercise such voting or other consensual rights will cease, and all such rights will become vested in the Collateral Agent, which, to the extent permitted by law, will have the sole right to exercise such voting and other consensual rights; and

(ii) the Collateral Agent may sell the Collateral or any part of the Collateral in accordance with the terms of the Security Documents. The Collateral Agent, in accordance with the provisions of this Indenture, will distribute all funds distributed under the Security Documents and received by the Collateral Agent to the Trustee for the benefit of the holders of the Notes.

(f) If at any time after the Issue Date there is a change in PRC law or interpretation in PRC law that permits the encumbrance of the WFOE’s assets or Property by a Lien without the approval of any Governmental Authority of the PRC, then the Company shall cause the WFOE to, concurrently:

(i) execute and deliver to the Trustee a Security Document upon substantially the same terms granting a Lien upon such property to the Trustee for the benefit of the holders of Notes, which Lien shall be first priority if such assets or Property is not then encumbered by any other Lien (other than Liens required by law) or a second priority (to the extent recognizable as such) Lien if such assets or Property is at that time so encumbered;

 

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(ii) cause the Lien to be granted in such Security Document to be duly perfected in any manner permitted by law; and

(iii) deliver to the Trustee an Opinion of Counsel confirming as to such Security Document the matters set forth as to the Security Documents and Liens thereunder in the Opinions of Counsel delivered to holders on the Issue Date and, if the property subject to such Security Document is an interest in real estate, such local counsel opinions, insurance policies, surveys and other supporting documents as the Trustee may reasonably request.

(g) Notwithstanding (i) anything to the contrary contained in this Indenture, the Security Documents, the Notes or any other instrument governing, evidencing or relating to any Debt, (ii) the time, order or method of attachment of any Liens, (iii) the time or order of filing or recording of financing statements or other documents filed or recorded to perfect any Lien upon any Collateral, (iv) the time of taking possession or control over any Collateral or any other law of any relevant jurisdiction governing relative priorities of secured creditors:

(A) except for the Liens granted under the Security Documents for the benefit of the holders of the Floating Rate Notes and the Floating Rate Note Guarantees, the Liens will rank at least equally and ratably with all the other valid, enforceable and perfected Liens, whenever granted upon any present or future Collateral, but only to the extent such Liens are permitted under this Indenture to exist and to rank equally and ratably with the Notes and the Guarantees; and

(B) all proceeds of the Collateral applied under the Security Documents shall be allocated and distributed as set forth in Section 6.03.

Section 10.02. Future Guarantor Pledgors.

(a) The Company will use its commercially reasonable efforts promptly to obtain any necessary consents and waivers and to take all other actions necessary to pledge and to cause each Future Guarantor to pledge (i) the Capital Stock of any future Subsidiary (other than any PRC Subsidiary unless there has been after the Issue Date a change in PRC law or interpretation in PRC law that permits such pledges without approval of any Governmental Authority) in each case owned by the Company or such Future Guarantor and (ii) any loan or other extension of credit by such Future Guarantor or any other Guarantor to the WFOE, in each case on a first priority basis (subject to the prior rights of any holders of Senior Debt having a Lien on such Capital Stock or loan or extension of credit, including, without limitation, holders of Floating Rate Notes) in order to secure the obligations of the Company under the Notes and this Indenture and of such Future Guarantor under its Guarantee; provided that in exercising such reasonable best efforts the Company shall not be required to take any action that is commercially unreasonable.

 

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(b) The Company will, for the benefit of the Holders of the Notes, pledge, or cause each Guarantor to pledge, (i) the Capital Stock owned by the Company or such Guarantor of any Person that becomes a Subsidiary (other than any PRC Subsidiary unless there has been after the Issue Date a change in PRC law or interpretation in PRC law that permits such pledges without approval of any Governmental Authority) after the Issue Date and (ii) any loan or other extension of credit by such Future Guarantor or any other Guarantor to the WFOE, immediately upon such Person becoming a Subsidiary or creditor of the WFOE, to secure the obligations of the Company under the Notes and this Indenture, and of such Guarantor under its Guarantee, in the manner described above.

(c) Each Guarantor that pledges Capital Stock of a Subsidiary after the Issue Date, or a loan or extension of credit to the WFOE, is referred to as a “Future Guarantor Pledgor” and, upon giving such pledge, will be a “Guarantor Pledgor.”

(d) Upon each pledge by a Future Guarantor of the Capital Stock of any Subsidiary that is not a Guarantor or any future Subsidiary, or a loan or extension of credit to the WFOE, in accordance with Section 10.02(a) or Section 10.02(b), the Company will deliver to the Trustee an Officers’ Certificate stating that entry into the applicable pledge agreement has been duly and validly authorized and an Opinion of Counsel to the effect that (i) in the opinion of such counsel, such action has been taken with respect to the recording, registering and filing of or with respect to this Indenture and the applicable pledge agreement and all other instruments of further assurance as are necessary to make effective the lien created by such pledge agreement in the Capital Stock referenced in Section 10.02(a) or Section 10.02(b), and referencing the details of such action; or (ii) in the opinion of such counsel, no such action is necessary to make such lien effective; provided that any such Opinion of Counsel may rely on an Officers’ Certificate or certificates of public officials with respect to matters of fact.

(e) All Opinions of Counsel delivered pursuant to Section 10.02(d) may contain assumptions, qualifications, exceptions and limitations as are appropriate and customary for similar opinions relating to the nature of the Capital Stock pledged.

(f) Upon each pledge by any Future Guarantor of the Capital Stock of any Other Non-Guarantor Subsidiary or any future Subsidiary, or a loan or extension of credit to the WFOE, in accordance with Section 10.02(a) or Section 10.02(b), the Company will give notice, file, register or record any supplemental indentures, financing statements, continuation statements, pledge agreements or other instruments or cause each such Future Guarantor Pledgor to give notice, file, register or record any supplemental indentures, financing statements, continuation statements, pledge agreements, Intercreditor Agreement or other instruments and take any other actions necessary in order to perfect and protect the second priority lien (subject to Permitted Liens) thereby created.

(g) Notwithstanding any other provision of this Section 10.02, neither the Company nor any Guarantor or Subsidiary shall pledge or otherwise grant any Lien or other security interest over any Capital Stock, or a loan or extension of credit to the

 

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WFOE, or other assets or grant any guarantee hereunder unless it shall have first granted a guarantee and given a pledge for the benefit of holders of the Floating Rate Notes which (i) guarantee for the benefit of holders of the Floating Rate Notes shall be senior and have priority to and which pledge for the benefit of holders of the Floating Rate Notes shall be a first priority Lien, in each case to any guarantee or pledge granted for the benefit of Holders hereunder; and (ii) shall remain in full force and effect and be enforceable against the Company and or such future Guarantor until payment in full in cash of all obligations arising pursuant to the indenture governing the Floating Rate Notes.

Section 10.03. Recording and Opinions.

(a) The Company will furnish to the Trustee within three months after each anniversary of the Issue Date, an Opinion of Counsel, dated as of such date, stating either that (i) in the opinion of such counsel, action has been taken with respect to the recording, registering, filing, re-recording, re-registering and re-filing of all supplemental indentures, financing statements, continuation statements or other instruments of further assurance as is necessary to maintain the Lien of the Security Documents and reciting with respect to the security interest in the Collateral the details of such action or referring to prior Opinions of Counsel in which such details are given, and stating that, in the opinion of such counsel, based on relevant laws as in effect on the date of such Opinion of Counsel, all financing statements and continuation statements have been executed and filed that are necessary as of such date and during the succeeding 12 months fully to preserve and protect, to the extent such protection and preservation are possible by filing, the rights of the holders and the Trustee hereunder and under the Security Documents with respect to the security interest in the Collateral; or (ii) in the opinion of such counsel, no such action is necessary to maintain such Lien and assignment.

Section 10.04. Release of Collateral.

(a) Subject to subsections (b), (c) and (d) of this Section 10.04, Collateral may be released from the Lien and security interest created by the Security Documents at any time or from time to time in accordance with the provisions of the Security Documents or as provided hereby. In addition, upon the request of the Company pursuant to an Officers’ Certificate certifying that all conditions precedent provided under the Security Documents and the provisions hereunder have been met and stating whether or not such release is in connection with an Asset Sale and (at the sole cost and expense of the Company) the Collateral Agent will release Collateral that is sold, conveyed or disposed of in compliance with the provisions of this Indenture; provided, that if such sale, conveyance or disposition constitutes an Asset Sale, the Company will apply the Net Available Cash in accordance with Section 4.12 hereof. Upon receipt of such Officers’ Certificate the Collateral Agent shall execute, deliver or acknowledge any necessary or proper instruments of termination, satisfaction or release to evidence the release of any Collateral permitted to be released pursuant to this Indenture or the Security Documents.

 

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(b) No Collateral may be released from the Lien and security interest created by the Security Documents pursuant to the provisions of the Security Documents unless the certificate required by this Section has been delivered to the Trustee.

(c) At any time when a Default or Event of Default has occurred and is continuing and the maturity of the Notes has been accelerated (whether by declaration or otherwise), no release of Collateral pursuant to the provisions of the Security Documents will be effective as against the holders.

(d) The release of any Collateral from the terms of this Indenture and the Security Documents will not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Collateral is released pursuant to the terms of the Security Documents and hereof.

Section 10.05. Authorization of Actions to Be Taken by the Trustee Under the Security Documents.

Subject to the provisions of Section 7.01 and 7.02 hereof, the Trustee may, but is not obligated to, in its sole discretion and without the consent of the holders, take, on behalf of the holders, all actions it deems necessary or appropriate in order to:

(i) enforce any of its rights or any of the rights of the holders of the Notes under the Security Documents; and

(ii) collect and receive any and all amounts payable in respect of the Obligations of the Company hereunder.

The Trustee will have power (but shall not be obligated) to institute and maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any acts that may be unlawful or in violation of the Security Documents or this Indenture, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the holders in the Collateral (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or be prejudicial to the interests of the holders or of the Trustee).

Section 10.06. Authorization of Receipt of Funds by the Trustee Under the Security Documents.

The Trustee is authorized to receive any funds for the benefit of the holders distributed under the Security Documents, and to make further distributions of such funds to the holders according to the provisions of this Indenture.

 

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Section 10.07. Termination of Security Interest.

Upon the payment in full of all Obligations of the Company under this Indenture and the Notes, the Trustee will, at the request of the Company, release the Liens pursuant to this Indenture and the Security Documents.

ARTICLE XI

SATISFACTION AND DISCHARGE OF INDENTURE

Section 11.01. Discharge of Indenture. When (a) the Company shall deliver to the Trustee for cancellation all Notes theretofore authenticated (other than any Notes that have been destroyed, lost or stolen and in lieu of or in substitution for which other Notes shall have been authenticated and delivered in each case pursuant to Section 2.06) and not theretofore canceled, or (b) all the Notes not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, cash sufficient to pay at maturity or upon redemption of all of the Notes (other than any Notes that shall have been mutilated, destroyed, lost or stolen and in lieu of or in substitution for which other Notes shall have been authenticated and delivered) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and Interest due or to become due to such date of maturity or redemption date, as the case may be, accompanied by a verification report, as to the sufficiency of the deposited amount, from an internationally recognized firm of independent certified accountants or other financial professional satisfactory to the Trustee, and if the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect (except as to (i) remaining rights of registration of transfer, substitution and exchange and conversion of Notes, (ii) rights hereunder of holders of the Notes to receive payments of principal of and premium, if any, and Interest on, the Notes and the other rights, duties and obligations of holders of the Notes, as beneficiaries hereof with respect to the amounts, if any, so deposited with the Trustee and (iii) the rights, obligations and immunities of the Trustee hereunder), and the Trustee, on written demand of the Company accompanied by an Officers’ Certificate and an Opinion of Counsel as required by Section 17.05 and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture; the Company, however, hereby agrees to reimburse the Trustee for any costs or expenses thereafter properly incurred by the Trustee and to compensate the Trustee for any services thereafter properly rendered by the Trustee in connection with this Indenture or the Notes. The Trustee shall hold in trust money deposited with it pursuant to this Article 11. It shall apply the deposited money through the Paying Agent and in accordance with this Indenture to the payment of principal of and Interest on the Notes. Money so held in trust are not subject to Article 16.

 

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Section 11.02. Deposited Monies to be Held in Trust by Trustee. Subject to Section 11.04, all monies deposited with the Trustee pursuant to Section 11.01, shall be held in trust for the sole benefit of the holders of the Notes, and such monies shall be applied by the Trustee to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Notes for the payment or redemption of which such monies have been deposited with the Trustee, of all sums due and to become due thereon for principal and Interest and premium, if any.

Section 11.03. Paying Agent to Repay Monies Held. Upon the satisfaction and discharge of this Indenture, all monies then held by any paying agent of the Notes (other than the Trustee) shall, upon written request of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such monies.

Section 11.04. Return of Unclaimed Monies. Subject to the requirements of applicable law, any monies deposited with or paid to the Trustee for payment of the principal of, premium, if any, or Interest on Notes and not applied but remaining unclaimed by the holders of Notes for two years (or such shorter period of time under applicable escheat law) after the date upon which the principal of, premium, if any, or Interest on such Notes, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee on demand and all liability of the Trustee shall thereupon cease with respect to such monies; and the holder of any of the Notes shall thereafter look only to the Company for any payment that such holder may be entitled to collect unless an applicable abandoned property law designates another Person.

Section 11.05. Reinstatement. If the Trustee or the paying agent is unable to apply any money in accordance with Section 11.02 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company’s obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 11.01 until such time as the Trustee or the paying agent is permitted to apply all such money in accordance with Section 11.02; provided that if the Company makes any payment of Interest on or principal of any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the holders of such Notes to receive such payment from the money held by the Trustee or paying agent.

ARTICLE XII

THE HOLDERS

Section 12.01. Action By Holders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the

 

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fact that at the time of taking any such action, the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by holders of the Notes in person or by agent or proxy appointed in writing, or (b) by the record of the holders of Notes voting in favor thereof at any meeting of holders of the Notes duly called and held in accordance with the provisions of Article 13, or (c) by a combination of such instrument or instruments and any such record of such a meeting of holders of the Notes. Whenever the Company or the Trustee solicits the taking of any action by the holders of the Notes, the Company or the Trustee may fix in advance of such solicitation, a date as the record date for determining holders entitled to take such action. The record date shall be not more than fifteen (15) days prior to the date of commencement of solicitation of such action.

Section 12.02. Proof of Execution by Holders. Subject to the provisions of Sections 7.01, 7.02 and 13.05, proof of the execution of any instrument by a Noteholder or its agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The holding of Notes shall be proved by the registry of such Notes or by a certificate of the Security Registrar.

The record of any meeting of holders of the Notes shall be proved in the manner provided in Section 13.06.

Section 12.03. Who Are Deemed Absolute Owners. The Company, the Trustee, any paying agent, any conversion agent and any Security Registrar may deem the Person in whose name such Note shall be registered upon the Security Register to be, and may treat it as, the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notation of ownership or other writing thereon made by any Person other than the Company or any Security Registrar) for the purpose of receiving payment of or on account of the principal of, premium, if any, and Interest on such Note, for conversion of such Note and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any conversion agent nor any Security Registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being, or upon such holder’s order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for monies payable upon any such Note.

Section 12.04. Company-owned Notes Disregarded. In determining whether the holders of the requisite aggregate principal amount of Notes have concurred in any direction, consent, waiver or other action under this Indenture, Notes which are owned by the Company or any other obligor on the Notes or any Affiliate of the Company or any other obligor on the Notes shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent, waiver or other action, only

 

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Notes which a Responsible Officer knows are so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 12.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee’s right to vote such Notes and that the pledgee is not the Company, any other obligor on the Notes or any Affiliate of the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Upon request of the Trustee, the Company shall furnish to the Trustee promptly an Officers’ Certificate listing and identifying all Notes, if any, known by the Company to be owned or held by or for the account of any of the above described Persons, and, subject to Section 7.01, the Trustee shall be entitled to accept such Officers’ Certificate as conclusive evidence of the facts therein set forth and of the fact that all Notes not listed therein are outstanding for the purpose of any such determination.

Section 12.05. Revocation Of Consents, Future Holders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 12.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such action, any holder of a Note which is shown by the evidence to be included in the Notes the holders of which have consented to such action may, by filing written notice with the Trustee at its Corporate Trust Office and upon proof of holding as provided in Section 12.02, revoke such action so far as concerns such Note. Except as aforesaid, any such action taken by the holder of any Note shall be conclusive and binding upon such holder and upon all future holders and owners of such Note and of any Notes issued in exchange or substitution therefor, irrespective of whether any notation in regard thereto is made upon such Note or any Note issued in exchange or substitution therefor.

ARTICLE XIII

MEETINGS OF HOLDERS OF THE NOTES

Section 13.01. Purpose of Meetings. A meeting of holders of the Notes may be called at any time and from time to time pursuant to the provisions of this Article 13 for any of the following purposes:

(1) to give any notice to the Company or to the Trustee or to give any directions to the Trustee permitted under this Indenture, or to consent to the waiving of any Default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by holders of the Notes pursuant to any of the provisions of Article 6;

(2) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article 7;

 

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(3) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 8.02; or

(4) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Notes under any other provision of this Indenture or under applicable law.

Section 13.02. Call of Meetings by Trustee. The Trustee may at any time call a meeting of holders of the Notes to take any action specified in Section 13.01, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of the holders of the Notes, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting and the establishment of any record date pursuant to Section 12.01, shall be mailed to holders of Notes at their addresses as they shall appear on the Security Register. Such notice shall also be mailed to the Company. Such notices shall be mailed not less than twenty-one (21) nor more than ninety (90) days prior to the date fixed for the meeting.

Any meeting of holders of the Notes shall be valid without notice if the holders of all Notes then outstanding are present in person or by proxy or if notice is waived before or after the meeting by the holders of all Notes outstanding, and if the Company and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice.

Section 13.03. Call of Meetings by Company or Holders of the Notes. In case at any time the Company, pursuant to a resolution of its Board of Directors, or the holders of at least ten percent (10%) in aggregate principal amount of the Notes then outstanding, shall have requested the Trustee to call a meeting of holders of the Notes, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within twenty (20) days after receipt of such request, then the Company or such holders of the Notes may determine the time and the place for such meeting and may call such meeting to take any action authorized in Section 13.01, by mailing notice thereof as provided in Section 13.02.

Section 13.04. Qualifications For Voting. To be entitled to vote at any meeting of holders of the Notes a person shall (a) be a holder of one or more Notes on the record date pertaining to such meeting or (b) be a person appointed by an instrument in writing as proxy by a holder of one or more Notes on the record date pertaining to such meeting. The only persons who shall be entitled to be present or to speak at any meeting of holders of the Notes shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.

Section 13.05. Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem

 

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advisable for any meeting of holders of the Notes, in regard to proof of the holding of Notes and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit.

The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by holders of the Notes as provided in Section 13.03, in which case the Company or the holders of the Notes calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the holders of a majority in principal amount of the Notes represented at the meeting and entitled to vote at the meeting.

Subject to the provisions of Section 12.04, at any meeting each Noteholder or proxyholder shall be entitled to one vote for each $100,000 principal amount of Notes held or represented by him; provided that no vote shall be cast or counted at any meeting in respect of any Note challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Notes held by him or instruments in writing as aforesaid duly designating him as the proxy to vote on behalf of other holders of the Notes. At any meeting of holders of the Notes duly called pursuant to the provisions of Section 13.02 or 13.03, the presence of persons holding or representing Notes in principal amount sufficient to take action on the business for the transaction of which such meeting was called shall constitute a quorum, but, if less than a quorum is present, the person or persons holding or representing a majority in principal amount of the Notes represented at the meeting may adjourn such meeting with the same effect for all intents and purposes, as though a quorum had been present.

Section 13.06. Voting. The vote upon any resolution submitted to any meeting of holders of the Notes shall be by written ballot on which shall be subscribed the signatures of the holders of Notes or of their representatives by proxy and the outstanding principal amount of the Notes held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of holders of the Notes shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 13.02. The record shall show the principal amount of the Notes voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting.

 

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Any record so signed and verified shall be conclusive evidence of the matters therein stated.

Section 13.07. No Delay Of Rights By Meeting. Nothing contained in this Article 13 shall be deemed or construed to authorize or permit, by reason of any call of a meeting of holders of the Notes or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the holders of the Notes under any of the provisions of this Indenture or of the Notes.

ARTICLE XIV

HOLDERS’ LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE

Section 14.01. Holders’ Lists. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee, semiannually, not more than fifteen (15) days after each April 1 or October 1 in each year beginning with October 1, 2007, and at such other times as the Trustee may request in writing, within thirty (30) days after receipt by the Company of any such request (or such lesser time as the Trustee may reasonably request in order to enable it to timely provide any notice to be provided by it hereunder), a list in such form as the Trustee may reasonably require of the names and addresses of the holders of Notes as of a date not more than fifteen (15) days (or such other date as the Trustee may reasonably request in order to so provide any such notices) prior to the time such information is furnished, except that no such list need be furnished by the Company to the Trustee so long as the Trustee is acting as the sole Security Registrar.

Section 14.02. Preservation and Disclosure of Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Notes contained in the most recent list furnished to it as provided in Section 14.01 or maintained by the Trustee in its capacity as Security Registrar or co-registrar in respect of the Notes, if so acting. The Trustee may destroy any list furnished to it as provided in Section 14.01 upon receipt of a new list so furnished.

(b) The rights of holders of the Notes to communicate with other holders of Notes with respect to their rights under this Indenture or under the Notes, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act.

(c) Every Noteholder, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of holders of Notes made pursuant to the Trust Indenture Act.

 

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Section 14.03. Reports by Company. The Company shall file with the Trustee (and the Commission if at any time after this Indenture becomes qualified under the Trust Indenture Act), and transmit to holders of Notes, such information, documents and other reports and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto, whether or not the Notes are governed by the Trust Indenture Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within fifteen (15) days after the same is so required to be filed with the Commission. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on an Officers’ Certificates).

ARTICLE XV

CONVERSION OF NOTES

Section 15.01. Right to Convert. (a) Subject to and upon compliance with the provisions of this Indenture, the holder of any Note shall have the right, at such holder’s option (i) at any time from and after a Qualifying IPO and prior to April 9, 2012 and (ii) if there has been no Qualifying IPO prior to April 1, 2012 then from and including April 2, 2012 through April 6, 2012 (each, the “Conversion Period”), to convert the principal amount of the Note, or any portion of such principal amount which is a multiple of $100,000, into fully paid and non-assessable Common Shares (as such shares shall then be constituted) at the Conversion Rate in effect at such time, by surrender of the Note to be so converted in whole or in part, together with any required funds, in the manner provided in Section 15.02.

(a) In addition, if:

(i) (A) the Company distributes to all holders of its Common Shares rights or warrants entitling them (for a period expiring within 45 days of the record date for the determination of the shareholders entitled to receive such distribution) to subscribe for or purchase Common Shares, at a price per share less than the average of the Closing Sale Price for the ten Trading Days immediately preceding, but not including, the date such distribution is first publicly announced by the Company, or (B) the Company distributes to all holders of its Common Shares cash or other assets, debt securities or rights to purchase its securities, where the Fair Market Value of such distribution per Common Share exceeds 5% of the Closing Sale Price on the Trading Day immediately preceding the date such

 

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distribution is first publicly announced by the Company, then, in either case, the Notes may be surrendered for conversion at any time on and after the date that the Company gives notice to the holders of such distribution, which shall be not less than 20 days prior to the Ex-Dividend Time for such distribution, until the earlier of the close of business on the Business Day immediately preceding, but not including, the Ex-Dividend Time or the date the Company publicly announces that such distribution will not take place; provided that neither any adjustment to the Conversion Price will be made if the holder will otherwise participate in such distribution without conversion nor will a holder of a Note have the ability to convert pursuant to this Section 15.01(b); or

(ii) the Company consolidates with or merges with or into another Person or is a party to a binding share exchange or conveys, transfers, sells, leases or otherwise disposes of all or substantially all of its properties and assets in each case pursuant to which the Company’s Common Shares are converted into cash, securities or other property, then the Notes may be surrendered for conversion at any time from and after the date fifteen (15) days prior to the anticipated effective date of the transaction and ending on and including the date fifteen (15) days after the consummation of the transaction. If such transaction constitutes a Designated Event, the Notes may be surrendered for conversion until the corresponding Designated Event Expiration Time. In such an event, a holder of Notes may elect to exercise its option to require the Company to repurchase all or a portion of such holder’s Notes. The Board of Directors shall determine the anticipated effective date of the transaction, and such determination shall be conclusive and binding on the holders and shall be publicly announced by the Company and posted on its web site not later than two Business Days prior to such 15^th day. If Notes are not surrendered pursuant to this paragraph for conversion, on the effective date of the transaction, the right to convert the Notes into Common Shares will convert into a right to convert the Notes into the kind and amount of cash, securities and other property that a Noteholder would have received if such holder had converted such holder’s Notes immediately prior to the transaction.

If any Notes have been called for redemption pursuant to Section 3.02, such Notes may be converted, at any time on or after the date the notice of redemption has been given until the close of business on the fifth Business Day immediately preceding the redemption date.

A Note in respect of which a holder is electing to exercise its option to require the Company to repurchase such holder’s Notes upon a Designated Event pursuant to Section 3.05 or at the option of the holder pursuant to Section 3.06 may be converted only if such holder withdraws its election in accordance with Section 3.05. A holder of Notes is not entitled to any rights of a holder of Common Shares until such holder has converted its Notes into Common Shares, and only to the extent such Notes are deemed to have been converted into Common Shares under this Article 15.

 

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Section 15.02. Exercise of Conversion Privilege; Issuance of Common Shares on Conversion; No Adjustment for Interest or Dividends.

(a) Deposit by Converting Holders. In order to exercise the conversion privilege with respect to any Note in certificated form (if issued), during the Conversion Period, the Conversion Agent must receive, on behalf of the Company, such Note with the original or facsimile of the form entitled “Conversion Notice” as set out in Exhibit D hereto on the reverse thereof, duly completed and manually signed, together with such Notes duly endorsed for transfer, accompanied by the funds, if any, required by this Section 15.02, from 9:00 am to 3:00 pm on any Business Day at its specified office (such date, the “Deposit Date”). Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for Common Shares which shall be issuable on such conversion shall be issued, and shall be accompanied by transfer or similar taxes, if required pursuant to Section 15.07. A Conversion Notice or any Note in certificated form (if issued) deposited outside the hours specified above or on a day that is not a Business Day at the place of the specified office of the relevant Conversion Agent shall for all purposes be deemed to have been deposited with that Agent between 9:00 am and 3:00 pm on the next Business Day.

In order to exercise the conversion privilege with respect to any interest in a Global Note, subject to the appropriate instruction form for conversion pursuant to Euroclear or Clearstream’s requirements, the Holder shall

(i) pay the funds, if any, required by this Section 15.02,

(ii) pay to the relevant tax authorities any stamp, issue, registration or similar taxes and duties (if any) arising on conversion in the country in which the Notes are deposited as aforesaid or payable in any jurisdiction consequent upon the issue, delivery or transfer of Common Shares or any other property or cash to or to the order of a person other than such converting holder, together with any transfer taxes if required pursuant to Section 15.07, in which case the Conversion Agent shall not be required to verify that such payments have been made,

(iii) the Global Note need not be deposited with a Conversion Agent together with the relevant Conversion Notice;

(iv) the Conversion Notice for Notes represented by the Global Note may be completed and deposited by or on behalf of an account holder of Clearstream or Euroclear or any clearing system in which the Notes to be converted is held at such time, which has an interest in such Notes; and

(v) the holding of an interest in Notes by an account holder of Clearstream or Euroclear or any clearing system in which the Notes are held at such time in respect of which the conversion rights are exercised will be confirmed by the relevant clearing system with a Conversion Agent.

 

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Once deposited, a Conversion Notice may not be withdrawn without the written consent of the Company (with a copy of such consent together with the relevant Conversion Notice sent to the relevant Conversion Agent at the same time).

(b) Notice to the Company and Registrar. The Conversion Agent shall upon receipt of the Notes and the Conversion Notice from a converting holder or upon receipt of a facsimile copy of the Conversion Notice as soon as practicable but in no event later than two Business Days following the Deposit Date, notify the Registrar and the Company, by means of a notification, substantially in the form of Exhibit E hereto (an “Agent Conversion Fax”), by fax with the following information:

(i) the total number and aggregate principal amount and serial or identifying numbers of all Notes deposited on such Deposit Date for conversion by the same holder, the number of Common Shares deliverable in respect of such Notes upon conversion and the name and address of such holder;

(ii) the Deposit Date, the Conversion Date and the Conversion Price (as notified to such Conversion Agent by the Company pursuant to Section 15.05 if such price has been adjusted) in respect of such conversion;

(iii) (if applicable) the amount of cash payment due to the converting holder in respect of fraction of Common Shares (which amount shall be calculated by the Company and for which no Agent shall have any responsibility to calculate);

(iv) the name and address of the person in whose name the Common Shares to be issued and deliverable upon conversion are to be registered; and

No Agent has any responsibility whatsoever with respect of the issue and delivery of the Common Shares to the converting holder.

(c) Actions by the Company. As promptly as practicable after satisfaction of the requirements for conversion set forth above, subject to compliance with any restrictions on transfer if shares issuable on conversion are to be issued in a name other than that of the Noteholder (as if such transfer were a transfer of the Note or Notes (or portion thereof) so converted), the Company shall, within five (5) Business Days after the Conversion Date (as defined below), issue and shall deliver to such Noteholder a certificate or certificates for the number of full Common Shares issuable upon the conversion of such Note or portion thereof as determined by the Company in accordance with the provisions of this Article 15 and a check or cash in respect of any fractional interest in respect of a Common Share arising upon such conversion, calculated by the Company as provided in Section 15.03. In case any Note of a denomination greater than $100,000 shall be surrendered for partial conversion, and subject to Section 2.03, the Company shall execute and the Trustee shall authenticate and deliver to the holder of the Note so surrendered, without charge, a new Note or Notes in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Note.

 

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Each conversion shall be deemed to have been effected as to any such Note (or portion thereof) on the date (the “Conversion Date”) on which the conversion agent determined that the requirements set forth above in this Section 15.02 have been satisfied as to such Note (or portion thereof), and the Person in whose name any certificate or certificates for Common Shares shall be issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; provided that any such surrender during the period from the date which is two (2) Business Days before the stock transfer books of the Company shall be closed and until the end of such close period (the “Closed Period”) shall constitute the Person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next succeeding day on the end of such Closed Period, but such conversion shall be at the Conversion Rate in effect on the date upon which such Note shall be surrendered. As soon as practicable but in no event later than ten (10) days upon becoming aware of the same, the Company shall deliver to the Trustee and the conversion agent a written notice with the following information: (A) the dates upon which there shall be a Closed Period, (B) particulars of the reason for such Closed Period and (C) the expected date when the Closed Period shall commence and end.

Any Note or portion thereof surrendered for conversion during the period from the close of business on the record date for any interest payment date to the close of business on the Business Day preceding the following interest payment date shall be accompanied by payment, in immediately available funds or other funds acceptable to the Company, of an amount equal to the Interest otherwise payable on such interest payment date on the principal amount being converted; provided that no such payment need be made (1) if the Company has specified a redemption date that is after a record date and on or prior to the next interest payment date, (2) if the Company has specified a Designated Event Repurchase Date that is after a record date and on or prior to the next interest payment date or (3) to the extent of any overdue Interest, if any overdue Interest exists at the time of conversion with respect to such Note. Except as provided above in this Section 15.02, no payment or other adjustment shall be made for Interest accrued on any Note converted or for dividends on any shares issued upon the conversion of such Note as provided in this Article 15.

Upon the conversion of an interest in a Global Note, the Trustee (or other conversion agent appointed by the Company) shall make a notation on such Global Note as to the reduction in the principal amount represented thereby. The Company shall notify the Trustee in writing of any conversions of Notes effected through any conversion agent other than the Trustee.

Upon the conversion of a Note, any accrued but unpaid Interest to the Conversion Date with respect to the converted Note shall not be cancelled, extinguished or forfeited, but rather shall be deemed to be paid in full to the holder thereof through delivery of the Common Shares (together with the cash payment, if any in lieu of fractional shares) in exchange for the Note being converted pursuant to the provisions hereof; and the Fair Market Value of such Common Shares (together with any such cash payment in lieu of fractional shares) shall be treated as issued, to the extent thereof, first in exchange for and

 

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in satisfaction of the Company’s obligation to pay the principal amount of the converted Note, the accrued but unpaid Interest to the Conversion Date, and the balance, if any, of such Fair Market Value of such Common Shares (and any such cash payment) shall be treated as issued in exchange for and in satisfaction of the right to convert the Note being converted pursuant to the provisions hereof.

The Company agrees, and by acceptance of a beneficial interest in a Note each holder and any beneficial owner of a Note shall be deemed to have agreed, to treat, for United States federal income tax purposes, the Fair Market Value of the Common Shares received upon a conversion of the Note (together with any cash payment in lieu of fractional shares) as a contingent payment on the Note for purposes of Treasury Regulation Section 1.1275-4 or any successor provision.

Section 15.03. Cash Payments in Lieu of Fractional Shares. No fractional Common Shares or scrip certificates representing fractional shares shall be issued upon conversion of Notes. If more than one Note shall be surrendered for conversion at one time by the same holder, the number of full shares that shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of the Notes (or specified portions thereof to the extent permitted hereby) so surrendered. If any fractional share of stock would be issuable upon the conversion of any Note or Notes, the Company shall make an adjustment and payment therefor in cash at the Closing Sale Price on the last Trading Day immediately preceding the Conversion Date thereof to the holder of the Notes.

Section 15.04. Conversion Rate. Each $100,000 principal amount of the Notes shall be convertible into the number of Common Shares specified in the form of Note (herein called the “Conversion Rate”) attached as Exhibit A hereto, subject to adjustment as provided in this Article 15.

Section 15.05. Adjustment of Conversion Rate. The Conversion Rate shall be adjusted from time to time by the Company as follows:

(a) In case the Company shall hereafter pay a dividend or make a distribution to all holders of the outstanding Common Shares in Common Shares, the Conversion Rate shall be increased so that the same shall equal the rate determined by multiplying the Conversion Rate in effect at the opening of business on the date following the Record Date for such dividend or distribution by a fraction,

(i) the numerator of which shall be the sum of the number of Common Shares outstanding at the close of business on such Record Date plus the total number of Common Shares constituting such dividend or other distribution; and

(ii) the denominator of which shall be the number of Common Shares outstanding at the close of business on such Record Date,

 

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such increase to become effective immediately after the opening of business on the day following such Record Date. For the purpose of this paragraph (a), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Company. If any dividend or distribution of the type described in this Section 15.05(a) is declared but not so paid or made, the Conversion Rate shall again be adjusted to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

(b) In case the Company shall issue rights or warrants to all holders of its outstanding Common Shares entitling them (for a period expiring within forty-five (45) days after the Record Date for the issuance of such rights and warrants) to subscribe for or purchase Common Shares at a price per share less than the average of the Closing Sale Prices of the Common Shares for the 10 Trading Days immediately preceding the date such distribution is first publicly announced by the Company, the Conversion Rate shall be increased so that the same shall equal the rate determined by multiplying the Conversion Rate in effect immediately prior to such Record Date by a fraction,

(i) the numerator of which shall be the number of Common Shares outstanding on such Record Date plus the total number of additional Common Shares offered for subscription or purchase, and

(ii) the denominator of which shall be the sum of the number of Common Shares outstanding at the close of business on such Record Date plus the number of shares that the aggregate offering price of the total number of shares so offered would purchase at a price equal to the average of the Closing Sale Prices of the Common Shares for the 10 Trading Days immediately preceding the date such distribution is first publicly announced by the Company.

Such adjustment shall be successively made whenever any such rights or warrants are issued, and shall become effective immediately after the opening of business on the day following the Record Date for the issuance of such rights or warrants. To the extent that Common Shares are not delivered after the expiration of such rights or warrants, the Conversion Rate shall be readjusted to the Conversion Rate that would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of Common Shares actually delivered. If such rights or warrants are not so issued, the Conversion Rate shall again be adjusted to be the Conversion Rate that would then be in effect if such Record Date had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase Common Shares at a price less than the average of the Closing Sale Prices of the Common Shares for the 10 Trading Days immediately preceding the date such distribution is first publicly announced by the Company, and in determining the aggregate offering price of such Common Shares, there shall be taken into account any consideration received by the Company for such rights or warrants and any amount payable on exercise or conversion thereof, the value of such consideration, if other than cash, to be determined by the Board of Directors.

 

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(c) In case outstanding Common Shares shall be subdivided into a greater number of Common Shares, the Conversion Rate in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and conversely, in case outstanding Common Shares shall be combined into a smaller number of Common Shares, the Conversion Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective.

(d) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares of any class of capital stock of the Company or evidences of its indebtedness or assets (including cash or securities, but excluding any rights or warrants referred to in Section 15.05(b), and excluding any dividend or distribution (x) paid exclusively in cash or (y) referred to in Section 15.05(a)) (any of the foregoing hereinafter in this Section 15.05(d) called the “Distributed Property”), then, in each such case (unless the Company elects to reserve such Distributed Property for distribution to the holders of the Notes upon the conversion of the Notes so that any such holder converting Notes will receive upon such conversion, in addition to the Common Shares to which such holder is entitled, the amount and kind of such Distributed Property which such holder would have received if such holder had converted its Notes into Common Shares immediately prior to the Record Date for such distribution of the Distributed Property) the Conversion Rate shall be increased so that the same shall be equal to the rate determined by multiplying the Conversion Rate in effect on the Record Date with respect to such distribution by a fraction,

(i) the numerator of which shall be the Current Market Price on such Record Date; and

(ii) the denominator of which shall be the Current Market Price on such Record Date less the Fair Market Value (as determined by the Board of Directors, whose determination shall be conclusive, and described in a resolution of the Board of Directors) on such Record Date of the portion of the Distributed Property so distributed applicable to one Common Share,

such adjustment to become effective immediately prior to the opening of business on the day following such Record Date; provided that if the then Fair Market Value (as so determined) of the portion of the Distributed Property so distributed applicable to one Common Share is equal to or greater than the Current Market Price on such Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Noteholder shall have the right to receive upon conversion the amount of Distributed Property such holder would have received had such holder converted each Note on the Record Date for such distribution. If such dividend or distribution is not so paid or made, the Conversion Rate shall again be adjusted to be the Conversion Rate that would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the Fair Market Value of any distribution for purposes of this

 

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Section 15.05(d) by reference to the actual or when issued trading market for any securities, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price on the applicable Record Date for such distribution. Notwithstanding the foregoing, if the Distributed Property distributed by the Company to all holders of its Common Shares consist of capital stock of, or similar equity interests in, a Subsidiary or other business unit of the Company or a Subsidiary, the Conversion Rate shall be increased so that the same shall be equal to the rate determined by multiplying the Conversion Rate in effect on the Record Date with respect to such distribution by a fraction,

(i) the numerator of which shall be the sum of (A) the average of the Closing Sale Prices of the Common Shares for the ten (10) Trading Days commencing on and including the fifth Trading Day after the Ex-Dividend Time plus (B) the Fair Market Value of the securities distributed in respect of each Common Share for which this Section 15.05(d) applies, which shall equal the number of securities distributed in respect of each Common Share multiplied by the average of the Closing Sale Prices of those securities distributed for the ten (10) Trading Days commencing on and including the fifth Trading Day after the Ex-Dividend Time; and

(ii) the denominator of which shall be the average of the Closing Sale Prices of the Common Shares for the ten (10) Trading Days commencing on and including the fifth Trading Day after the Ex-Dividend Time,

such adjustment to become effective immediately prior to the opening of business on the day following such Record Date; provided that the Company may in lieu of the foregoing adjustment make adequate provision so that each Noteholder shall have the right to receive upon conversion the amount of Distributed Property such holder would have received had such holder converted each Note on the Record Date with respect to such distribution.

Rights or warrants distributed by the Company to all holders of Common Shares entitling the holders thereof to subscribe for or purchase shares of the Company’s capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events (“Trigger Event”): (i) are deemed to be transferred with such Common Shares; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Shares, shall be deemed not to have been distributed for purposes of this Section 15.05 (and no adjustment to the Conversion Rate under this Section 15.05 will be required) until the occurrence of the earliest Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate adjustment (if any is required) to the Conversion Rate shall be made under this Section 15.05(d). If any such right or warrant, including any such existing rights or warrants distributed prior to the date of this Indenture, are subject to events, upon the occurrence of which such rights or warrants become exercisable to purchase different securities, evidences of indebtedness or other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and Record Date

 

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with respect to new rights or warrants with such rights (and a termination or expiration of the existing rights or warrants without exercise by any of the holders thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Trigger Event or other event (of the type described in the preceding sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Rate under this Section 15.05 was made, (1) in the case of any such rights or warrants that shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Rate shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Shares with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Shares as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants that shall have expired or been terminated without exercise by any holders thereof, the Conversion Rate shall be readjusted as if such rights and warrants had not been issued.

No adjustment of the Conversion Rate shall be made pursuant to this Section 15.05(d) in respect of rights or warrants distributed or deemed distributed on any Trigger Event to the extent that such rights or warrants are actually distributed or reserved by the Company for distribution to holders of Notes upon conversion by such holders of Notes into Common Shares.

For purposes of this Section 15.05(d) and Section 15.05(a) and (b), any dividend or distribution to which this Section 15.05(d) is applicable that also includes Common Shares, or rights or warrants to subscribe for or purchase Common Shares (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets or shares of capital stock other than such Common Shares or rights or warrants (and any Conversion Rate adjustment required by this Section 15.05(d) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such Common Shares or such rights or warrants (and any further Conversion Rate adjustment required by Section 15.05(a) and Section 15.05(b) with respect to such dividend or distribution shall then be made), except any Common Shares included in such dividend or distribution shall not be deemed “outstanding at the close of business on such Record Date” within the meaning of Section 15.05(a).

(e) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Shares cash (excluding any dividend or distribution in connection with the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary), then, in such case, the Conversion Rate shall be increased so that the same shall equal the rate determined by multiplying the Conversion Rate in effect immediately prior to the close of business on the Record Date for such dividend or distribution by a fraction,

(i) the numerator of which shall be the Current Market Price on such Record Date; and

 

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(ii) the denominator of which shall be the Current Market Price on such Record Date less the amount of cash so distributed applicable to one Common Share,

such adjustment to be effective immediately prior to the opening of business on the day following such Record Date; provided that if the portion of the cash so distributed applicable to one Common Share is equal to or greater than the Current Market Price on such Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Noteholder shall have the right to receive upon conversion the amount of cash such holder would have received had such holder converted each Note on the Record Date. If such dividend or distribution is not so paid or made, such Conversion Rate shall again be adjusted to be the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

(f) In case a tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Shares shall expire and such tender or exchange offer (as amended upon the expiration thereof) shall require the payment to shareholders of consideration per Common Share having a Fair Market Value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that as of the last time (the “Expiration Time”) tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) exceeds the Closing Sale Price of an Common Share on the Trading Day next succeeding the Expiration Time, the Conversion Rate shall be increased so that the same shall equal the rate determined by multiplying the Conversion Rate in effect immediately prior to the Expiration Time by a fraction,

(i) the numerator of which shall be the sum of (x) the Fair Market Value (determined as aforesaid) of the aggregate consideration payable to shareholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted up to any such maximum, being referred to as the “Purchased Shares”) and (y) the product of the number of Common Shares outstanding (less any Purchased Shares) at the Expiration Time and the Closing Sale Price of an Common Share on the Trading Day next succeeding the Expiration Time, and

(ii) the denominator of which shall be the number of Common Shares outstanding (including any Purchased Shares) at the Expiration Time multiplied by the Closing Sale Price of an Common Share on the Trading Day next succeeding the Expiration Time.

such adjustment to become effective immediately prior to the opening of business on the day following the Expiration Time. If the Company is obligated to purchase shares pursuant to any such tender or exchange offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Rate shall again be adjusted to be the Conversion Rate that would then be in effect if such tender or exchange offer had not been made.

 

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(g) For purposes of this Section 15.05, the following terms shall have the meaning indicated:

(i) “Current Market Price” shall mean the average of the daily Closing Sale Prices per Common Share for the ten consecutive Trading Days ending on the earlier of such date of determination and the day before the “ex” date with respect to the issuance, distribution, subdivision or combination requiring such computation immediately prior to the date in question. For purposes of this paragraph, the term “ex” date, (1) when used with respect to any issuance or distribution, means the first date on which the Common Shares trade, regular way, on the relevant exchange or in the relevant market from which the Closing Sale Price was obtained without the right to receive such issuance or distribution, and (2) when used with respect to any subdivision or combination of Common Shares, means the first date on which the Common Shares trade, regular way, on such exchange or in such market after the time at which such subdivision or combination becomes effective.

If another issuance, distribution, subdivision or combination to which Section 15.05 applies occurs during the period applicable for calculating “Current Market Price” pursuant to the definition in the preceding paragraph, “Current Market Price” shall be calculated for such period in a manner determined by the Board of Directors to reflect the impact of such issuance, distribution, subdivision or combination on the Closing Sale Price of the Common Shares during such period.

(ii) “Record Date” shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Shares have the right to receive any cash, securities or other property or in which the Common Shares (or other applicable security) are exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of shareholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise).

(iii) “Trading Day” shall mean (x) if the applicable security is quoted on the Nasdaq National Market, a day on which trades may be made thereon or (y) if the applicable security is listed or admitted for trading on the American Stock Exchange, New York Stock Exchange or another national securities exchange, a day on which the American Stock Exchange, New York Stock Exchange or another national securities exchange is open for business or (z) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close.

 

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(h) If at any time the Company shall become obligated to issue Performance Warrant Shares, the Conversion Rate in effect immediately prior thereto shall immediately thereafter be, for each $100,000 principal amount of Notes, the number of Common Shares into which such principal amount of Notes shall have been convertible immediately prior to the Company becoming obligated to issue the Performance Warrant Shares plus the number which is equal to the fraction, (X) the numerator of which is 8.34% of the maximum number of Common Shares into which the Series A Preferred Shares issuable upon exercise of the Performance Warrants shall be convertible at the then current conversion rate therefor, and (Y) the denominator of which is 250.

(i) The Company may make such increases in the Conversion Rate, in addition to those required by Section 15.05(a), (b), (c), (d), (e), or (f) as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Shares or rights to purchase Common Shares resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes.

To the extent permitted by applicable law and rules of the principal trading market for the Common Shares, the Company from time to time may increase the Conversion Rate by any amount for any period of time if the period is at least twenty (20) Business Days, the increase is irrevocable during the period and the Board of Directors shall have made a determination that such increase would be in the best interests of the Company, which determination shall be conclusive. Whenever the Conversion Rate is increased pursuant to the preceding sentence, the Company shall mail to holders of record of the Notes a notice of the increase at least fifteen (15) days prior to the date the increased Conversion Rate takes effect, and such notice shall state the increased Conversion Rate and the period during which it will be in effect.

(j) No adjustment in the Conversion Rate shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in such rate; provided that any adjustments that by reason of this Section 15.05(i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 15 shall be made by the Company and shall be made to the nearest cent or to the nearest one-ten thousandth (1/10,000) of a share, as the case may be. No adjustment need be made for rights to purchase Common Shares pursuant to a Company plan for reinvestment of dividends or interest or for any issuance of Common Shares or convertible or exchangeable securities or rights to purchase Common Shares or convertible or exchangeable securities. To the extent the Notes become convertible into cash, assets, property or securities (other than capital stock of the Company), no adjustment need be made thereafter as to the cash, assets, property or such securities. Interest will not accrue on any cash into which the Notes are convertible.

(k) Whenever the Conversion Rate is adjusted as herein provided, the Company shall promptly file with the Trustee and any conversion agent other than the Trustee an Officers’ Certificate setting forth the Conversion Rate after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Unless and until

 

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a Responsible Officer of the Trustee shall have received such Officers’ Certificate, the Trustee shall not be deemed to have knowledge of any adjustment of the Conversion Rate and may assume that the last Conversion Rate of which it has knowledge is still in effect. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Rate setting forth the adjusted Conversion Rate and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Rate to the holder of each Note at his last address appearing on the Security Register provided for in Section 2.05 of this Indenture, within twenty (20) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of any such adjustment.

(l) In any case in which this Section 15.05 provides that an adjustment shall become effective immediately after (1) a Record Date for an event, (2) the Record Date for a dividend or distribution described in Section 15.05(a), (3) the Record Date for the issuance of rights or warrants as described in Section 15.05(b) or (4) the Expiration Time for any tender or exchange offer pursuant to Section 15.05(f) (each a “Determination Date”), the Company may elect to defer until the occurrence of the applicable Adjustment Event (as hereinafter defined) (x) issuing to the holder of any Note converted after such Determination Date and before the occurrence of such Adjustment Event, the additional Common Shares or other securities issuable upon such conversion by reason of the adjustment required by such Adjustment Event over and above the Common Shares issuable upon such conversion before giving effect to such adjustment and (y) paying to such holder any amount in cash in lieu of any fraction pursuant to Section 15.03. For purposes of this Section 15.05(k), the term “Adjustment Event” shall mean:

(i) in any case referred to in clause (1) hereof, the occurrence of such event,

(ii) in any case referred to in clause (2) hereof, the date any such dividend or distribution is paid or made,

(iii) in any case referred to in clause (3) hereof, the date of expiration of such rights or warrants, and

(iv) in any case referred to in clause (4) hereof, the date a sale or exchange of Common Shares pursuant to such tender or exchange offer is consummated and becomes irrevocable.

(m) For purposes of this Section 15.05, the number of Common Shares at any time outstanding shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. The Company will not pay any dividend or make any distribution on Common Shares held in the treasury of the Company.

Section 15.06. Effect of Reclassification, Consolidation, Merger or Sale. If any of the following events occur, namely (i) any reclassification or change of the outstanding Common Shares (other than a subdivision or combination to

 

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which Section 15.05(c) applies), (ii) any consolidation, merger or combination of the Company with another Person as a result of which holders of Common Shares shall be entitled to receive stock, other securities or other property or assets (including cash) with respect to or in exchange for such Common Shares, or (iii) any sale or conveyance of all or substantially all of the properties and assets of the Company to any other Person as a result of which holders of Common Shares shall be entitled to receive stock, other securities or other property or assets (including cash) with respect to or in exchange for such Common Shares, then the Company or the successor or purchasing Person, as the case may be, shall execute with the Trustee a supplemental indenture providing that each Note shall be convertible into the kind and amount of shares of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of a number of Common Shares issuable upon conversion of such Notes (assuming, for such purposes, a sufficient number of authorized Common Shares are available to convert all such Notes) immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance assuming such holder of Common Shares did not exercise such holder’s rights of election, if any, as to the kind or amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance (provided that, if the kind or amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance is not the same for each Common Share in respect of which such rights of election shall not have been exercised (“Non-electing share”), then for the purposes of this Section 15.06 the kind and amount of stock, other securities or other property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 15.

The Company shall cause notice of the execution of such supplemental indenture to be mailed to each holder of Notes, at its address appearing on the Security Register provided for in Section 2.05 of this Indenture, within twenty (20) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture.

The above provisions of this Section shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances.

If this Section 15.06 applies to any event or occurrence, Section 15.05 shall not apply.

 

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Section 15.07. Taxes on Shares Issued. The issuance of share certificates on conversions of Notes shall be made without charge to the converting Noteholder for any documentary, stamp or similar issue or transfer tax in respect of the issue thereof. The Company shall not, however, be required to pay any such tax which may be payable in respect of any transfer involved in the issue and delivery of shares in any name other than that of the holder of any Note converted, and the Company shall not be required to issue or deliver any such share certificate unless and until the Person or Persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

Section 15.08. Reservation of Shares, Shares to be Fully Paid; Compliance with Governmental Requirements; Listing of Common Shares. The Company shall provide, free from preemptive rights, out of its authorized but unissued shares, sufficient Common Shares to provide for the conversion of the Notes from time to time as such Notes are presented for conversion.

Before taking any action which would cause an adjustment increasing the Conversion Rate to an amount that would cause the Conversion Price to be reduced below the then par value, if any, of the Common Shares issuable upon conversion of the Notes, the Company will take all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue Common Shares at such adjusted Conversion Rate.

The Company covenants that all Common Shares which may be issued upon conversion of Notes will upon issue be fully paid and non-assessable by the Company and free from all taxes, liens and charges with respect to the issue thereof.

The Company covenants that, if any Common Shares to be provided for the purpose of conversion of Notes hereunder require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued upon conversion, the Company will in good faith and as expeditiously as possible, to the extent then permitted by the rules and interpretations of the Commission (or any successor thereto), endeavor to secure such registration or approval, as the case may be.

The Company covenants that, if at any time the Common Shares shall be listed on the Nasdaq National Market or any other national securities exchange or automated quotation system, the Company will, if permitted by the rules of such exchange or automated quotation system, list and keep listed, so long as the Common Shares shall be so listed on such exchange or automated quotation system, all Common Shares issuable upon conversion of the Note; provided that if the rules of such exchange or automated quotation system permit the Company to defer the listing of such Common Shares until the first conversion of the Notes into Common Shares in accordance with the provisions of this Indenture, the Company covenants to list such Common Shares issuable upon conversion of the Notes in accordance with the requirements of such exchange or automated quotation system at such time.

 

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Section 15.09. Responsibility of Trustee. The Trustee and any other conversion agent shall not at any time be under any duty or responsibility to any holder of Notes to determine the Conversion Rate or whether any facts exist which may require any adjustment of the Conversion Rate, or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. The Trustee and any other conversion agent shall not be accountable with respect to the validity or value (or the kind or amount) of any Common Shares, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Note; and the Trustee and any other conversion agent make no representations with respect thereto. Neither the Trustee nor any conversion agent shall be responsible for any failure of the Company to issue, register the transfer of or deliver any Common Shares or share certificates or other securities or property or cash upon the surrender of any Note for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Company contained in this Article 15. Without limiting the generality of the foregoing, neither the Trustee nor any conversion agent shall be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture entered into pursuant to Section 15.06 relating either to the kind or amount of shares of stock or securities or property (including cash) receivable by holders of the Notes upon the conversion of their Notes after any event referred to in such Section 15.06 or to any adjustment to be made with respect thereto, but, subject to the provisions of Section 7.01, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers’ Certificate (which the Company shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) with respect thereto.

Section 15.10. Notice to Holders Prior to Certain Actions. In case:

(a) the Company shall declare a dividend (or any other distribution) on its Common Shares that would require an adjustment in the Conversion Rate pursuant to Section 15.05; or

(b) the Company shall authorize the granting to the holders of all or substantially all of its Common Shares of rights or warrants to subscribe for or purchase any share of any class or any other rights or warrants; or

(c) of any reclassification or reorganization of the Common Shares of the Company (other than a subdivision or combination of its outstanding Common Shares, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or

 

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(d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company;

the Company shall cause to be filed with the Trustee and to be mailed to each holder of Notes at such holder’s address appearing on the Security Register provided for in Section 2.05 of this Indenture, as promptly as possible but in any event at least ten (10) days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective or occur, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up.

Section 15.11. Shareholder Rights Plans. Each Common Share issued upon conversion of Notes pursuant to this Article 15 shall be entitled to receive the appropriate number of rights, if any, and the certificates representing the Common Shares issued upon such conversion shall bear such legends, if any, in each case as may be provided by the terms of any shareholder rights plan adopted by the Company, as the same may be amended from time to time. If at the time of conversion, however, the rights have separated from the Common Shares in accordance with the provisions of the applicable shareholder rights agreement so that the holders of the Notes would not be entitled to receive any rights in respect of Common Shares issuable upon conversion of the Notes, the Conversion Rate will be adjusted in accordance with Section 15.05(d) treating all rights previously issued as Distributed Property for purposes of such adjustment, subject to readjustment in the event of the expiration, termination or redemption of the rights.

Section 15.12. Transfer Restrictions. (a) Common Shares issued upon conversion of Restricted Notes (all Common Shares issued in exchange therefor or substitution thereof) shall be represented by certificates bearing the Regulation S Legend and shall be subject to the restrictions or transfer set forth in the Regulation S Legend.

(b) Any Common Shares as to which such restrictions on transfer as to which the conditions for removal of the Regulation S Legend have been satisfied may, upon surrender of the certificates representing such Common Shares for exchange in accordance with the procedures of the transfer agent for the Common Shares, be exchanged for a new certificate or certificates for a like number of Common Shares, which shall not bear the Regulation S Legend.

 

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ARTICLE XVI

SUBORDINATION OF NOTES

Section 16.01. Agreement of Subordination. The Company covenants and agrees, and each holder of Notes issued hereunder by its acceptance thereof likewise covenants and agrees, that all Notes shall be issued subject to the provisions of this Article 16 and to the terms and conditions of the Intercreditor Agreement, and each Person holding any Notes, whether upon original issue or upon registration of transfer, assignment or exchange thereof, accepts and agrees to be bound by such provisions.

The payment of the principal of, premium, if any, and Interest on all Notes (including, but not limited to, the redemption price with respect to the Notes called for redemption in accordance with Section 3.02 or submitted for repurchase in accordance with Section 3.05 or Section 3.06, as the case may be, as provided in this Indenture or any other payment payable in respect of Notes pursuant to the provisions of this Indenture) issued hereunder and any claim for rescission or damages in respect thereof shall, to the extent and in the manner hereinafter set forth, be subordinated and subject in right of payment to the prior payment in full in cash of all Senior Debt, whether outstanding at the date of this Indenture or thereafter incurred, and the Company agrees that the subordination is for the benefit of and enforceable by the holders of such Senior Debt. For purposes of this Article 16, the Debt evidenced by the Notes shall be deemed to include any Additional Interest. The Notes shall in all respects rank pari passu with all other Subordinated Debt of the Company, and only Debt of the Company that is Senior Debt of the Company shall rank senior to the Notes in accordance with the provisions set forth herein.

No provision of this Article 16 shall prevent the occurrence of any default or Event of Default hereunder or have any effect on the rights of the holders of the Notes or the Trustee to accelerate the maturity of the Notes.

Section 16.02. No Payments to Holders upon Defaults Relating to Senior Debt. (a) No payment shall be made with respect to the principal of, premium, if any, or Interest on the Notes (including, but not limited to, the redemption price with respect to the Notes to be called for redemption in accordance with Section 3.02 or submitted for repurchase in accordance with Section 3.05 or Section 3.06 as the case may be, as provided in this Indenture or any other payment payable in respect of Notes pursuant to the provisions of this Indenture), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 16.09, upon:

(i) the maturity of any Designated Senior Debt by lapse of time, acceleration or otherwise;

(ii) a default, or event which after notice or passage of time or both would be a default, in the payment of principal (including any letter of credit

 

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reimbursement obligations), premium, if any, interest (including post-petition interest in any proceeding under any Bankruptcy Law), rent, commissions or other obligations in respect of Senior Debt occurs and is continuing (a “Payment Default”); or

(iii) a default, , or event which after notice or passage of time or both would be a default, other than a Payment Default, on any Senior Debt occurs and is continuing that permits holders of such Senior Debt to accelerate its maturity (or in the case of any lease that is Senior Debt, a default occurs and is continuing that permits the lessor to either terminate the lease or require the Company to make an irrevocable offer to terminate the lease following an event of default thereunder) (a “Non-Payment Default”) and the Trustee receives a notice of the default (a “Payment Blockage Notice”) from a holder of Senior Debt or a Representative of Senior Debt.

If the Trustee receives any Payment Blockage Notice pursuant to clause (iii) above, no subsequent Payment Blockage Notice shall be effective for purposes of this Section 16.02 unless and until (A) at least 365 days shall have elapsed since the initial effectiveness of the immediately prior Payment Blockage Notice and (B) all scheduled payments of principal, any premium and Additional Interest, and interest on the Notes that have come due have been paid in full. No Non-Payment Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been waived for a period of not less than 90 days.

(b) The Company may and shall resume payments on and distributions in respect of the Notes (including, but not limited to, the redemption price with respect to the Notes to be redeemed):

(1) in the case of a Payment Default, on the date upon which any such Payment Default and all other Payment Defaults are cured or waived or ceases to exist,

(2) in the case of a Non-Payment Default, on the earlier of (a) the date upon which such default and all other Non-Payment Defaults are cured or waived or ceases to exist or (b) 179 days after the applicable Payment Blockage Notice is received by the Trustee if the maturity of such Senior Debt has not been accelerated and there is no Payment Default (or in the case of any lease, 179 days after notice is received if the Company and the Trustee have not received notice that the lessor under such lease has exercised its right to terminate the lease or require the Company to make an irrevocable offer to terminate the lease following an event of default thereunder and there is no Payment Default), or

 

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(3) upon the earlier of the payment in full in cash of the obligations outstanding under and the satisfaction and discharge or defeasance of Designated Senior Debt,

unless this Article 16 otherwise prohibits the payment or distribution at the time of such payment or distribution.

Section 16.03. Payments over to Senior Debt upon Dissolution. Upon any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Debt shall first be paid in full in cash before any payment is made on account of the principal of, premium, if any, or Interest on the Notes (except payments made pursuant to Article 11 from monies deposited with the Trustee pursuant thereto prior to commencement of proceedings for such dissolution, winding up, liquidation or reorganization), and upon any such dissolution or winding up or liquidation or reorganization of the Company or bankruptcy, insolvency, receivership or other similar proceeding, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the holders of the Notes or the Trustee would be entitled, except for the provisions of this Article 16, shall (except as aforesaid) be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the holders of the Notes or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Debt (pro rata to such holders on the basis of the respective amounts of Senior Debt held by such holders, or as otherwise required by law or a court order) or their Representative or Representatives, as their respective interests may appear, to the extent necessary to pay all Senior Debt in full in cash, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt, before any payment or distribution is made to the holders of the Notes or to the Trustee.

For purposes of this Article 16, the words, “cash, property or securities” shall not be deemed to include Permitted Junior Securities. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another Person upon the terms and conditions provided for in Article 5 shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 16.03 if such other Person shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article 5.

Section 16.04. Prior Payment of Senior Debt upon Acceleration of Notes. If the maturity of the Notes has been accelerated because of a Default, no

 

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payment or distribution shall be made to the Trustee or any holder of Notes in respect of the principal of, premium, if any, or Interest on the Notes (including, but not limited to, the redemption price with respect to the Notes called for redemption in accordance with Section 3.02 or submitted for repurchase in accordance with Section 3.05 or Section 3.06, as the case may be, as provided in this Indenture), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 16.09 until all Senior Debt has been paid in full in cash or such acceleration is rescinded in accordance with the terms of this Indenture. If payment of the Notes is accelerated because of a Default, the Company or, at the Company’s request and expense, the Trustee shall promptly notify holders of Designated Senior Debt of the acceleration. If any Designated Senior Debt of the Company is outstanding, the Company may not pay the Notes (other than Permitted Junior Securities) until five Business Days after such holders or the Representative of such Designated Senior Debt receive notice of such acceleration and have received the payment in full in cash of all the outstanding amount under such Designated Senior Debt, thereafter, may pay the Notes only if this Article 16 otherwise permits payment at that time.

Section 16.05. Payment over to Senior Debt. In the event that, notwithstanding Sections 16.02, 16.03 or 16.04, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (including, without limitation, by way of setoff or otherwise), prohibited by Section 16.02, 16.03 or 16.04 shall be received by the Trustee or the holders of the Notes before all Senior Debt is paid in full in cash or provision is made for such payment thereof in accordance with its terms to the extent that the Trustee or any holder of the Notes has acquired notice, by whatever means, that all Senior Debt has not been paid in full in cash, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of Senior Debt or their Representative or Representatives, as their respective interests may appear, as calculated by the Company, for application to the payment of any Senior Debt remaining unpaid to the extent necessary to pay all Senior Debt in full in cash after giving effect to any concurrent payment or distribution to or for the holders of such Senior Debt.

Nothing in Section 16.02, 16.03 or 16.04 and this Section shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.06.

Section 16.06. Subrogation. Subject to the payment in full in cash of all Senior Debt, the rights of the holders of the Notes shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Debt pursuant to the provisions of this Article 16 (equally and ratably with the holders of all Debt of the Company which by its express terms is subordinated to other Debt of the Company to substantially the same extent as the Notes are subordinated and is entitled to like rights of subrogation) to the rights of the holders of Senior Debt to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Debt until the principal,

 

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premium, if any, and Interest on the Notes shall be paid in full, and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Debt of any cash, property or securities to which the holders of the Notes or the Trustee would be entitled except for the provisions of this Article 16, and no payment pursuant to the provisions of this Article 16, to or for the benefit of the holders of Senior Debt by holders of the Notes or the Trustee, shall, as among the Company, its creditors other than holders of Senior Debt, and the holders of the Notes, be deemed to be a payment by the Company to or on account of the Senior Debt, and no payments or distributions of cash, property or securities to or for the benefit of the holders of the Notes pursuant to the subrogation provisions of this Article 16, which would otherwise have been paid to the holders of Senior Debt, shall, as among the Company and its creditors other than the holders of Notes, be deemed to be a payment by the Company to or for the account of the Notes. It is understood that the provisions of this Article 16 are intended solely for the purposes of defining the relative rights of the holders of the Notes, on the one hand, and the holders of the Senior Debt, on the other hand.

Section 16.07. Payment Obligations Unconditional. Nothing contained in this Article 16 or elsewhere in this Indenture or in the Notes is intended to or shall impair, as among the Company, its creditors other than the holders of Senior Debt, and the holders of the Notes, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Notes the principal of, premium, if any, and Interest on the Notes as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Notes and creditors of the Company other than the holders of the Senior Debt, nor shall anything herein or therein prevent the Trustee or, subject to Section 6.04, the holder of any Note from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article 16 of the holders of Senior Debt in respect of cash, property or securities of the Company received upon the exercise of any such remedy.

Section 16.08. Authorization to Effect Subordination. Each holder of a Note by the holder’s acceptance thereof authorizes and directs the Trustee on the holder’s behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 16 and appoints the Trustee to act as the holder’s attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in the third paragraph of Section 6.02 hereof at least thirty (30) days before the expiration of the time to file such claim, the holders of any Senior Debt or their Representatives are hereby authorized to file an appropriate claim for and on behalf of the holders of the Notes.

Section 16.09. Notice to Trustee. The Company shall give prompt written notice in the form of an Officers’ Certificate to a Responsible Officer of the Trustee and to any paying agent of any fact known to the Company that would

 

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prohibit the making of any payment of monies to or by the Trustee or any paying agent in respect of the Notes pursuant to the provisions of this Article 16. Notwithstanding the provisions of this Article 16 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Notes pursuant to the provisions of this Article 16, unless and until a Responsible Officer of the Trustee shall have received written notice thereof at the Corporate Trust Office from the Company (in the form of an Officers’ Certificate) or a Representative or a holder or holders of Senior Debt, and before the receipt of any such written notice, the Trustee, subject to the provisions of Section 7.01, shall be entitled in all respects to assume that no such facts exist; provided that if on a date not less than one Business Day prior to the date upon which by the terms hereof any such monies may become payable for any purpose (including, without limitation, the payment of the principal of, or premium, if any, or Interest on any Note) the Trustee shall not have received, with respect to such monies, the notice provided for in this Section 16.09, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to apply monies received to the purpose for which they were received, and shall not be affected by any notice to the contrary that may be received by it on or after such prior date.

Notwithstanding anything in this Article 16 to the contrary, nothing shall prevent any payment by the Trustee to the holders of the Notes of monies deposited with it pursuant to Section 11.01.

The Trustee, subject to the provisions of Section 7.01, shall be entitled to rely on the delivery to it of a written notice by a Representative or a person representing himself to be a holder of Senior Debt (or a trustee on behalf of such holder) to establish that such notice has been given by a Representative or a holder of Senior Debt or a trustee on behalf of any such holder or holders. The Trustee shall not be required to make any payment or distribution to or on behalf of a holder of Senior Debt pursuant to this Article 16 unless it has received satisfactory evidence as to the amount of Senior Debt held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article 16, except in the case of (i) and (ii) if such failure or payment or delivery is made as a result of the willful misconduct or gross negligence of the Trustee.

Section 16.10. Trustee’s Relation to Senior Debt. The Trustee in its individual or any other capacity may hold Senior Debt of the Company with the same rights it would have if it were not Trustee. The Security Registrar and the Paying Agent may do the same with like rights. The Trustee shall be entitled to all the rights set forth in this Article 16 with respect to any Senior Debt of the Company which may at any time be held by it, to the same extent as any other holder of such Senior Debt; and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article 16 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.06 or any other Section of this Indenture.

 

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With respect to the holders of Senior Debt, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article 16, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt and, subject to the provisions of Section 7.01, the Trustee shall not be liable to any holder of Senior Debt (i) for any failure to make any payments or distributions to such holder or (ii) if it shall pay over or deliver money to holders of Notes, the Company or any other Person in compliance with this Article 16, except in the case of clause (i) or (ii) if such failure or payment or delivery is made as a result of the willful misconduct or gross negligence of the Trustee.

Section 16.11. No Impairment of Subordination. No right of any present or future holder of any Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. Senior Debt may be created, renewed or extended and holders of Senior Debt may exercise any rights under any instrument creating or evidencing such Senior Debt, including, without limitation, any waiver of default thereunder, without any notice to or consent from the holders of the Notes or the Trustee. No compromise, alteration, amendment, modification, extension, renewal or other change of, or waiver, consent or other action in respect of, any liability or obligation under or in respect of the Senior Debt or any terms or conditions of any instrument creating or evidencing such Senior Debt shall in any way alter or affect any of the provisions of this Article 16 or the subordination of the Notes provided thereby.

Section 16.12. Certain Conversions not Deemed Payment. For the purposes of this Article 16 only, (1) the issuance and delivery of Permitted Junior Securities upon conversion of Notes in accordance with Article 15 and (2) the payment, issuance or delivery of cash, property or securities upon conversion of a Note as a result of any transaction specified in Section 15.06 shall not be deemed to constitute a payment or distribution on account of the principal of, premium, if any, or Interest on Notes or on account of the purchase or other acquisition of Notes. Nothing contained in this Article 16 or elsewhere in this Indenture or in the Notes is intended to or shall impair, as among the Company, its creditors (other than holders of Senior Debt) and the Holders, the right, which is absolute and unconditional, of the holder of any Note to convert such Note in accordance with Article 15.

 

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Section 16.13. Article Applicable to Paying Agents. If at any time any paying agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term “Trustee” as used in this Article 16 shall (unless the context otherwise requires) be construed as extending to and including such paying agent within its meaning as fully for all intents and purposes as if such paying agent were named in this Article 16 in addition to or in place of the Trustee; provided that the first paragraph of Section 16.09 and the second paragraph of Section 16.10 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as paying agent.

The Trustee shall not be responsible for the actions or inactions of any other paying agents (including the Company if acting as its own paying agent) and shall have no control of any funds held by such other paying agents.

Section 16.14. Senior Debt Entitled to Rely. The holders of Senior Debt shall have the right to rely upon the provisions of this Article 16, and no amendment or modification of the provisions contained herein shall diminish the rights of such holders unless such holders shall have agreed in writing thereto. Each Noteholder by accepting a Note acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Debt of the Company, whether such Senior Debt was created or acquired before or after the issuance of the Notes, to acquire and continue to hold, or to continue to hold, such Senior Debt and such holder of such Senior Debt shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Debt.

Section 16.15. Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article 16, the Trustee and the holders of the Notes shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the holders of the Notes, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 16.

 

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ARTICLE XVII

GENERAL PROVISIONS

Section 17.01. Provisions Binding on Company’s Successors. All the covenants, stipulations, promises and agreements by the Company contained in this Indenture shall bind its successors and assigns whether so expressed or not.

Section 17.02. Official Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any Person that shall at the time be the lawful sole successor of the Company.

Section 17.03. Addresses for Notices, Etc. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Notes on the Company shall be deemed to have been sufficiently given or made, for all purposes, if given or served by being deposited postage prepaid by registered or certified mail in a post office letter box, or sent by express overnight air courier for next day delivery or sent by telecopier transmission addressed as follows: to No. 18, Xinyuan Road, Zhengzhou City, Henan, PRC, Telecopier No.: +(86) 0371 6565 1168, Attention: Longgen Zhang. Any notice, direction, request or demand hereunder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or served by being deposited, postage prepaid, by registered or certified mail in a post office letter box or sent by telecopier transmission addressed as follows: The Hong Kong and Shanghai Banking Corporation Limited, Level 30, HSBC Main Building, 1 Queen’s Road, Central, Hong Kong, Telecopier No.: +852 2801 5586, Attention: Corporate Trust and Loan Agency.

The Trustee, by notice to the Company, may designate additional or different addresses for subsequent notices or communications.

Any notice or communication mailed to a Noteholder shall be mailed to such holder by first class mail, postage prepaid, or sent by express overnight air courier for next day delivery at his address as it appears on the Security Register and shall be sufficiently given to such holder if so mailed within the time prescribed. So long as the Notes are represented by a Global Note which is held by the Common Depositary on behalf of Euroclear and Clearstream, notices to a Noteholder may be given by delivery of the relevant notice to Euroclear and Clearstream for communication by it to entitled accountholders in substitution for notification as required elsewhere in this Indenture or in the Notes.

Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other holders of the Notes. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it.

 

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Section 17.04. Governing Law. This Indenture and each Note shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of laws principles thereof.

Section 17.05. Evidence of Compliance with Conditions Precedent, Certificates to Trustee. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers’ Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with.

Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, such person has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with.

Section 17.06. Legal Holidays. In any case in which the date of maturity of Interest on or principal of the Notes or the redemption date of any Note, or the last day on which a Noteholder has a right to convert such holder’s Note, will not be a Business Day, then payment of such Interest on or principal of the Notes, or delivery for conversion of such Note, need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the redemption date or by such last date of conversion, and no Interest shall accrue for the period from and after such date.

Section 17.07. Benefits of Indenture. Nothing in this Indenture or in the Notes, express or implied, shall give to any Person, other than the parties hereto, any paying agent, any authenticating agent, any Security Registrar and their successors hereunder and the holders of Notes any benefit or any legal or equitable right, remedy or claim under this Indenture.

Section 17.08. Table of Contents, Headings, Etc. The table of contents and the titles and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof.

 

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Section 17.09. Authenticating Agent. The Trustee may appoint an authenticating agent that shall be authorized to act on its behalf, and subject to its direction, in the authentication and delivery of Notes in connection with the original issuance thereof and transfers and exchanges of Notes hereunder, including under Sections 2.04, 2.05, 2.06, 2.07, 3.03 and 3.05, as fully to all intents and purposes as though the authenticating agent had been expressly authorized by this Indenture and those Sections to authenticate and deliver Notes. For all purposes of this Indenture, the authentication and delivery of Notes by the authenticating agent shall be deemed to be authentication and delivery of such Notes “by the Trustee” and a certificate of authentication executed on behalf of the Trustee by an authenticating agent shall be deemed to satisfy any requirement hereunder or in the Notes for the Trustee’s certificate of authentication. Such authenticating agent shall at all times be a Person eligible to serve as trustee hereunder pursuant to Section 7.09.

Any corporation into which any authenticating agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any authenticating agent shall be a party, or any corporation succeeding to the corporate trust business of any authenticating agent, shall be the successor of the authenticating agent hereunder, if such successor corporation is otherwise eligible under this Section 17.09, without the execution or filing of any paper or any further act on the part of the parties hereto or the authenticating agent or such successor corporation.

Any authenticating agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any authenticating agent by giving written notice of termination to such authenticating agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any authenticating agent shall cease to be eligible under this Section, the Trustee shall either promptly appoint a successor authenticating agent or itself assume the duties and obligations of the former authenticating agent under this Indenture and, upon such appointment of a successor authenticating agent, if made, shall give written notice of such appointment of a successor authenticating agent to the Company and shall mail notice of such appointment of a successor authenticating agent to all holders of Notes as the names and addresses of such holders appear on the Security Register.

The Company agrees to pay to the authenticating agent from time to time such reasonable compensation for its services as shall be agreed upon in writing between the Company and the authenticating agent.

The provisions of Sections 7.02, 7.03, 7.04 and 12.03 and this Section 17.09 shall be applicable to any authenticating agent.

 

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Section 17.10. Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.

Section 17.11. Severability. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, then (to the extent permitted by law) the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

Section 17.12. Company Responsible for Making Calculations. The Company will be responsible for making all calculations required under the Notes. The Company will make these calculations in good faith and absent manifest error, these calculations will be final and binding on the holders of the Notes. Promptly after the calculation thereof, the Company will provide to each of the Trustee and the Conversion Agent an Officers’ Certificate setting forth a schedule of its calculations, and each of the Trustee and the Conversion Agent is entitled to conclusively rely upon the accuracy of such calculations without independent verification. The Trustee will forward the Company’s calculations any holder upon the written request of such holder.

Section 17.13. Indenture and Notes Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or Interest on any Note, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, shareholder, employee, agent, officer, director or subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes.

The Hongkong and Shanghai Banking Corporation Limited hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions herein above set forth.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed.

 

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EXHIBIT A

[GLOBAL SECURITIES LEGEND]

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF EUROCLEAR BANK S.A./N.V. (“EUROCLEAR”), OR CLEARSTREAM BANKING, SOCIÉTÉ ANONYME (“CLEARSTREAM”), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF ITS AUTHORIZED NOMINEE OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF EUROCLEAR OR CLEARSTREAM (AND ANY PAYMENT IS MADE TO ITS AUTHORIZED NOMINEE, OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF EUROCLEAR OR CLEARSTREAM), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, ITS AUTHORIZED NOMINEE, HAS AN INTEREST HEREIN.

TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF EUROCLEAR OR CLEARSTREAM OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR’S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.

[REGULATION S LEGEND]

UNTIL 40 DAYS AFTER THE LATER OF THE DAY ON WHICH THE NOTES ARE FIRST OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S, AS DEFINED BELOW) AND THE DATE OF THE CLOSING OF THE OFFERING OF THE NOTES, AN OFFER OR SALE OF THE NOTES WITHIN THE UNITED STATES (AS DEFINED IN THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “U.S. SECURITIES ACT”) MAY VIOLATE THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT IF SUCH OFFER OR SALE IS MADE OTHERWISE THAN IN ACCORDANCE WITH RULE 144A OR ANOTHER APPLICABLE EXEMPTION THEREUNDER.

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OR OTHER SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT.

 

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THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE U.S. SECURITIES ACT (“RULE 144A”)) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN “OFFSHORE TRANSACTION” PURSUANT TO RULE 904 OF REGULATION S UNDER THE U.S. SECURITIES ACT (“REGULATION S”), (2) AGREES ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SECURITIES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS 40 DAYS AFTER THE LATER OF THE DATE OF THE COMMENCEMENT OF THE OFFERING AND THE DATE OF ORIGINAL ISSUANCE (OR OF ANY PREDECESSOR OF THIS NOTE) AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW (THE “RESALE RESTRICTION TERMINATION DATE”), OFFER, SELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE U.S. SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE U.S. SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF ANOTHER QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT, AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE ISSUER, THE TRUSTEE, THE REGISTRAR AND THE TRANSFER AGENT SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D) PRIOR TO THE END OF THE 40-DAY DISTRIBUTION COMPLIANCE PERIOD WITHIN THE MEANING OF REGULATION S OR PURSUANT TO CLAUSE (E) PRIOR TO THE RESALE RESTRICTION TERMINATION DATE TO REQUIRE THAT AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO THE COMPANY, THE TRUSTEE, THE REGISTRAR AND THE TRANSFER AGENT IS COMPLETED AND DELIVERED BY THE TRANSFEROR. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS “OFFSHORE TRANSACTION,” “UNITED STATES” AND “U.S. PERSON” HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S.

THIS NOTE MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (I) AS PART OF

 

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THEIR DISTRIBUTION AT ANY TIME OR (II) OTHERWISE UNTIL 40 DAYS AFTER THE LATER OF THE DATE OF THE COMMENCEMENT OF THE OFFERING AND THE DATE OF ORIGINAL ISSUANCE, EXCEPT IN EITHER CASE IN ACCORDANCE WITH REGULATION S (OR RULE 144A, IF AVAILABLE) OR ANOTHER APPLICABLE EXEMPTION UNDER THE SECURITIES ACT.

[IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.]¹

 

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XINYUAN REAL ESTATE CO., LTD.

2% GUARANTED CONVERTIBLE SUBORDINATED NOTES DUE 2012

ISIN: XS0293107859

Common Code: 029310785

 

No.				$

XINYUAN REAL ESTATE CO., LTD., a company incorporated with limited liability in the Cayman Islands (herein called the “Company”, which term includes any successor corporation under the Indenture referred to on the reverse hereof), for value received hereby promises to pay to HSBC Nominees (Hong Kong) Limited or its registered assigns, [the principal sum of TWENTY-FIVE MILLION Dollars] [the principal sum as set forth on Schedule I hereto]¹ on April 15, 2012 at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay Interest, semiannually on April 15 or October 15 of each year, commencing October 15, 2007 on said principal sum at said office or agency, in like coin or currency, at the rate per annum of 2%, from the April 15 or October 15, as the case may be, next preceding the date of this Note to which Interest has been paid or duly provided for, or unless no Interest has been paid or duly provided for on the Notes, in which case from April 13, 2007 to but excluding the following Interest Payment Date until payment of said principal sum has been made or duly provided for; provided, that if a Qualifying IPO does not occur prior to October 15, 2009 the Notes will bear interest at 8.0% per annum (together with any Additional Interest and Additional Amounts that the Company may be required to pay) from and including October 15, 2009 until maturity. Except as otherwise provided in the Indenture, the Interest payable on the Note pursuant to the Indenture on any April 15 or October 15 will be paid to the Person entitled thereto as it appears in the Security Register at the close of business on the record date, which shall be the April 1 or October 1 (whether or not a Business Day) next preceding such April 1 or October 1, as provided in the Indenture; provided that any such Interest not punctually paid or duly provided for shall be payable as provided in the Indenture. The Company shall pay Interest (i) on any Notes in certificated form by check mailed to the address of the Person entitled thereto as it appears in the Security Register (provided that the holder of Notes with an aggregate principal amount in excess of $2,000,000 shall, at the written election of such holder, be paid by wire transfer of immediately available funds) or (ii) on any Global Note by wire transfer of immediately available funds to the account of the Common Depositary or its nominee.

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1	Include in Global Note.

 

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The Company promises to pay Interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal, premium, if any, and (to the extent that payment of such Interest is enforceable under applicable law) interest (including post-petition interest in any proceeding under any Bankruptcy Law) at the rate of 4.0% per annum.

Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions subordinating the payment of principal of and premium, if any, and Interest on the Notes to the prior payment in full in cash of all Senior Debt, as defined in the Indenture, and provisions giving the holder of this Note the right to convert this Note into Common Shares of the Company on the terms and subject to the limitations referred to on the reverse hereof and as more fully specified in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place.

So long as the Notes are represented by a Global Note which is held by the Common Depositary on behalf of Euroclear or Clearstream, notices to a Noteholder may be given by delivery of the relevant notice to Euroclear or Clearstream for communication by it to entitled accountholders in substitution for notification as required elsewhere.

This Note shall be governed by and construed in accordance with the laws of the State of New York.

This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee or a duly authorized authenticating agent under the Indenture.

 

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed.

 

TRUSTEE’S CERTIFICATE OF AUTHENTICATION

This is one of the Notes described in the within-named Indenture.

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED,

as Trustee

 

By:
		Authorized Signatory

 

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FORM OF REVERSE OF SECURITY

XINYUAN REAL ESTATE CO., LTD.

2% GUARANTEED CONVERTIBLE SUBORDINATED NOTES DUE 2012

This Note is one of a duly authorized issue of Notes of the Company, designated as its “2% Guaranteed Convertible Subordinated Notes due 2012” (herein called the “Notes”), issued under and pursuant to an Indenture dated as of April 12, 2007 (herein called the “Indenture”), between the Company and The Hongkong and Shanghai Banking Corporation Limited, as trustee (herein called the “Trustee”), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Notes.

In case an Event of Default shall have occurred and be continuing, the principal of, premium, if any, and accrued and unpaid Interest on all Notes may be declared by either the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding, and upon said declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture.

(a) The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of a majority in aggregate principal amount of the Notes at the time outstanding, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the holders of the Notes; provided that no such supplemental indenture shall, without the consent of the holders of all Notes then outstanding, (i) extend the fixed maturity of any Note; (ii) reduce the rate or extend the time of payment of Interest thereon; (iii) reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption or repurchase thereof, or the time of such payment, whether pursuant to Section 3.06, 4.12, or 4.17 of the Indenture or otherwise; (iv) change the obligation of the Company to repurchase any Note, or the time of such payment, upon the happening of a Designated Event in a manner adverse to the holders of Notes; (v) impair the right of any Noteholder to institute suit for the payment thereof or of any Guarantee; (vi) make any change in any Guarantee that would adversely affect the Holders; (vii) make the principal thereof or Interest or premium, if any, thereon payable in any coin or currency other than that provided in the Notes; (viii) impair the right to convert the Notes into Common Shares or reduce the number of Common Shares or any other property receivable by a Noteholder upon conversion subject to the terms set forth herein, including Section 15.05 and Section 15.06 of the Indenture; (ix) modify any of the provisions of Section 8.02 or Section 6.07 of the Indenture, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the holder of each Note so affected; (x) change any obligation of the Company to maintain an office or agency in the places and for the purposes set forth in Section 4.02 of the Indenture; (xi) modify the obligation of the Company to deliver information required

 

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under Rule 144A to permit resales of the Notes or the Common Shares issuable upon conversion thereof, at such times that the Company is not subject to Section 13(a) or 15(d) of the Exchange Act, in a manner adverse to the holders; (xii) reduce the quorum or voting requirements set forth in Article 13 of the Indenture; (xiii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplemental indenture; (xiv) modify the provisions of the Indenture with respect to the subordination of Notes in a manner adverse to the holders of the Notes in any material respect, in each case, without the consent of the holder of each Note so affected; (xv) (A) release the security interest granted in favor of the holders of the Notes in the Collateral other than pursuant to the terms of the Security Documents, or (B) release any other security interest that may have been granted in favor of the holders of the Notes other than pursuant to the terms of such security interest; or (xvi) change the obligation of the Company to repurchase any Note at the option of a Noteholder on a Repurchase Date in a manner adverse to the holders of Notes.

Subject to the provisions of the Indenture, the holders of a majority in aggregate principal amount of the Notes at the time outstanding may on behalf of the holders of all of the Notes waive any past Default or Event of Default under the Indenture and its consequences except (A) a default in the payment of Interest, or any premium on, or the principal of, any of the Notes, (B) a failure by the Company to convert any Notes into Common Shares of the Company, (C) a default in the payment of the redemption price pursuant to Article 3 of the Indenture, (D) a default in the payment of the repurchase price pursuant to Article 3 of the Indenture, or (E) a default in respect of a covenant or provisions of the Indenture which under Article 8 of the Indenture cannot be modified or amended without the consent of the holders of each or all Notes then outstanding or affected thereby. Upon any such waiver, the Company, the Trustee and the holders of the Notes shall be restored to their former positions and rights hereunder; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by Section 6.07 of the Indenture, said default or Event of Default shall for all purposes of the Notes and the Indenture be deemed to have been cured and to be not continuing; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon.

The indebtedness evidenced by the Notes is, to the extent and in the manner provided in the Indenture, expressly subordinated and subject in right of payment to the prior payment in full in cash of all Senior Debt of the Company, whether outstanding at the date of the Indenture or thereafter incurred, and this Note is issued subject to the provisions of the Indenture with respect to such subordination. Each holder of this Note, by accepting the same, agrees to and shall be bound by such provisions and authorizes the Trustee on its behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and appoints the Trustee his attorney-in-fact for such purpose.

No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and Interest on this Note at the place, at the respective times, at the rate and in the coin or currency herein prescribed.

 

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Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months.

The Notes are issuable in fully registered form, without coupons, in denominations of $100,000 principal amount and any multiple of $100,000. At the office or agency of the Company referred to on the face hereof, and in the manner and subject to the limitations provided in the Indenture, without payment of any service charge but may be with payment of a sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in connection with any registration or exchange of Notes, Notes may be exchanged for a like aggregate principal amount of Notes of any other authorized denominations.

The Company may not elect to redeem any Notes prior to their maturity.

The Company may not give notice of any redemption of the Notes if a default in the payment of Interest, or premium, if any, on the Notes has occurred and is continuing or if the principal amount of the Notes has been accelerated.

The Notes are not subject to redemption through the operation of any sinking fund.

If a Designated Event occurs at any time prior to maturity of the Notes, the Company shall become obligated to purchase, at the option of the holder, all or any portion of the Notes held by such holder, on a date specified by the Company not less than twenty (20) and not more than thirty-five (35) Business Days after notice thereof at a cash repurchase price of 100% of the principal amount, plus any accrued and unpaid Interest, on such Note up to, but excluding, the Designated Event Repurchase Date; provided that if the repurchase date falls after a record date and on or prior the corresponding interest payment date, then the full amount of Interest payable on such interest payment date shall be paid to the holders of record of such Notes on the applicable record date instead of the holders surrendering such Notes for repurchase on such date. The Notes will be subject to repurchase in multiples of $100,000 principal amount. The Company shall mail to all holders of record of the Notes a notice of the occurrence of a Designated Event and of the repurchase right arising as a result thereof on or before the 10th day after the occurrence of such Designated Event. To exercise such right, a holder shall deliver to the Company such Note with the form entitled “Designated Event Repurchase Notice” on the reverse thereof duly completed, together with the Note, duly endorsed for transfer, at any time prior to the close of business on the Designated Event Repurchase Date, and shall deliver the Notes to the Trustee (or other paying agent appointed by the Company) as set forth in the Indenture.

Holders have the right to withdraw any Designated Event Repurchase Notice by delivering to the Trustee (or other paying agent appointed by the Company) a written

 

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notice of withdrawal prior to the close of third Business Day immediately prior to the Designated Event Repurchase Date (which notice shall be received by the Trustee no later on the third Business Day immediately prior to the Designated Event Repurchase Date) all as provided in the Indenture.

If sufficient money to pay the repurchase price of all Notes or portions thereof to be purchased as of the Designated Event Repurchase Date is deposited with the Trustee (or other paying agent appointed by the Company), on the Business Day following the Designated Event Repurchase Date, the Notes will cease to be outstanding, Interest will cease to accrue on such Notes (or portions thereof) immediately after the Designated Event Repurchase Date, and the holder thereof shall have no other rights as such other than the right to receive the repurchase price upon surrender of such Note.

Subject to the provisions of the Indenture, at any time prior to the final maturity date of the Notes, the holder hereof has the right, at its option, to convert each $100,000 principal amount of the Notes into 38,388 shares of the Company’s Common Shares (a conversion price of approximately $2.6049 per share), as such shares shall be constituted at the date of conversion and subject to adjustment from time to time as provided in the Indenture, upon surrender of this Note with the form entitled “Conversion Notice” on the reverse thereof duly completed, to the Company at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, or at the option of such holder, the Corporate Trust Office, and, unless the shares issuable on conversion are to be issued in the same name as this Note, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or by his duly authorized attorney. The Company will notify the holder thereof of any event triggering the right to convert the Notes as specified above in accordance with the Indenture.

No adjustment in respect of Interest on any Note converted or dividends on any shares issued upon conversion of such Note will be made upon any conversion except as set forth in the next sentence. If this Note (or portion hereof) is surrendered for conversion during the period from the close of business on any record date for the payment of Interest to the close of business on the Business Day preceding the following interest payment date, this Note (or portion hereof being converted) must be accompanied by payment, in immediately available funds or other funds acceptable to the Company, of an amount equal to the Interest otherwise payable on such interest payment date on the principal amount being converted; provided that no such payment shall be required (1) if the Company has specified a redemption date that is after a record date and on or prior to the next interest payment date, (2) if the Company has specified a repurchase date following a Designated Event that is during such period or (3) to the extent of any overdue Interest, if any overdue Interest exists at the time of conversion with respect to such Note.

No fractional shares will be issued upon any conversion, but an adjustment and payment in cash will be made, as provided in the Indenture, in respect of any fraction of a share which would otherwise be issuable upon the surrender of any Note or Notes for conversion.

 

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A Note in respect of which a holder is exercising its right to require repurchase upon a Designated Event or repurchase on a Repurchase Date may be converted only if such holder withdraws its election to exercise either such right in accordance with the terms of the Indenture.

Any Notes called for redemption, unless surrendered for conversion by the holders thereof on or before the close of business on the Business Day preceding the redemption date, may be deemed to be redeemed from the holders of such Notes for an amount equal to the applicable redemption price, together with accrued but unpaid Interest to, but excluding, the date fixed for redemption, by one or more investment banks or other purchasers who may agree with the Company (i) to purchase such Notes from the holders thereof and convert them into the Company’s Common Shares and (ii) to make payment for such Notes as aforesaid to the Trustee in trust for the holders.

To the extent provided in the Indenture, the Notes are subordinated to Senior Debt, as defined in the Indenture and pari passu with any and all other Subordinated Debt, as defined in the Indenture, of the Company. To the extent provided in the Indenture and an intercreditor agreement (the “Intercreditor Agreement”) dated the Issue Date with the trustee under the Company’s Guaranteed Senior Secured Floating Rate Notes due 2010, Senior Debt must be paid in full in cash before the Notes may be paid. The Company agrees, and each Noteholder by accepting a Note agrees, to the subordination provisions contained in the Indenture and the Intercreditor Agreement and authorizes the Trustee to give it effect and appoints the Trustee as attorney-in-fact for such purpose.

Upon due presentment for registration of transfer of this Note at the office or agency of the Company maintained for that purpose in accordance with the terms of the Indenture, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange thereof, subject to the limitations provided in the Indenture, without charge except for any tax, assessment or other governmental charge imposed in connection therewith.

The Company, the Trustee, any authenticating agent, any paying agent, any conversion agent and any Security Registrar may deem and treat the registered holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon made by anyone other than the Company or any Security Registrar) for the purpose of receiving payment hereof, or on account hereof, for the conversion hereof and for all other purposes, and neither the Company nor the Trustee nor any other authenticating agent nor any paying agent nor other conversion agent nor any Security Registrar shall be affected by any notice to the contrary. All payments made to or upon the order of such registered holder shall be valid, and, to the extent of the sum or sums paid, satisfy and discharge liability for monies payable on this Note.

 

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No recourse for the payment of the principal of or any premium or Interest on this Note, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any supplemental indenture or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, shareholder, employee, agent, officer or director or subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released.

This Note shall be governed by and construed in accordance with the laws of New York.

Terms used in this Note and defined in the Indenture are used herein as therein defined.

 

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ABBREVIATIONS

The following abbreviations, when used in the inscription of the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations.

 

TEN COM -		as tenants in common		UNIF GIFT MIN ACT -         Custodian
TEN ENT -		as tenant by the entireties		(Cust)    (Minor)
JT TEN -		as joint tenants with right of survivorship		under Uniform Gifts to Minors Act
		and not as tenants in common
				(State)

Additional abbreviations may also be used though not in the above list.

 

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TO:	XINYUAN REAL ESTATE CO., LTD.

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED

The undersigned registered owner of this Note hereby irrevocably acknowledges receipt of a notice from Xinyuan Real Estate Co., Ltd. (the “Company”) regarding the right of holders to elect to require the Company to repurchase the Notes upon the occurrence of a Designated Event with respect to the Company and requests and instructs the Company to repay the entire principal amount of this Note, or the portion thereof (which is $100,000 or an integral multiple thereof) below designated, in accordance with the terms of the Indenture at the price of 100% of such entire principal amount or portion thereof, together with accrued Interest to, but excluding, the Designated Event Repurchase Date, to the registered holder hereof, provided that if such Designated Event Repurchase Date falls after a record date and on or prior to the corresponding interest payment date, then the full amount of Interest payable on such interest payment date shall be paid to the holders of record of the Notes on the applicable record date instead of the holders surrendering the Notes for repurchase on such Designated Event Repurchase Date. Capitalized terms used herein but not defined shall have the meanings ascribed to such terms in the Indenture. The Notes shall be repurchased by the Company as of the portion thereof, together with accrued Interest to, by excluding, the Designated Event Repurchase Date pursuant to the terms and conditions specified in the Indenture, provided that if such Designated Event Repurchase Date falls after a record date and on or prior to the corresponding interest payment date, then the full amount of Interest payable on such interest payment date shall be paid to the holders of record of the Notes on the applicable record date instead of the holders surrendering the Notes for repurchase on such Designated Event Repurchase Date. The undersigned registered owner elects:

[    ] to withdraw this Designated Event Repurchase Notice as to $[            ] principal amount of the Notes to which this Designated Event Repurchase Notice relates (Certificate Numbers:            ), or

[    ] to receive cash in respect of $[            ] principal amount of the Notes to which this Designated Event Repurchase Notice relates.

Dated:

Signature(s):

NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

Note Certificate Number (if applicable):

Principal amount to be repurchased (if less than all):

Social Security or Other Taxpayer Identification Number:

 

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OPTION OF HOLDER TO ELECT PURCHASE

If you want to elect to have this Note purchased by the Company pursuant to Section 3.06, Section 4.12 or 4.17 of the Indenture, check the box below:

 

Section 3.06				Purchase Date:
Section 4.12
Section 4.17

If you want to elect to have only part of the Note purchased by the Company pursuant to Section 3.06, 4.12 or 4.17 of the Indenture, state the amount you elect to have purchased: $                    

Date:                    

 

Your Signature:
		(Sign exactly as your name appears on the Note)

 

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ASSIGNMENT

For value received                                          hereby sell(s) assign(s) and transfer(s) unto                                          (Please insert social security or other Taxpayer Identification Number of assignee) the within Note, and hereby irrevocably constitutes and appoints                                          attorney to transfer said Note on the books of the Company, with full power of substitution in the premises.

In connection with any transfer of the Note prior to the date that is two years after the last original issue date of the Initial Notes (other than any transfer pursuant to a registration statement that has been declared effective under the Securities Act), the undersigned confirms that such Note is being transferred:

To Xinyuan Real Estate Co., Ltd. or a subsidiary thereof; or

To a “qualified institutional buyer” in compliance with Rule 144A under the Securities Act of 1933, as amended; or

Pursuant to and in compliance with Rule 144 under the Securities Act of 1933, as amended; or

Pursuant to a Registration Statement which has been declared effective under the U.S. Securities Act of 1933, as amended, and which continues to be effective at the time of transfer;

and unless the Note has been transferred to Xinyuan Real Estate, Ltd. or a subsidiary thereof, the undersigned confirms that such Note is not being transferred to an “affiliate” of the Company as defined in Rule 144 under the Securities Act of 1933, as amended.

Unless one of the boxes is checked, the Trustee will refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered holder thereof.

 

Dated:
						Signature(s)

NOTICE: The signature on the Conversion Notice, the Designated Event Repurchase Notice or the Assignment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

 

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Schedule I*

XINYUAN REAL ESTATE, LTD.

2% GUARANTEED CONVERTIBLE SUBORDINATED NOTES DUE 2012

No.                 

 

Date		Principal Amount		Notation Explaining Principal Amount Recorded		Authorized Signature of Trustee

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*	To be included only for a Global Note.

 

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EXHIBIT B

FORM OF NOTATION OF GUARANTEE

For value received, each Guarantor (which term includes any successor Person under the Indenture), jointly and severally, unconditionally guarantees, to the extent set forth in the Indenture and subject to the provisions in the Indenture, dated April 13, 2007 (the “Indenture”), among Xinyuan Real Estate Co., Ltd., as issuer (the “Company”), the Guarantor listed on the signature pages thereto and The Hongkong and Shanghai Banking Corporation Limited as trustee (the “Trustee”), (a) the due and punctual payment of the principal of, premium, if any, and interest on the Notes, whether at maturity, by acceleration, redemption or otherwise, the due and punctual payment of interest on overdue principal and premium, if any, and, to the extent permitted by law, interest and the due and punctual performance of all other obligations of the Company to the Holders or the Trustee all in accordance with the terms of the Indenture and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. The obligations of the Guarantors to the Holders of Notes and to the Trustee pursuant to the Guarantee and the Indenture are expressly set forth in Article 9 of the Indenture and reference is hereby made to the Indenture for the precise terms of the Guarantee. This Guarantee is subject to release as and to the extent set forth in Section 9.05 of the Indenture. Each Holder of a Note, by accepting the same agrees to and shall be bound by such provisions. Capitalized terms used herein and not defined are used herein as so defined in the Indenture.

 

 

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EXHIBIT C

SECURITY DOCUMENTS

 

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EXHIBIT D

FORM OF NOTE CONVERSION NOTICE

NOTE CONVERSION NOTICE

Name of Company

Transaction Details

 

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PLEASE READ THE NOTES AT THE END OF THIS NOTICE BEFORE COMPLETING THIS NOTICE.

 

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Please fax the completed Note Conversion Notice to:

THE HONGKONG AND SHANGHAI BANKING

CORPORATION LIMITED

Level 30, HSBC Main Building

1 Queen’s Road Central

Hong Kong

 

Fax No.		(+852) 2801 5586
Attention:		Corporate Trust and Loan Agency

 

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Please enter principal amount and serial or identifying numbers of Notes to be converted:

 

Total principal amount of Notes:
Serial or identifying number of Notes*:
ISIN number of Notes:

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*	Not required for Notes represented by a Global Note. Attach extra sheets if necessary.

 

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TO:	The Hongkong and Shanghai Banking Corporation Limited

Xinyuan Real Estate Co., Ltd. (the “Company”)

I/We, being the holder(s) of the Notes specified above, hereby irrevocably elect to convert such principal amount of Notes (being US$100,000 in principal amount) as indicated above into common shares (“Common Shares”) in accordance with Article 15 of the Indenture.

 

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Please complete Item A below:

 

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A. Information on the Registered holder of the Common Shares

Name and address of the person in whose name Common Shares (as defined in the Indenture) are to be registered (if applicable) upon conversion of the Notes:

 

Name:
Address:

 

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Please read and complete Items B through H below:

B. Delivery of the Required Documents. I/we have provided the Conversion Agent with the Notes to be converted hereby and any documents required in relation to the declarations below or to verify the same accompany this form.

C. Acknowledgement of the Closed Period. I/we hereby declare that I/we have been notified by the Company that the Company’s register of shareholders may be closed from time to time. I/We hereby declare that any applicable condition to convert of the Notes, if any, has been complied with by me/us, that I/we am/are not acting on behalf of the Company or any of its affiliates and that the Common Shares issued upon conversion are not when received by the converting holder of the Notes “restricted securities” under the U.S. Securities Act of 1933, as amended.

D. Taxes and Duties Payable. I/We hereby declare that all stamp, issue, registration or similar taxes and duties payable on conversion of the Notes in the jurisdiction where the Notes are delivered have been paid.

E. Approvals etc. I/We hereby declare that all approvals, consents and authorizations (if any) required by applicable laws to be obtained by me/us prior to the said conversion have been obtained and are in full force and effect and that any applicable condition thereto has been complied with by me/us.

F. Not Located in the United States and Not a US Person. I/we certify that I am/we are not located in the United States, am/are not US person or persons (as defined in Regulation S under the Securities Act) and are not converting Notes on behalf of a US person or persons.

H. Converting holder’s Information and Signature.

Please complete the following information with respect to the converting holder of the Note

 

Name:
Date:
Signature:
Nationality:
Address:
Euroclear/Clearstream* Account No.:
Contact Person:

 

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Daytime Telephone No.:
Fax No.:
Email Address:

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*	Delete as appropriate.

For Conversion Agent’s use only:

 

1	Notes Deposited for Conversion.

 

(a)

Notes conversion identification reference:

 

(b)

Deposit Date:

 

(c)

Conversion Date:

 

2	Common Shares to be Issued Upon conversion.

 

(a)

Aggregate principal amount of Notes deposited for conversion:

 

(b)

Conversion Price on Conversion Date:

 

(c)

Number of Common Shares deliverable:

(disregard fractions)

 

3	Amount of cash payment due to converting Noteholder in respect of fractions of Common Shares (if applicable):

N.B. The Conversion Agent must complete items 1, 2 and 3 (if applicable).

 

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NOTES

1 This Conversion Notice shall be void unless the applicable Sections A through H above are duly completed and must be deposited during the Conversion Period.

2 Your attention is drawn to Section 15 of the Indenture with respect to the conditions precedent which must be fulfilled before the Notes specified above shall be treated as effectively deposited for conversion.

3 If a retroactive adjustment of the Conversion Price contemplated by the terms and conditions of the Notes is required in respect of a conversion of Notes, additional Common Shares deliverable pursuant to such retroactive adjustment (together with any other securities, property or cash) shall be delivered or dispatched in accordance with the Indenture.

4 Despatch of share certificates or other securities or property will be made at the risk of the converting Noteholder and the converting Noteholder will be required to submit any necessary documents required in order to effect, despatch in the manner specified.

 

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EXHIBIT E

FORM OF AGENT CONVERSION FAX FROM CONVERSION AGENT

[To be sent by fax by a Conversion Agent to the Company and by fax to the Registrar]

 

To:	Xinyuan Real Estate Co., Ltd. (Company) (Fax: +(86) 0371 6565 1168)

(Attention:)

Notes conversion identification reference:                                         

Deposit Date:                                         

Conversion Date:                                         

(A)

(B)

(C)

(D)

(E)

(F)

Regards

The Hongkong and Shanghai Banking Corporation Limited

Explanation:

Against the letters (A) to (F) inclusive shall be inserted the following information with respect to the relevant Conversion Notice:

(A)    =     name and address of the converting holder of the Notes or participant in Euroclear and Clearstream in which the Notes is held at such time,

(B)    =    aggregate principal amount of Notes deposited by the same holder of the Notes and to be converted,

(C)    =    serial or identifying numbers of such Notes(s),

(D)    =    number of Common Shares (excluding fractions) issuable upon conversion to such holder of the Notes,

(E)    =    name and address of the person in whose name the Common Shares issuable upon conversion are to be registered,

(F)    =    Deposit Date, Conversion Date and the Conversion Price in respect of the conversion, and

 

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Exhibit 10.7

EXECUTION COPY

EQUITY REGISTRATION RIGHT AGREEMENT

THIS EQUITY REGISTRATION RIGHT AGREEMENT (“Agreement”) is made as of April 13, 2007, by and among Xinyuan Real Estate Co., Ltd., a company incorporated under the laws of the Cayman Islands (the “Company”), each of the holders of the Warrants (as defined below) listed on Schedule A hereto and each of the holders of the Convertible Notes (as defined below) listed on Schedule B (each of the holders of Warrants and Convertible Notes is referred to in this Agreement as an “Investor”).

RECITALS

WHEREAS, the Company and the Investors are parties to the various Securities Purchase Agreements of even date herewith (the “Purchase Agreements”); and

WHEREAS, in order to induce the Company to enter into the Purchase Agreements and to induce the Investors to invest funds in the Company pursuant to the Purchase Agreements, the Investors and the Company hereby agree that this Agreement shall govern the rights of the Investors to cause the Company to register the Company’s Common Shares (as defined below) issuable to (i) the holders of the Warrants upon the exercise thereof (the “Warrant Shares”) and (ii) the holders of the Convertible Notes upon the conversion thereof (the “Conversion Shares”) and shall govern certain other matters as set forth in this Agreement.

NOW, THEREFORE, the parties hereby agree as follows:

1. Definitions. For purposes of this Agreement:

1.1 “Affiliate” means, with respect to any specified Person, any other Person who or which, directly or indirectly, controls, is controlled by, or is under common control with such specified Person, including without limitation any general partner, officer, director, or manager of such Person and any venture capital fund now or hereafter existing that is controlled by one or more general partners or managing members of, or shares the same management company with, such Person.

1.2 “Agreement” is defined in the preamble.

1.3 “Company” is defined in the preamble.

1.4 “Common Shares” means the Company’s common shares, par value $0.0001.

1.5 “Convertible Notes” means 2% Convertible Subordinated Notes due 2012 issued pursuant to the Indenture signed by and between the Company and The Hongkong and Shanghai Banking Corporation Limited, dated April 13, 2007.

1.6 “Conversion Shares” is defined in the Recitals.

1.7 “Damages” means any loss, damage, or liability (joint or several) to which a party hereto may become subject under the Securities Act, the Exchange Act, or other

 

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federal, state or other applicable law or at common law, insofar as such loss, damage, or liability (or any action in respect thereof) arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any securities registration statement of the Company, including any preliminary prospectus or final prospectus used in connection with the sale of securities issued by the Company or any amendments or supplements thereto; (ii) an omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the indemnifying party (or any of its agents or Affiliates) of the Securities Act, the Exchange Act, any state or other applicable securities law, or any rule or regulation promulgated under the Securities Act, the Exchange Act, or any state or other applicable securities law.

1.8 “Demand Notice” is defined in Section 2.1.

1.9 “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

1.10 “Excluded Registration” means (i) a registration relating to the sale of securities to employees of the Company or a subsidiary thereof pursuant to a stock option, stock purchase, or similar plan; (ii) a registration on a Form S-4 or Form F-4 relating to an SEC Rule 145 transaction; or (iii) in the case of a filing in the U.S., a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities.

1.11 “Form F-1” means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC.

1.12 “Form F-2” means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC.

1.13 “Form F-3” means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC that permits incorporation of substantial information by reference to other documents filed by the Company with the SEC.

1.14 “Holder” means any holder of Registrable Securities who is a party to this Agreement and any Person to whom Registrable Securities are transferred (if greater in number than the amount set forth in Section 3.1), other than a transferee to whom such securities have been transferred pursuant to a registration of securities or SEC Rule 144 and shall include any Person who holds an option to purchase, or a security directly or indirectly convertible into or exercisable or exchangeable for, Registrable Securities whether or not such acquisition or conversion has actually been effected and disregarding any legal restrictions upon the exercise of such rights, provided that if the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, only the registered owner of such Registrable Securities shall be deemed a Holder.

 

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1.15 “Immediate Family Member” means a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, of a natural person referred to herein.

1.16 “Initiating Holders” means, collectively, Holders who properly initiate a registration request under this Agreement.

1.17 “Investor” is defined in the preamble.

1.18 “Misstatement or Omission” means any untrue statement of a material fact contained in any registration statement, prospectus, offering circular or other document, whether preliminary or final, or any amendment or supplement thereto, incident to any registration of the Company’s securities, qualification or compliance, or based on any omission to state therein, a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they are made, not misleading.

1.19 “Permitted Holders” means Mr. ZHANG Yong and Ms. YANG Yuyan, a resident of Zhengzhou in Henan Province, PRC, and their respective estates, ancestors and lineal descendants, the legal representatives of any of the foregoing and the trustees of any bona fide trusts of which the foregoing are the sole beneficiaries or the grantors, or any Person of which the foregoing “beneficially owns” (as defined in Rule 13d-3 under the Exchange Act), individually or collectively with any of the foregoing, at least 80% of the total voting power of the voting stock of such Person.

1.20 “Person” means any individual, corporation, partnership, trust, limited liability company, association or other entity.

1.21 “Purchase Agreements” is defined in the Recitals.

1.22 “Qualifying IPO” means a public offering of Common Shares of the Company that results in (i) at least 15% of the Company’s issued and outstanding share capital being publicly held by Persons other than any Affiliate of the Company, the Permitted Holders or other Persons who, prior to the date of such public offering, held Common Shares of the Company, (ii) the gross proceeds of which are not less than $80.0 million and (iii) listing of the Common Shares on Nasdaq’s Capital Market, Global Market or Global Select Market or any other internationally recognized market outside the PRC other than in the Republic of Singapore.

1.23 “Registrable Securities” means (i) the Warrant Shares; (ii) the Conversion Shares; and (iii) any Common Share issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares referenced in clauses (i) and (ii) above; excluding in all cases, however, any Registrable Securities sold by a Person in a transaction in which the applicable rights under this Agreement are not assigned pursuant to Section 3.1, and excluding for purposes of Section 2 any shares for which registration rights have terminated pursuant to Section 2.13 of this Agreement.

 

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1.24 “Registrable Securities then outstanding” means the number of shares determined by adding the number of outstanding Common Shares that are Registrable Securities and the number of Common Shares issuable (directly or indirectly) pursuant to then exercisable and/or convertible securities that are Registrable Securities.

1.25 “Restricted Securities” means the securities of the Company required to bear the legend set forth in Section 2.12(b) hereof.

1.26 “SEC” means the U.S. Securities and Exchange Commission.

1.27 “SEC Rule 144” means Rule 144 promulgated by the SEC under the Securities Act.

1.28 “SEC Rule 144(k)” means Rule 144(k) promulgated by the SEC under the Securities Act.

1.29 “SEC Rule 145” means Rule 145 promulgated by the SEC under the Securities Act.

1.30 “Securities Act” means the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

1.31 “Selling Expenses” means all underwriting discounts, selling commissions, and stock transfer taxes applicable to the sale of Registrable Securities.

1.32 “Selling Holder Counsel” is defined in Section 2.6.

1.33 “U.S.” means the United States of America, including its states, territories and possessions.

1.34 “Warrant” means warrants issued pursuant to the Purchase Agreements and the Warrant Agreement signed by and between the Company and The Hongkong and Shanghai Banking Corporation Limited, dated April 13, 2007.

1.35 “Warrant Shares” as defined in the Recitals.

2. Registration Rights. The Company covenants and agrees as follows:

2.1 Demand Registration.

(a) Form F-1 Demand. If at any time after the earlier of (i) the expiration of thirty (30) months after the date of this Agreement or (ii) one hundred eighty (180) days after the effective date of the registration statement for the Qualifying IPO, the Company receives a request from Holders of thirty-three percent (33%) of the Registrable Securities then outstanding that the Company file a registration statement (which shall be on Form F-1, if filed in the U.S.) with respect to at least thirty-three percent (33%) of the Registrable Securities then outstanding (or a lesser percent if the anticipated aggregate offering price, net of Selling Expenses, would exceed $5 million), then the Company shall (i) within ten (10) days after the

 

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date such request is given, give notice thereof (the “Demand Notice”) to all Holders other than the Initiating Holders; and (ii) as soon as practicable, and in any event within sixty (60) days after the date such request is given by the Initiating Holders, file a registration statement (which shall be on Form F-1 under the Securities Act, if filed in the U.S.) covering all Registrable Securities that the Initiating Holders requested to be registered and any additional Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days after the date the Demand Notice is given, and in each case, subject to the limitations of Section 2.1(c) and (d) and Section 2.3.

(b) Other Demand. If at any time when it is eligible to use a Form F-2 or Form F-3 registration statement, the Company receives a request from Holders of at least ten percent (10%) of the Registrable Securities then outstanding that the Company file a Form F-2 or Form F-3, as the case may be, registration statement with respect to outstanding Registrable Securities of such Holders having an anticipated aggregate offering price, net of Selling Expenses, of at least $5 million, then the Company shall (i) within ten (10) days after the date such request is given, give a Demand Notice to all Holders other than the Initiating Holders; and (ii) as soon as practicable, and in any event within forty-five (45) days after the date such request is given by the Initiating Holders, file the appropriate registration statement under the Securities Act covering all Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days after the date the Demand Notice is given, and in each case, subject to the limitations of Section 2.1(c) and (d) and Section 2.3.

(c) Notwithstanding the foregoing obligations, if the Company furnishes to Holders requesting a registration pursuant to this Section 2.1 a certificate signed by the Company’s chief executive officer stating that in the good faith judgment of the Company’s Board of Directors it would be materially detrimental to the Company and its shareholders for such registration statement to either become effective or remain effective for as long as such registration statement otherwise would be required to remain effective, because such action would (i) materially interfere with a significant acquisition, corporate reorganization, or other similar transaction involving the Company; (ii) require premature disclosure of material information that the Company has a bona fide business purpose for preserving as confidential; or (iii) render the Company unable to comply with requirements under the Securities Act or Exchange Act, then the Company shall have the right to defer taking action with respect to such filing for a period of not more than ninety (90) days after the request of the Initiating Holders is given; provided, however, that the Company may not invoke this right more than once in any twelve (12) month period; and provided further that the Company shall not register any securities for its own account or that of any other shareholder during such ninety (90) day period other than pursuant to an Excluded Registration.

(d) The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 2.1(a) (i) during the period that is seventy-five (75) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is one hundred eighty (180) days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; (ii) after the Company has effected

 

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three registrations pursuant to Section 2.1(a); or (iii) if the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form F-3 pursuant to a request made pursuant to Section 2.1(b). The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 2.1(b) (i) during the period that is thirty (30) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is ninety (90) days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; or (ii) if the Company has, within the six (6) month period preceding the date of such request, already effected one (1) registration pursuant to Section 2.1(b). A registration shall not be counted as “effected” for purposes of this Section 2.1(d) until such time as the applicable registration statement has been declared effective by the SEC, unless the Initiating Holders withdraw their request for such registration, elect not to pay the registration expenses therefor, and forfeit their right to one demand registration statement pursuant to Section 2.6, in which case such withdrawn registration statement shall be counted as “effected” for purposes of this Section 2.1(d).

2.2 Company Registration. If the Company proposes to register (including, for this purpose, a registration effected by the Company for shareholders other than the Holders) any of its securities under the Securities Act in connection with the public offering of such securities solely for cash (other than in an Excluded Registration), the Company shall, at such time, promptly give each Holder notice of such registration. Upon the request of each Holder given within twenty (20) days after such notice is given by the Company, the Company shall, subject to the provisions of Section 2.3, cause to be registered all of the Registrable Securities that each such Holder has requested to be included in such registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.2 before the effective date of such registration, whether or not any Holder has elected to include Registrable Securities in such registration. The expenses (other than Selling Expenses) of such withdrawn registration shall be borne by the Company in accordance with Section 2.6.

2.3 Underwriting Requirements.

(a) If, pursuant to Section 2.1, the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 2.1, and the Company shall include such information in the Demand Notice. The underwriter(s) will be selected by the holders of a majority in interest of the Registrable Securities held by Initiating Holders and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include such Holder’s Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 2.4(e)) enter into an underwriting agreement in customary form with the underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Section 2.3, if the managing underwriter(s) advise(s) the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities that otherwise would be underwritten pursuant hereto, and the number of Registrable Securities that may be included in

 

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the underwriting shall be allocated pro rata among all Holders of the Registrable Securities; provided, however, that the number of Registrable Securities held by the Holders to be included in such underwriting shall not be reduced unless all other securities (including any registrable securities under that certain Shareholders Agreement, dated April 9, 2007, by and among the Company and the parties thereto (the “Existing Shareholders Agreement”)) are first entirely excluded from the underwriting.

(b) In connection with any offering involving an underwriting of shares of the Company’s capital stock pursuant to Section 2.2, the Company shall not be required to include any of the Holders’ Registrable Securities in such underwriting unless the Holders accept the terms of the underwriting as agreed upon between the Company and its underwriters (provided that such underwriting shall be on customary terms with the Investors’ representations, warranties, covenants and indemnities limited to customary matters and, with respect to the registration statement and prospectus containing information regarding such Investor, covering only such Investors’ name and beneficial ownership of Common Shares in the Company), and then only in such quantity as the underwriters in their sole discretion determine will not jeopardize the success of the offering by the Company. If the total number of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the number of securities to be sold (other than by the Company) that the underwriters in their reasonable discretion determine is compatible with the success of the offering, then the Company shall be required to include in the underwritten offering only that number of such securities, including Registrable Securities, which the underwriters in their sole discretion determine will not jeopardize the success of the offering. If the underwriters determine that less than all of (i) the Registrable Securities and (ii) the additional registrable securities under that Existing Shareholders Agreement (the “Additional Registrable Securities”) requested to be registered can be included in such underwritten offering, then such actual number of shares of Registrable Securities and Additional Registrable Securities that may be included in such underwritten offering (the “Permitted Registrable Securities”) shall be allocated as follows: the Registrable Securities shall constitute ninety percent (90%) of the Permitted Registrable Shares and the Additional Registrable Securities shall constitute the remaining ten percent (10%) of the Permitted Registrable Securities, and the Permitted Registrable Securities that are included in such underwritten offering shall be allocated among the selling Holders and the other selling shareholders in proportion (as nearly as practicable) to the number of Registrable Securities owned by each selling Holder (in the case of the Registrable Securities that constitute Permitted Registrable Securities) and the number of Additional Registrable Securities owned by each such other selling shareholder (in the case of the Additional Registrable Securities that constitute Permitted Registrable Securities), or in such other proportions as shall mutually be agreed to by all such selling Holders and other selling shareholders. Notwithstanding the foregoing, in no event shall (i) the number of Registrable Securities included in the offering be reduced unless all other securities (other than securities to be sold by the Company and such number of Additional Registrable Securities that constitute Permitted Registrable Securities) are first entirely excluded from the offering, or (ii) the number of Registrable Securities included in the offering be reduced below thirty percent (30%) of the total number of securities included in such offering, unless such offering is the Qualifying IPO, in which case the selling Holders may be excluded further if the underwriters make the determination described above and no other shareholder’s securities (including any registrable securities under the Existing Shareholders Agreement) are included in such offering. For purposes of the provision in this Section 2.3(b) concerning apportionment,

 

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for any selling Holder that is a partnership, limited liability company, or corporation, the partners, members, retired partners, retired members, stockholders, and Affiliates of such Holder, or the estates and Immediate Family Members of any such partners, retired partners, members, and retired members and any trusts for the benefit of any of the foregoing Persons, shall be deemed to be a single “selling Holder,” and any pro rata reduction with respect to such “selling Holder” shall be based upon the aggregate number of Registrable Securities owned by all Persons included in such “selling Holder,” as defined in this sentence.

(c) For purposes of Section 2.1, a registration shall not be counted as “effected” if, as a result of an exercise of the provisions in Section 2.3(a), the underwriter allows fewer than fifty percent (50%) of the total number of Registrable Securities that Holders have requested to be included in sales pursuant to such registration statement to be actually included.

2.4 Obligations of the Company. Whenever required under this Section 2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

(a) prepare and file with the SEC or such other applicable regulatory authority a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective within ninety (90) days following a Demand Notice and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred eighty (180) days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided, however, that (i) such one hundred eighty (180) day period shall be extended for a period of time equal to the period the Holder refrains, at the request of an underwriter of Common Shares (or other securities) of the Company, from selling any securities included in such registration, and (ii) in the case of any registration of Registrable Securities on Form F-3 that are intended to be offered on a continuous or delayed basis, subject to compliance with applicable SEC rules, such one hundred eighty (180) day period shall be extended for up to one hundred eighty (180) days, if necessary, to keep the registration statement effective until all such Registrable Securities are sold;

(b) prepare and file with the SEC or such other applicable regulatory authority such amendments and supplements to such registration statement, and the prospectus used in connection with such registration statement, as may be necessary to comply with the Securities Act or applicable law in order to enable the disposition of all securities covered by such registration statement;

(c) furnish to the selling Holders such number of copies of a registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus), any documents incorporated by reference therein, and such other documents as the Holders may reasonably request in order to facilitate their disposition of their Registrable Securities;

(d) notify each seller of Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such

 

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registration statement contains any Misstatement or Omission, and the Company shall promptly prepare a supplement or amendment to such prospectus and furnish to each seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, after delivery to the selling Holder, such prospectus shall not contain any Misstatement or Omission;

(e) use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or blue-sky laws of such jurisdictions as shall be reasonably requested by the selling Holders; provided that the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;

(f) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the underwriter(s) of such offering;

(g) if such sale is pursuant to an underwritten offering, obtain “cold comfort” letters from the Company’s independent public accountants in customary form and covering such matters of the type customarily covered in the relevant jurisdiction by “cold comfort” letters as Selling Holder Counsel or the managing underwriter reasonably request;

(h) furnish, at the request of any seller of Registrable Securities on the date such securities are delivered to the underwriters for sale pursuant to such registration or, if such securities are not being sold through underwriters, on the date the registration statement with respect to such securities becomes effective, an opinion, dated such date, of counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the seller making such request, covering such legal matters with respect to the registration in respect of which such opinion is being given as such seller may reasonably request and are customarily included in such opinions;

(i) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable but no later than 15 months after the effective date of the registration statement, an earning statement covering a period of 12 months beginning after the effective date of the registration statement;

(j) use its reasonable best efforts to cause all such Registrable Securities covered by such registration statement to be listed on a national securities exchange or trading system and each securities exchange and trading system (if any) on which similar securities issued by the Company are then listed;

(k) cooperate with each seller of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with any securities exchange or the NASD;

 

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(l) provide a transfer agent and registrar for all Registrable Securities registered pursuant to this Agreement and provide a CUSIP or ISIN or other identifying number for all such Registrable Securities, in each case not later than the effective date of such registration;

(m) promptly make available for inspection by the selling Holders, any managing underwriter(s) participating in any disposition pursuant to such registration statement, and any attorney or accountant or other agent retained by any such underwriter or selected by the selling Holders, all financial and other records, pertinent corporate documents, and properties of the Company, and cause the Company’s officers, directors, employees, and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant, or agent, in each case, as necessary or advisable to verify the accuracy of the information in such registration statement and to conduct appropriate due diligence in connection therewith;

(n) notify each selling Holder, promptly after the Company receives notice thereof, of the time when such registration statement has been declared effective or a supplement to any prospectus forming a part of such registration statement has been filed;

(o) after such registration statement becomes effective, notify each selling Holder of any request by the SEC or such other applicable regulatory authority that the Company amend or supplement such registration statement or prospectus; and

(p) notify each Holder and the Selling Holder Counsel if at any time the SEC or other applicable regulatory authority institutes or threatens to institute any proceedings for the purpose of issuing, or issues, a stop order suspending the effectiveness of the registration of the Company’s securities. Upon the occurrence of any of the events mentioned in the preceding sentence, the Company will use its reasonable best efforts to prevent the issuance of any such stop order or to obtain the withdrawal thereof as soon as possible. The Company will advise each Holder whose Registrable Securities are included in such registration promptly of any order or communication of any public board, body or authority addressed to the Company suspending or threatening to suspend the qualification of any Registrable Securities included in such registration for sale in any jurisdiction.

2.5 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as is reasonably required to effect the registration of such Holder’s Registrable Securities.

2.6 Expenses of Registration. All expenses (other than Selling Expenses) incurred in connection with registrations, filings, or qualifications pursuant to Section 2, including, without limitation, all registration, filing, and qualification fees; fees and expenses incurred in compliance with federal securities and state “blue sky” or securities laws; fees and expenses associated with filings required to be made with the NASD; printers’ and accounting fees; fees and expenses customarily paid by an issuer in connection with an underwritten offering

 

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(including road show costs); and fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the selling Holders (“Selling Holder Counsel”); shall be borne and paid by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2.1 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all selling Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be included in the withdrawn registration), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one registration pursuant to Section 2.1(a); provided further that if, at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness after learning of such information, then the Holders shall not be required to pay any of such expenses and shall not forfeit their right to one registration pursuant to Section 2.1(a). All Selling Expenses relating to Registrable Securities registered pursuant to this Section 2 shall be borne and paid by the Holders pro rata on the basis of the number of Registrable Securities registered on their behalf.

2.7 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any registration pursuant to this Agreement as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.

2.8 Indemnification. If any Registrable Securities are included in a registration statement under this Section 2:

(a) To the extent permitted by law, the Company will indemnify and hold harmless each selling Holder, and the partners, members, officers, directors and stockholders of each such Holder; and each Person, if any, who controls such Holder within the meaning of the Securities Act or the Exchange Act, against any Damages, and the Company will pay to each such Holder, controlling Person, or other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 2.8(a) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld or delayed, nor shall the Company be liable for any Damages to the extent that they arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of any such Holder, controlling Person, or other aforementioned Person expressly for use in connection with such registration.

(b) To the extent permitted by law, each selling Holder, severally and not jointly, will indemnify and hold harmless the Company, and each of its directors, each of its officers who has signed the registration statement, each Person (if any), who controls the Company within the meaning of the Securities Act, any other Holder selling securities in such registration statement, and any controlling Person of any such other Holder, against any Damages, in each case only to the extent that such Damages arise out of or are based upon

 

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actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of such selling Holder expressly for use in connection with such registration; and each such selling Holder will pay to the Company and each other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 2.8(b) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided further that in no event shall any indemnity under this Section 2.8(b) exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder).

(c) Promptly after receipt by an indemnified party under this Section 2.8 of notice of the commencement of any action (including any governmental action) for which a party may be entitled to indemnification hereunder, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.8, give the indemnifying party notice of the commencement thereof. The indemnifying party shall have the right to participate in such action and, to the extent the indemnifying party so desires, participate jointly with any other indemnifying party to which notice has been given, and to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such action, in the reasonable opinion of such indemnified party. The failure to give notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the indemnified party under this Section 2.8, except to the extent that such failure materially prejudices the indemnifying party’s ability to defend such action. The failure to give notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.8.

(d) To provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any party otherwise entitled to indemnification hereunder makes a claim for indemnification pursuant to this Section 2.8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that this Section 2.8 provides for indemnification in such case, or (ii) contribution under the Securities Act or other applicable law may be required on the part of any party hereto for which indemnification is provided under this Section 2.8, then, and in each such case, such parties will contribute to the aggregate losses, claims, damages, liabilities, or expenses to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of each of the indemnifying party and the indemnified party in connection with the statements, omissions, or other actions that resulted in such loss, claim, damage, liability, or expense, as well as to reflect any other relevant equitable considerations. The relative fault of the indemnifying

 

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party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact, or the omission or alleged omission of a material fact, relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case, (x) no Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement, and (y) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation; and provided further that in no event shall a Holder’s liability pursuant to this Section 2.8(e), when combined with the amounts paid or payable by such Holder pursuant to Section 2.8(b), exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder).

(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

(f) The indemnification and contribution required by this Section 2.8 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred.

(g) The indemnity agreements contained herein shall be in addition to any other rights to indemnification or contribution that any indemnified party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made or omitted by or on behalf of any Indemnified Party and shall survive the transfer of the Registrable Securities by any such party, including the completion of any offering of Registrable Securities in a registration under this Section 2, and otherwise shall survive the termination of this Agreement.

2.9 Reports Under Exchange Act. With a view to facilitating resales of the Company’s securities and to making available to the Holders the benefits of SEC Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form F-3, the Company shall:

(a) make and keep available adequate current public information, as those terms are understood and defined in SEC Rule 144, at all times after the effective date of any registration statement filed by the Company with the SEC;

(b) file with the SEC or other applicable regulatory authority in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act or other applicable law (at any time after the Company has become subject to such reporting requirements); and

 

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(c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) to the extent accurate, a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of any registration statement filed by the Company with the SEC), the Securities Act, and the Exchange Act (at any time after the Company has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form F-3 (at any time after the Company so qualifies); (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company; and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration (at any time after the Company has become subject to the reporting requirements under the Exchange Act) or pursuant to Form F-3 (at any time after the Company so qualifies to use such form).

2.10 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a two-thirds majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would allow such holder or prospective holder (i) to include such securities in any registration unless, under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such securities will not reduce the number of the Registrable Securities of the Holders that are included or (ii) to demand registration of any securities held by such holder or prospective holder; provided, however, that this limitation shall not apply to any additional Investor who becomes party to this Agreement in accordance with Section 3.11.

2.11 “Market Stand-off” Agreement. Each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Qualifying IPO, and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days in the case of the Qualifying IPO, which period may be extended upon the request of the managing underwriter for an additional period of up to fifteen (15) days if the Company issues or proposes to issue an earnings or other public release within fifteen (15) days of the expiration of the 180-day lockup period, (i) lend; offer; pledge; sell; contract to sell; sell any option or contract to purchase; purchase any option or contract to sell; grant any option, right, or warrant to purchase; or otherwise transfer or dispose of, directly or indirectly, any Common Shares or any securities convertible into or exercisable or exchangeable (directly or indirectly) for Common Shares held immediately before the effective date of the registration statement for such offering or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Shares or other securities, in cash, or otherwise; provided, however, that the foregoing provision shall not apply to the sale of any Common Shares pursuant to the Qualifying IPO. The foregoing provisions of this Section 2.11 shall apply only to the Qualifying IPO and shall be applicable to the Holders only if all officers, directors, and shareholders individually owning more than one percent (1%) of the Company’s outstanding Common Shares are subject to the same restrictions. The underwriters in connection with such registration are intended

 

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third-party beneficiaries of this Section 2.11 and shall have the right, power, and authority to enforce the provisions hereof as though they were a party hereto. Each Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in connection with such registration that are consistent with this Section 2.11 or that are necessary to give further effect thereto. Any discretionary waiver or termination of the restrictions of any or all of such agreements by the Company or the underwriters shall apply pro rata to all Holders subject to such agreements, based on the number of shares subject to such agreements.

2.12 Restrictions on Transfer.

(a) The Registrable Securities shall not be sold, pledged, or otherwise transferred, and the Company shall not recognize any such sale, pledge, or transfer, except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. A transferring Holder will cause any proposed purchaser, pledgee, or transferee of the Registrable Securities held by such Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement.

(b) Each certificate or instrument representing (i) the Registrable Securities, and (ii) any other securities issued in respect of the securities referenced in clause (i), upon any stock split, stock dividend, recapitalization, merger, consolidation, or similar event, shall (unless otherwise permitted by the provisions of Section 2.12(c)) be stamped or otherwise imprinted with a legend substantially in the following form:

THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD, PLEDGED, OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR A VALID EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.

The Holders consent to the Company making a notation in its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer set forth in this Section 2.12.

(c) The holder of each certificate representing Restricted Securities, by acceptance thereof, agrees to comply in all respects with the provisions of this Section 2. Before any proposed sale, pledge, or transfer of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transaction, the Holder thereof shall give notice to the Company of such Holder’s intention to effect such sale, pledge, or transfer. Each such notice shall describe the manner and circumstances of the proposed sale, pledge, or transfer in sufficient detail and, if reasonably requested by the Company, shall be accompanied at such Holder’s expense by either (i) a written opinion of legal counsel who shall, and whose legal opinion shall, be reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transaction may be effected without registration under the Securities Act; (ii) a “no action” letter from the SEC to the effect that the proposed sale, pledge, or transfer of such Restricted Securities without registration will not result in a

 

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recommendation by the staff of the SEC that action be taken with respect thereto; or (iii) any other evidence reasonably satisfactory to counsel to the Company to the effect that the proposed sale, pledge, or transfer of the Restricted Securities may be effected without registration under the Securities Act, whereupon the Holder of such Restricted Securities shall be entitled to sell, pledge, or transfer such Restricted Securities in accordance with the terms of the notice given by the Holder to the Company. The Company will not require such a legal opinion or “no action” letter (x) in any transaction in compliance with SEC Rule 144, (y) in any transaction in which such Holder distributes Restricted Securities to an Affiliate of such Holder for no consideration or (z) in any “offshore transaction” within the meaning of Regulation S under the Securities Act; provided that each transferee agrees in writing to be subject to the terms of this Section 2.12. Each certificate or instrument evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to SEC Rule 144, the appropriate restrictive legend set forth in Section 2.12(b), except that such certificate shall not bear such restrictive legend if, in the opinion of counsel for such Holder and the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act.

2.13 Termination of Registration Rights. The right of any Holder to request registration or inclusion of Registrable Securities in any registration pursuant to Section 2.1 or Section 2.2 shall terminate the earlier of (i) when all of such Holder’s Registrable Securities could be sold without restriction under SEC Rule 144(k), and (ii) ten (10) years after the date hereof.

2.14 Non U.S. Jurisdiction. The terms of this Agreement are drafted primarily in contemplation of securities offerings in the United States. The parties recognize, however, the possibility that there may be one or more registrations in a jurisdiction other than the United States. It is, accordingly, the parties’ intention that whenever this Agreement refers to a law or institution of the United States but the parties wish to effectuate a registration in a different jurisdiction, reference in this Agreement to the laws or institutions of the United States shall be read as referring, mutatis mutandis, to the comparable laws or institutions of the jurisdiction in question. For the avoidance of doubt, in the event of a Qualifying IPO in a jurisdiction other than the United States, the number of Registrable Securities included in such offering shall not be reduced below thirty percent (30%) of the total number of securities included in such offering, unless the selling Holders may be excluded further if the underwriters make the determination described in Section 2.3(b) and no other shareholder’s securities (including any registrable securities under the Existing Shareholders Agreement) are included in such offering.

3. Miscellaneous.

3.1 Successors and Assigns. The rights under this Agreement may be assigned (but only with all related obligations) by a Holder to a transferee of Registrable Securities; provided, however, that (x) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee and the Registrable Securities with respect to which such rights are being transferred; and (y) such transferee agrees in a written instrument delivered to the Company to be bound by and subject to the terms and conditions of this Agreement, including the provisions of Section 2.11. The terms and conditions of this Agreement inure to the benefit of and are binding upon the respective successors and permitted assignees of the parties. Nothing in this Agreement,

 

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express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assignees any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein.

3.2 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. The parties hereto consent to the non-exclusive jurisdiction of any state or federal court sitting in the State of New York and any appellate court from any thereof in any action or proceeding arising out of or relating to this Agreement.

3.3 Counterparts; Facsimile. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may also be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

3.4 Titles and Subtitles. The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement.

3.5 Notices. All notices, requests, and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given, delivered and received (i) upon personal delivery to the party to be notified; (ii) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day; (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one (1) business day after the business day of deposit with an internationally recognized overnight courier, specifying next-day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their addresses as set forth on Schedule A hereto, or to the principal office of the Company and to the attention of the Chief Executive Officer, in the case of the Company, or to such email address, facsimile number, or address as subsequently modified by written notice given in accordance with this Section 3.5.

3.6 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance, and either retroactively or prospectively) only with the written consent of the Company and the holders of a two-thirds majority of the Registrable Securities then outstanding; provided that (i) the Company may in its sole discretion waive compliance with Section 2.12(c) (and the Company’s failure to object promptly in writing after notification of a proposed assignment allegedly in violation of Section 2.12(c) shall be deemed to be a waiver); (ii) no change in the percentage of Registrable Securities included in the Qualifying IPO, or in this clause (ii), shall be made without the prior written consent of the holders of at least two-thirds of the Registrable Securities; and (iii) any provision hereof may be waived by any waiving party on such party’s own behalf, without the consent of any other party. Notwithstanding the foregoing, this Agreement may not be amended or terminated and the observance of any term hereof may not be waived with respect to any Investor without the written consent of such Investor, unless such amendment, termination, or waiver applies to all Investors in the same fashion. The Company shall give prompt notice of any amendment or termination hereof or

 

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waiver hereunder to any party hereto that did not consent in writing to such amendment, termination, or waiver. Any amendment, termination, or waiver effected in accordance with this Section 3.6 shall be binding on all parties hereto, regardless of whether any such party has consented thereto. No waivers of or exceptions to any term, condition, or provision of this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, condition, or provision.

3.7 Severability. In case any one or more of the provisions contained in this Agreement is for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Agreement, and such invalid, illegal, or unenforceable provision shall be reformed and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.

3.8 Aggregation of Shares. All shares of Registrable Securities held or acquired by Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

3.9 Entire Agreement. This Agreement (including any Schedules and Exhibits hereto) constitutes the full and entire understanding and agreement among the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties prior to the date hereof is expressly canceled.

3.10 Delays or Omissions. No delay or omission to exercise any right, power, or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power, or remedy of such nonbreaching or nondefaulting party, nor shall it be construed to be a waiver of or acquiescence to any such breach or default, or to any similar breach or default thereafter occurring, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. All remedies, whether under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.

3.11 Additional Investors. Notwithstanding anything to the contrary contained herein, if the Company issues additional Convertible Notes or Warrants after the date hereof that are fungible with the Convertible Notes or Warrants (as the case may be), whether pursuant to the Purchase Agreements or otherwise, any purchaser of such Convertible Notes or Warrants may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement, and thereafter shall be deemed an “Investor” for all purposes hereunder. No action or consent by the Investors shall be required for such joinder to this Agreement by such additional Investor, so long as such additional Investor has agreed in writing to be bound by all of the obligations as an “Investor” hereunder.

3.12 Jurisdiction. The Company agrees that any suit, action or proceeding against the Company arising out of or based upon this Agreement or the transactions contemplated hereby may be instituted in any State or U.S. federal court in The City of New York and County of New York, and waives any objection which it may now or hereafter have to the laying of venue of any such proceeding, and irrevocably submits to the non-exclusive jurisdiction of such courts in any suit, action or proceeding. The Company hereby appoints

 

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Law Debenture Corporate Services Inc., 400 Madison Avenue, Suite 4D, New York, NY 10017, Facsimile No. +1 212 750 1361, as its authorized agent (the “Authorized Agent”) upon whom process may be served in any suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated herein.

[Remainder of Page Intentionally Left Blank]

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

[SIGNATURE PAGE TO EQUITY REGISTRATION RIGHTS AGREEMENT]

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[SIGNATURE PAGE TO EQUITY REGISTRATION RIGHTS AGREEMENT]

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SCHEDULE A

Holders of Warrants

Drawbridge Global Macro Master Fund Ltd

Address:

Facsimile:

Email:

Polygon Global Opportunities Master Fund

Address:

Facsimile:

Email:

Merrill Lynch International

Address:

Merrill Lynch Financial Center

2 King Edward Street

London EC1A 1HQ

England

Facsimile:

Email:

Forum Partners Asian Realty II, LP

Address:

Facsimile:

Email:

Dillon Read Finance LP

Address:

Facsimile:

Email:

Dillon Read Financial Trading Products Ltd.

Address:

Facsimile:

Email:

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SCHEDULE B

Holders of Convertible Notes

Exhibit 10.8

VOTING AGREEMENT

THIS VOTING AGREEMENT (this “Agreement”) is made and entered into as of April 13, 2007 by and among Xinyuan Real Estate Co., Ltd., a Cayman Islands company (the “Company”), Drawbridge Global Macro Master Fund Ltd. (“Drawbridge”); and Mr. ZHANG Yong and Ms. YANG Yuyan (collectively, the “Controlling Shareholders”).

RECITALS

A. The Company proposes to issue and sell (A) (i) an aggregate of 750 units (the “Units”), with each Unit consisting of $100,000 in principal amount of the Company’s Senior Secured Floating Rate Notes due 2010 (the “Floating Rate Notes”), and a contingent warrant to purchase common shares of the Company, par value $0.0001 per share (the “Common Shares”), and (ii) an aggregate of $25,000,000 in principal amount of the Company’s 2% Convertible Subordinated Notes due 2012 (the “Convertible Notes” and together with the Floating Rate Notes, the “Notes”) or (B) an aggregate of 1,000 Units, on the terms and conditions set forth in one or more Securities Purchase Agreements dated as of April 13, 2007 (collectively, the “Purchase Agreements”);

C. The Purchase Agreements provides that the execution and delivery of this Agreement by the parties shall be a condition precedent to the consummation of the transactions contemplated under the Purchase Agreements.

D. The Company has entered into that certain Shareholders Agreement (the “Shareholders Agreement”), dated as of April 9, 2007 with Blue Ridge China Partners, L.P. (“Blue Ridge China”), the Controlling Shareholders and other parties thereto, pursuant to which Blue Ridge China is entitled, for so long as it holds its Preferred Threshold Shares (as defined therein), to designate two (2) individuals to be elected to the Company’s Board of Directors (each such individual, a “Blue Ridge Designee”).

E. The Company and Blue Ridge China have entered into that certain letter agreement dated April 9, 2007 pursuant to which Blue Ridge China has agreed to suspend its right to nominate and appoint one (1) of the two (2) Blue Ridge Designees for so long as (i) it has the right to designate two (2) Blue Ridge Designees pursuant to the terms and conditions of the Shareholders Agreement, and (ii) Drawbridge is entitled to appoint one (1) Note Holder Nominee (as defined below) pursuant to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. BOARD REPRESENTATION.

1.1 Note Holder Nominee. In the event that, at any time after the date hereof, Drawbridge holds notes in an aggregate principal amount of Notes that equals or exceeds $35,000,000 (“Minimum Drawbridge Amount”), Drawbridge shall be entitled to appoint up to one (1) individual (a “Note Holder Nominee”) to serve on the Company’s Board of Directors, and shall continue to be so entitled for so long as:

(a) Drawbridge holds Notes representing at least 50% of the Minimum Drawbridge Amount; and

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(b) Blue Ridge China has the right to designate at least two (2) Blue Ridge Designees pursuant to the terms and conditions of the Shareholders Agreement.

1.2 Drawbridge Election. If Drawbridge is entitled to appoint a Note Holder Nominee pursuant to Section 1.1 hereof and Drawbridge provides written notice to the Company informing the Company of (i) its election (the “Drawbridge Election”) to be represented on the Board of Directors and (ii) the name of the Note Holder Nominee, then, as soon as practicable after its receipt of such notice from Drawbridge, but in no event later than five (5) business days after such receipt, the Company shall:

(a) provide notice of the Drawbridge Election to the Company’s Board of Directors, Blue Ridge China and the Controlling Shareholders, and

(b) take all necessary actions so as to permit the Note Holder Nominee to be duly appointed or elected as a member of the Company’s Board of Directors.

Subject to the conditions and limitations set forth herein, the Drawbridge Election may be exercised by Drawbridge at any time in its sole discretion.

1.3 Size of the Board of Directors. Subject to the provisions of Section 1.1, the Company shall take all necessary action, from time to time and at all times, so as to (i) maintain the total size of the Board of Directors (including vacancies) to permit the Note Holder Nominee to be appointed to the Board of Directors and (ii) ensure that the total size of the Board of Directors does not exceed seven (7) members at any time.

1.4 Voting Agreement. Subject to the provisions of Section 1.1, each of the Controlling Shareholders agrees to vote, or cause to be voted, any and all Common Shares owned by such Controlling Shareholder (of record or through a brokerage firm or other nominee arrangement), or over which such Controlling Shareholder has voting control, from time to time and at all times, in whatever manner as shall be necessary:

(a) to ensure that at each annual or special meeting of shareholders at which an election of directors is held or pursuant to any written consent of the shareholders, the Note Holder Nominee is duly elected to the Board of Directors;

(b) to ensure that the size of the Board of Directors is sufficient to permit the appointment and/or election of the Note Holder Nominee to the Board of Directors; and

(c) to ensure that the total size of the Board of Directors does not exceed seven (7) members at any time.

1.5 Vacancies. Subject to the provisions of Section 1.1, any vacancies created by the resignation, removal or death of a Note Holder Nominee appointed or elected to the Board of Directors shall be filled pursuant to the provisions of this Section 1.

 

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2. Representations and Warranties of the Controlling Shareholders. The Controlling Shareholders represent and warrant that:

2.1 The Controlling Shareholders are the beneficial owners of (i) 60,000,000 Common Shares, which constitutes at least a majority of the outstanding voting power of the Company’s capital stock.

2.2 Each of the Controlling Shareholders has full power and authority to make, enter into and carry out the terms of this Agreement. This Agreement has been duly executed and delivered by each of the Controlling Shareholders and constitutes the legal, valid and binding obligations of each Controlling Shareholder, enforceable against such Controlling Shareholder in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally and (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

2.3 The execution and delivery of this Agreement by each of the Controlling Shareholders do not, and the performance of this Agreement by the Controlling Shareholders will not: (i) conflict with or violate any law, rule regulation, order, decree or judgment applicable to the Controlling Shareholders or by which the Controlling Shareholders or any of the properties of the Controlling Shareholders are or may be bound or affected; or (ii) result in or constitute (with or without notice or lapse of time) any breach of or default under, or give to any other person (with or without notice or lapse of time) in the creation of any encumbrance or restriction on any of the Common Shares pursuant to any contract to which any Controlling Shareholder is a party or by which any Controlling Shareholder or any of the affiliates or properties of any Controlling Shareholder is or may be bound or affected, except for the Shareholders Agreement. The execution and delivery of this Agreement by the Controlling Shareholders do not, and the performance of this Agreement by the Controlling Shareholders will not, require any consent or approval of any person, except those parties to the Shareholders Agreement.

3. Miscellaneous.

3.1 Term. This Agreement shall be effective as of the date hereof and shall continue in full force and effect until, and shall terminate upon, the earlier of (i) the Company and the Controlling Shareholder’s receipt of Drawbridge’s written notice to terminate the Agreement, or (ii) such time as Drawbridge holds Notes representing less than 50% of the Minimum Drawbridge Amount; whereupon the Company shall promptly exercise its contractual rights and take all other actions necessary to forthwith cause the removal of the Note Holder Nominee if such nominee does not immediately resign at such time.

3.2 Notices. Except as may be otherwise provided herein, all notices, requests, waivers and other communications made pursuant to this Agreement shall be in writing and shall be conclusively deemed to have been duly given (a) when hand delivered to the other party, upon delivery; (b) when sent by facsimile at the number set forth in Exhibit A hereto, upon receipt of confirmation of error-free transmission; (c) seven (7) business days after deposit in the mail as air mail or certified mail, receipt requested, postage prepaid and addressed to the other party as set forth in Exhibit A; or (d) three (3) business days after deposit with an international overnight delivery service, postage prepaid, addressed to the parties as set forth in Exhibit A with next business day delivery guaranteed; provided that the sending party receives a confirmation of delivery from the delivery service provider.

 

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A party may change or supplement the addresses given above, or designate additional addresses, for purposes of this Section 3.2 by giving the other party written notice of the new address in the manner set forth above.

3.3 Entire Agreement. This Agreement and the Purchase Agreement, together with all the exhibits hereto and thereto, constitute and contain the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understandings, duties or obligations between the parties respecting the subject matter hereof.

3.4 Governing Law. This Agreement shall be governed by and construed exclusively in accordance the internal laws of the Cayman Islands without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the Cayman Islands to the rights and duties of the parties hereunder.

3.5 Severability. If any provision of this Agreement is found to be invalid or unenforceable, then such provision shall be construed, to the extent feasible, so as to render the provision enforceable and to provide for the consummation of the transactions contemplated hereby on substantially the same terms as originally set forth herein, and if no feasible interpretation would save such provision, it shall be severed from the remainder of this Agreement, which shall remain in full force and effect unless the severed provision is essential to the rights or benefits intended by the parties. In such event, the parties shall use best efforts to negotiate, in good faith, a substitute, valid and enforceable provision or agreement which most nearly effects the parties’ intent in entering into this Agreement.

3.6 Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of the parties hereto; it being understood that Drawbridge shall be permitted to assign its rights under this Agreement to any third party purchaser of the Notes.

3.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts transmitted by facsimile shall be deemed to be originals.

3.8 Specific Performance. The parties hereto acknowledge that, in view of the transactions contemplated by this Agreement, each party would not have an adequate remedy at law for money damages in the event that this Agreement has not been performed in accordance with its terms, and therefore agrees that the non-breaching parties shall be entitled to specific enforcement of the terms hereof in addition to any other remedy to which such non-breaching parties may be entitled at law or in equity.

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the parties have caused their respective duly authorized representatives to execute this Agreement as of the date and year first above written.

 

[SIGNATURE PAGE TO VOTING AGREEMENT]

Exhibit 10.9

EXECUTION VERSION

 

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SHARE EXCHANGE AND ASSUMPTION AGREEMENT

AMONG

BLUE RIDGE CHINA PARTNERS, L.P.,

EI FUND II CHINA, LLC,

ZHANG YONG, YANG YUYAN,

XINYUAN REAL ESTATE, LTD.

AND

XINYUAN REAL ESTATE CO., LTD.

DATED AS OF APRIL 9, 2007

 

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Table of Contents

 

ARTICLE I DEFINITIONS		2
ARTICLE II EXCHANGE OF SECURITIES		9
ARTICLE III ASSIGNMENT AND ASSUMPTION		11
ARTICLE IV REPRESENTATIONS AND WARRANTS OF STOCKHOLDERS		11
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY		14
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE PARENT		17
ARTICLE VII DELIVERIES		18
ARTICLE VIII CONDITIONS TO STOCKHOLDERS’ AND COMPANY’S CLOSING OBLIGATIONS		19
ARTICLE IX CONDITIONS TO PARENT’S CLOSING OBLIGATIONS		21
ARTICLE X COVENANTS		22
ARTICLE XI TERMINATION		23
ARTICLE XII MISCELLANEOUS		24

 

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THIS SHARE EXCHANGE AND ASSUMPTION AGREEMENT (the “Agreement”), dated as of April 9, 2007, by and among Xinyuan Real Estate Co., Ltd., a company established under the laws of the Cayman Islands (the “Parent”), Xinyuan Real Estate, Ltd., a company established under the laws of the Cayman Islands (the “Company”), Blue Ridge China Partners, L.P., a Cayman Islands exempted limited partnership (“Blue Ridge China”), EI Fund II China, LLC, a Delaware limited liability company (“EI” and together with Blue Ridge China, the “Investors”), Zhang Yong, a PRC national (“Zhang”), Yang Yuyan, a PRC national (“Yang” and together with Zhang and the Investors, the “Stockholders”). Each of the parties to this Agreement is individually referred to herein as a “Party” and collectively, as the “Parties”.

RECITALS

WHEREAS, the Company has 75,704,379 common shares, par value of US$0.0001 per share (the “Common Shares”) and 30,805,400 Series A preferred shares (the “Preferred Shares”), par value of US$0.0001 per share of capital stock (the Common Shares and Preferred Shares hereinafter referred to collectively as the “Company Stock”) outstanding, all of which are held by the Stockholders and each of the Stockholders is the record and beneficial owner of the number of shares of Company Stock set forth opposite such Stockholder’s name on Exhibit A.

WHEREAS, each of the Stockholders has agreed to exchange all of his, her or its (hereinafter “its”) Company Stock for newly issued common shares, par value of US$0.0001 per share, of the Parent (the “Parent Common Shares”) and Series A preferred shares, par value of US$0.0001 per share, of the Parent (the “Parent Preferred Shares”), on a one-for-one exchange basis (the Parent Common Shares and the Parent Preferred Shares hereinafter referred to collectively as the “Parent Stock”) that will, in the aggregate, constitute 100% of the issued and outstanding capital stock of the Parent as at and immediately after the Closing. The class and number of shares of Parent Stock to be received by each Stockholder shall be as listed opposite such Stockholder’s name on Exhibit A to this Agreement. The aggregate number of shares of Parent Stock that will be reflected on Exhibit A is referred to herein as the “Shares”;

WHEREAS, the exchange of Company Stock for Parent Stock is intended to constitute a reorganization within the meaning of Section 368(a)(l)(F) of the Internal Revenue Code of 1986 (the “Code”), as amended or such other tax free reorganization exemptions that may be available under the Code;

WHEREAS, the Company and the Stockholders are parties to that certain securities purchase agreement, dated as of August 22, 2006 (as amended, extended, modified or supplemented from time to time, the “Securities Purchase Agreement”) and that certain share purchase agreement, dated as of November 18, 2006 (as amended, extended, modified or supplemented from time to time, the “Share Purchase Agreement”), pursuant to which the Investors purchased certain securities of the Company;

 

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WHEREAS, the Company and the Investors are parties to that certain credit agreement, dated as of December 7, 2006 (as amended, extended, modified or supplemented from time to time, the “Credit Agreement”), pursuant to which Blue Ridge China loaned the amount of $21,000,000 to the Company and EI loaned the amount of $14,000,000 to the Company, with each being issued a promissory note evidencing such loan (the “Notes”);

WHEREAS, the Company had entered into separate indemnification agreements, each dated August 25, 2006, with each of Mr. Christopher Fiegen, Mr. Justin Tang and Mr. Angus Lo (the “Directors”), providing for the indemnification of each in his capacity as a director of the Company (as amended, extended, modified or supplemented from time to time, the “Indemnity Agreements”);

WHEREAS, the Company has entered into an employment agreement, dated February 8, 2006, with Longgen Zhang (the “Executive”) to employ the Executive as the chief financial officer of the Company and to perform all duties and services consistent with the Executive’s position (as amended, extended, modified or supplemented from time to time, the “CFO Employment Agreement”);

WHEREAS, the Company has agreed to assign to Parent, and Parent has determined it to be in its best interest to agree to assume from the Company, all the rights, benefits, restrictions and obligations as set forth in each of the Securities Purchase Agreement, the Share Purchase Agreement and the Credit Agreement (collectively, the “Assumed Security Agreements”) and the Indemnity Agreements and the CFO Employment Agreement (collectively, the “Assumed Executive Agreements” and together with the Assumed Security Agreements, the “Assumed Agreements”); and

WHEREAS, the Parent and the Company have each determined that it is desirable to effect the plan of reorganization described in the recitals above, to complete the share exchange and the assignment and assumption of the Assumed Agreements.

NOW, THEREFORE, in consideration of the mutual agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE I

DEFINITIONS

As used herein, unless the context requires a different meaning, the following terms shall have the following meanings:

“Agreement” has the meaning set forth in the preamble.

“Affiliate” means, with respect to a specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Person specified.

“Assumed Agreements” has the meaning set forth in the preamble.

 

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“Assumed Executive Agreements” has the meaning set forth in the preamble.

“Assumed Security Agreements” has the meaning set forth in the preamble.

“Burnham” means Burnham Securities, Inc.

“Burnham Warrants” means the warrants to purchase a total of 1,853,172 Common Shares issued by the Company to Burnham and Gardner.

“Business” means the business that the WFOE and the Operating Companies engage in, including the business of investing in real estate in the PRC.

“Business Day” means any day except a Saturday, a Sunday or a legal holiday in the city of Toronto, Canada or the PRC.

“CFO Employment Agreement” has the meaning set forth in the preamble.

“Closing” has the meaning set forth in Section 2.04.

“Closing Date” has the meaning set forth in Section 2.04.

“Code” has the meaning set forth in the preamble.

“Common Shares” means the common shares, par value $0.0001 per share, of the Company.

“Company” has the meaning set forth in the preamble.

“Company Contract” has the meaning set forth in Section 5.05.

“Company Stock” has the meaning set forth in the preamble.

“Credit Agreement” has the meaning set forth in the preamble.

“Equity Incentive Plan” means the Company equity incentive plan consisting of a stock option agreement and a stock bonus agreement for the benefit of certain employees, directors and advisors.

“FCPA” has the meaning set forth in Section 5.10.

“Gardner” means Mr. Joel B. Gardner.

“Governing Documents” means, with respect to the Company, the Memorandum of Association, with respect to the WFOE or any Operating Company, its Articles of Association or other organizational documents, and with respect to the Parent, the Parent Memorandum of Association, in each case as amended from time to time.

 

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“Governmental Authorization” means any consent, approval, license, registration or permit issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Law.

“Governmental Body” means any legislative or executive branch of any federal, state or local government (including municipalities), anywhere in the world (including the United States, the Cayman Islands and the PRC), and any agency, bureau, commission, court, department or other instrumentality thereof.

“Henan Xinyuan” means Henan Xinyuan Real Estate Co., Ltd., a company organized under the laws of the PRC.

“ICC” has the meaning set forth in Section 12.10.

“Indemnity Agreements” has the meaning set forth in the preamble.

“Investor Warrants” means the warrants to purchase Series A Preferred Shares issued by the Company to the Investors in connection with the Securities Purchase Agreement.

“Law” means applicable common law and any statute, ordinance, code or other law, rule, permit, permit condition, regulation, order, decree, technical or other standard, requirement or procedure enacted, adopted, promulgated, applied or followed by any Governmental Body.

“Lien” means any mortgage, pledge, hypothecation, security assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and any lien related to any filing of any financing statement under the Uniform Commercial Code or comparable Law of any jurisdiction), any right of first refusal, right to call, preemptive right or other right of another Person with respect to any property or asset, or any option, warrant or commitment of any kind or nature.

“Material Adverse Effect” means any change(s) or effect(s) that individually or in the aggregate is or may (so far as can reasonably be foreseen at the time) be materially adverse to (a) in the case of the Company (i) the assets, business, operations, income, prospects or condition (financial or other) of the Company, the WFOE, any of the Operating Companies or the Transactions, (ii) the ability of the Company, the WFOE or any of the Operating Companies to perform its obligations under this Agreement or the Parent Shareholders Agreement to which it is a party or to consummate the Transactions, or (iii) a Stockholder’s rights under this Agreement or the Parent Shareholders Agreement or the ability of a Stockholder to perform its obligations hereunder and thereunder or consummate the Transactions, but excluding changes in general economic conditions in the PRC, and (b) in the case of the Parent (c) the assets, business, operations, income, prospects or condition (financial or other) of the Parent or the Transactions, (d) the ability of the Parent to perform its obligations under this Agreement or the Parent Shareholders Agreement or to consummate the Transactions, or (e) a Stockholders’s rights under this Agreement or the Parent Shareholders Agreement or the ability of a Stockholder to perform its obligations hereunder and thereunder or consummate the Transactions, but excluding changes in general economic conditions in the PRC.

 

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“Notes” has the meaning set forth in the preamble.

“OFAC”, “OFAC Sanctions”, and “OFAC Sanctioned Person” has the meaning set forth in Section 5.08.

“Operating Company” means each of Henan Xinyuan, Henan Wanzhong Real Estate Co., Ltd., Shandong Xinyuan Real Estate Co., Ltd. and Qingdao Xinyuan Real Estate Co., Ltd.

“Order” means any order, writ, injunction, decree, judgment, award, determination or written direction of any arbitrator or Governmental Body.

“Parent Burnham Warrant Shares” has the meaning set forth in Section 2.03(a)(ii).

“Parent Burnham Warrants” has the meaning set forth in Section 2.03(a)(ii).

“Parent Common Shares” has the meaning set forth in the preamble.

“Parent Equity Incentive Plan” has the meaning set forth in Section 2.03(b).

“Parent Investor Conversion Shares” has the meaning set forth in Section 2.03(c)(ii).

“Parent Investor Warrant Shares” has the meaning set forth in Section 2.03(c)(ii)

“Parent Investor Warrants” has the meaning set forth in Section 2.03(c)(ii).

“Parent Memorandum of Association” has the meaning set forth in Section 2.01.

“Parent Notes” means has the meaning set forth in Section 2.03(d)(ii).

“Parent Preferred Shares” has the meaning set forth in the preamble.

“Parent Securities” means the Parent Common Shares, the Parent Preferred Shares, the Parent Investor Warrants, the Parent Burnham Warrants, the Parent Investor Conversion Shares, the Parent Investor Warrant Shares and the Parent Burnham Warrant Shares.

“Parent Shareholders Agreement” means the shareholders agreement with respect to the Parent Securities among the Parties, Burnham and Gardner, in the form set forth in Exhibit B.

“Parent Stock” has the meaning set forth in the preamble.

“Parent Zhang Yong Common Shares” has the meaning set forth in Section 2.03(a)(iv).

“Parent Zhang Yong Warrant” has the meaning set forth in Section 2.03(a)(iv).

“Person” means any individual or entity, including any corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or Governmental Body.

“PRC” means the People’s Republic of China.

 

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“Preferred Shares” has the meaning set forth in the preamble.

“Purchased Securities” has the meaning set forth in Section 2.01 (a).

“Securities Act” means the Securities Act of 1933 of the United States, as amended, and, as applicable, any relevant securities laws of any state or non-U.S. jurisdiction (including the Cayman Islands and the PRC).

“Securities Purchase Agreement” has the meaning set forth in the preamble.

“Shareholders Agreement” means that certain Shareholders Agreement, dated August 22, 2006, and as amended November 18, 2006, among the Company, the Investors, Zhang, Yang, and to the extent set forth therein, Burnham and Gardner, as the same may from time to time be amended, modified or supplemented in accordance with the terms hereof and thereof.

“Share Purchase Agreement” has the meaning set forth in the preamble.

“Shares” has the meaning set forth in the preamble.

“Solvent” has the meaning set forth in Section 5.09.

“Stockholders” has the meaning set forth in the preamble.

“Subsidiary” means, as to any Person, (i) a corporation or other entity whose shares of capital stock or other ownership interests having ordinary voting power to elect a majority of the directors of such corporation, or other Persons performing similar functions for such entity, are owned or controlled, directly or indirectly, by such Person, or (ii) a corporation or other entity of which a majority of the equity is owned, directly or indirectly, by such Person.

“Tax” means any income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental, windfall profit, customs, vehicle, airplane, boat, vessel or other title or registration, capital stock, franchise, employees’ income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, value added, alternative, add-on minimum and other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever and any interest, penalty, addition or additional amount thereon imposed, assessed or collected by or under the authority of any Governmental Body or payable under any tax-sharing agreement or any other Contract.

“Transactions” means the transactions contemplated by this Agreement and the Parent Shareholders Agreement.

“United States Person” or “U.S. Person” has the meaning set forth in Section 7701(a)(30) of the Code.

“United States” or “U.S.” means the United States of America.

 

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“WFOE” means Xinyuan Real Estate (Henan) Development, Ltd., a company organized under the laws of the PRC, which is a wholly foreign-owned enterprise 100% held by the Company under the laws of the PRC.

“Yang” has the meaning set forth in the preamble.

“Zhang” has the meaning set forth in the preamble.

“Zhang Yong Warrant” means warrants to be issued to Zhang Yong upon the termination of the Burnham Warrants equal to the number of Burnham Warrants, if any, that remain unexercised at termination, with each Zhang Yong Warrant exercisable into Common Shares for an exercise price of $0.0001 per share, provided that such number of Common Shares for which the Zhang Yong Warrants are exercisable into shall not be more than 1,853,172 Common Shares of the Company.

ARTICLE II

EXCHANGE OF SECURITIES

SECTION 2.01. Exchange by Stockholders. Subject to the terms and conditions of this Agreement, at Closing, each of the Stockholders shall sell, transfer, convey, assign and deliver to the Parent its Company Stock (the “Purchased Securities”) free and clear of all Liens, in exchange for the Parent Stock (free and clear of all Liens) listed on Exhibit A opposite such Stockholder’s name, in each case having the rights, restrictions, privileges and preferences as set forth in the form of the Amended and Restated Memorandum and Articles of Association of the Parent (the “Parent Memorandum of Association”) attached hereto as Exhibit C.

SECTION 2.02. Cancellation of Securities. The Company shall have authorized upon the Closing (i) the cancellation of the Investor Warrants, (ii) the cancellation of the Burnham Warrants, and (iii) the cancellation of the Notes. The Stockholders and the Company shall have authorized upon the Closing the termination of the Equity Incentive Plan.

SECTION 2.03. Obligations of Parent.

(a) The Parent shall have authorized upon the Closing:

(i) the issuance and sale to: (A) Blue Ridge China of 18,483,240 Parent Preferred Shares and 9,422,627 Parent Common Shares, (B) EI of 12,322,160 Parent Preferred Shares and 6,281,752 Parent Common Shares, (C) Zhang of 48,000,000 Parent Common Shares, and (D) Yang of 12,000,000 Parent Common Shares, in each case having the rights, restrictions, privileges and preferences as set forth in the form of the Parent Memorandum of Association;

(ii) the issuance and sale to each of Burnham and Gardner of warrants, each in the form attached hereto as Exhibit D (each a “Parent Burnham Warrant” and collectively, the “Parent Burnham Warrants”) to purchase Parent Common Shares (the “Parent Burnham Warrant Shares”);

 

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(iii) the issuance of the Parent Burnham Warrant Shares upon exercise of the Parent Burnham Warrants;

(iv) to the extent issuable, the issuance and sale to Zhang Yong of warrants (the “Parent Zhang Yong Warrants”) to purchase Parent Common Shares (the “Parent Zhang Yong Common Shares”); and

(v) to the extent issuable, the issuance of the Parent Zhang Yong Common Shares upon the exercise of the Parent Zhang Yong Warrant.

(b) The Parent shall adopt the Parent Memorandum of Association on or before the Closing. The Parent shall have authorized, effective upon Closing, an equity incentive plan consisting of a stock option agreement and a stock bonus agreement for the benefit of certain employees, directors and advisors, pursuant to which the Parent may issue a maximum of 6,802,495 Parent Common Shares, which amount shall not exceed ten percent (10%) of the issued and outstanding capital stock of the Parent immediately following the Closing (calculated on a fully-diluted basis), on such terms and conditions as shall be reasonably acceptable to the Investors (the “Parent Equity Incentive Plan”).

(c) In connection with the assumption by Parent of the Securities Purchase Agreement pursuant to Article III hereof and subject to the terms and conditions of this Agreement:

(i) at the Closing, the Company, Blue Ridge China and EI agree to cancel the Investor Warrants; and

(ii) the Parent shall have authorized upon the Closing, the issuance and sale to each of the Investors of warrants, each in the forms and amounts attached hereto as Exhibit E (each a “Parent Investor Warrant” and collectively, the “Parent Investor Warrants”) to purchase Parent Preferred Shares (the “Parent Investor Warrant Shares”) and to authorize the issuance of the Parent Investor Warrant Shares upon exercise of the Parent Investor Warrants and the issuance of Parent Common Shares upon conversion of the Parent Preferred Shares and the Parent Investor Warrant Shares (the “Parent Investor Conversion Shares”).

(d) In connection with the assumption by Parent of the Credit Agreement pursuant to Article III hereof and subject to the terms and conditions of this Agreement, at the Closing:

(i) the Company and Blue Ridge China agree to cancel the Notes; and

(ii) the Parent agrees to issue to Blue Ridge China a promissory note of the Parent in the amount of $21,000,000 and to issue EI a promissory note of the Parent in the amount of $14,000,000 in the form attached hereto as Exhibit F (the “Parent Notes”) and authorize the issuance of Parent Common Shares upon conversion of the Parent Notes.

 

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SECTION 2.04. Closing. Subject to the terms and conditions of this Agreement, the closing (the “Closing”) of the Transactions shall take place at the offices of Baker & McKenzie LLP in Toronto, Canada at 10:00 a.m. local time on the second Business Day following the satisfaction or waiver of all conditions to the obligations of the parties to consummate the Transactions contemplated hereby (other than conditions with respect to actions the respective parties will take at the Closing itself), or such other date and time as the parties may mutually determine (the “Closing Date”).

ARTICLE III

ASSIGNMENT AND ASSUMPTION

SECTION 3.01. Assignment. The Company, with effect upon the Closing, irrevocably grants, assigns, transfers and sets over unto the Parent and the Parent, with effect upon the Closing, accepts all of the Company’s right, title, benefit, interest and obligations in the Assumed Agreements, including any amendments, extensions, renewals or assignments thereof, and in and to all amounts due or to become due and payable under the Assumed Agreements, and with respect to any issuances of securities issuable or to become issuable under the Assumed Security Agreements from and after the date of the Closing, to have and to hold with full power to the Parent to take all such measures for the enjoyment of the rights under the Assumed Agreements as the Company might take for the remaining term of the Assumed Agreements and any renewal or renewals thereof.

SECTION 3.02. Assumption. The Parent, with effect upon the Closing, expressly assumes and undertakes to satisfy, perform, discharge and fulfill (a) all of the covenants, terms, conditions, obligations and liabilities of the Company under the Assumed Agreements as fully and to the same extent as if the Parent had been an original party to the Assumed Agreements instead of the Company, and (b) any other covenants, obligations and liabilities of the Company with respect to the Investors existing as of the date hereof.

ARTICLE IV

REPRESENTATIONS AND WARRANTS OF STOCKHOLDERS

Each of the Stockholders hereby severally and not jointly, represents and warrants as to itself, but not to any other Stockholder, to the Parent as follows:

SECTION 4.01. Good Title. Such Stockholder is the record and beneficial owner, and has good title to its Company Stock, with the right and authority to sell and deliver such Company Stock. Upon delivery of any certificate or certificates duly assigned, representing the same as herein contemplated and upon registering of the Parent as the new owner of such Company Stock in the register of members of the Company the Parent will receive good title to such Company Stock, free and clear of all Liens, and

 

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upon the termination of the Shareholders Agreement as contemplated by Section 9.05 hereof, free and clear of any terms, conditions or restrictions of any voting trusts and stockholder agreements.

SECTION 4.02. Organization. Each such Stockholder that is an entity is duly organized and validly existing in its jurisdiction of organization.

SECTION 4.03. Power and Authority. Each such Stockholder that is an entity has all requisite power and authority to execute, deliver and perform its obligations under this Agreement. All acts required to be taken by such Stockholder to enter into this Agreement and to carry out the Transactions have been properly taken. This Agreement constitutes a legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with the terms hereof, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, and (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

SECTION 4.04. No Conflicts. To the knowledge of such Stockholder, the execution and delivery of this Agreement and the Parent Shareholders Agreement, and the consummation of the Transactions, will not, directly or indirectly (with or without notice or lapse of time): (a) breach any provision of any of its memorandum and articles of association or other organizational documents, as amended; (b) breach or give any Governmental Authority or other Person the right to challenge any of the Transactions contemplated by the Agreement or the Parent Shareholders Agreement, or to exercise any remedy or obtain any relief under any Law to which such Stockholder and its respective assets may be subject; (c) contravene, conflict with or result in a violation or breach of any of the terms or requirements of, or give any Governmental Authority the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by such Stockholder; (d) violate or breach any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or payment under, or to cancel, terminate or modify, any contractual obligation to which such Stockholder is a party; (e) result in the imposition or creation of any Lien upon or with respect to the assets of such Stockholder; or (f) require the consent of any third party or any Governmental Body under any Law.

SECTION 4.05. Investment Representations.

(a) Such Stockholder is acquiring the Parent Securities for its own account not as a nominee or agent, and not with a view to the distribution of any part thereof, and such Stockholder has no present intention of selling, granting any participation in, or otherwise distributing the same. Such Stockholder does not have any contract, undertaking, agreement or arrangement with any Person to sell, transfer or grant participations to such Person or to other Person, with respect to any of the Parent Securities. Such Stockholder understands that such Parent Securities must be held indefinitely unless they are registered under the Securities Act or an exemption from such registration is available, and that such Parent Securities may be transferred only in accordance with the Parent Shareholders Agreement.

 

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(b) Such Stockholder understands that the purchase of the Parent Securities involves substantial risk and that its financial condition and investments are such that it is in a financial position to hold the Parent Securities for an indefinite period of time and to bear the economic risk of, and withstand a complete loss of its investment in, the Parent Securities. In addition, by virtue of its expertise, the advice available to it and previous investment experience, such Stockholder has extensive knowledge and experience in financial and business matters, investments, securities and private placements and the capability to evaluate the merits and risks of the transactions contemplated by this Agreement. Such Stockholder represents that it is an “accredited investor” as that term is defined in Regulation D promulgated under the Securities Act.

(c) If such Stockholder is not a “United States Person” and is not acquiring the securities for the account or benefit of any U.S. Person, within the meaning of Regulation S under the Securities Act, such Stockholder (i) agrees not to resell the Parent Securities except in accordance with the provisions of Regulation S under the Securities Act, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration, and agrees not to engage in hedging transactions with regard to such securities unless in compliance with the Securities Act, (ii) agrees that any certificates representing the Parent Securities issued to the Stockholder shall contain a legend to the effect that transfer is prohibited except in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act or pursuant to an available exemption from registration and that hedging transactions with regard to such securities may not be conducted unless in compliance with the Securities Act, (iii) agrees that the Parent is hereby required to refuse to register any transfer of any securities issued to the Stockholder not made in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration, (iv) represents that it has satisfied itself as to the full observance of the laws of the jurisdiction of its organization in connection with any invitation to subscribe for the Parent Securities, including (w) the legal requirements of the jurisdiction of its organization for the purchase of Parent Securities, (x) any foreign exchange restrictions applicable to such purchase, (y) any governmental or other consents that may need to be obtained, and (z) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Parent Securities, and (iii) represents that its subscription and payment for and continued beneficial ownership of the Parent Securities will not violate any applicable securities or other laws of the jurisdiction of its organization.

(d) In addition to any legend described above, such Stockholder understands that the certificates evidencing the Parent Securities may bear a legend as set forth in the Parent Shareholders Agreement.

(e) Such Stockholder has had an opportunity to ask questions and receive answers from the Parent regarding the terms and conditions of the offering of the Parent Securities and the business, management, properties, prospects and financial condition of the Parent.

 

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(f) Such Stockholder understands that the Parent Securities it is purchasing are characterized as “restricted securities” under the Securities Act laws because they are being acquired from the Parent in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold absent registration under the Securities Act only in certain limited circumstances. Such Stockholder further understands that no public market now exists for any of the securities issued by the Parent and the Parent has given no assurances that a public market will ever exist for the Parent’s securities.

SECTION 4.06. Exculpation Among Stockholders. Such Stockholder acknowledges that it is not relying upon any Person, other than the Parent, the Company and their respective officers and directors, in making its investment or decision to invest in the Parent. Such Stockholder agrees that no Stockholder nor any of its Affiliates or any controlling persons, members, officers, directors, partners, agents or employees of any Stockholder or its Affiliates shall be liable to any other Stockholder for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Parent Securities.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to the Parent and each of the Stockholders as follows:

SECTION 5.01. Organization, Good Standing and Qualification. The Company is a company duly organized, validly existing and in good standing under the laws of the Cayman Islands and is duly qualified to do business as a foreign company in each additional jurisdiction where the failure to so qualify would have a Material Adverse Effect. Each of the Subsidiaries are duly organized, validly existing and in good standing under the laws of the PRC.

SECTION 5.02. Power and Authority. The Company has all requisite power and authority to own its properties and to carry on its business as now being conducted and as proposed to be conducted, and to execute, deliver and perform its obligations under this Agreement. All acts required to be taken by the Company to enter into this Agreement and to carry out the Transactions have been properly taken. This Agreement constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with the terms hereof, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, and (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

 

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SECTION 5.03. Authorization, Execution and Enforceability. The execution, delivery and performance by the Company of this Agreement and the Parent Shareholders Agreement have been duly authorized by all necessary corporate or other action on the part of the Company and its respective shareholders. This Agreement and the Parent Shareholders Agreement are legal, valid and binding obligations of the parties thereto, enforceable in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, and (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

SECTION 5.04. Consents. No consent of, notice to, or filing with any Governmental Authority or any other Person, including any creditor or shareholder of the Company, is required to be made or obtained in connection with the execution, delivery and performance by any party, other than from (i) the Parties, (ii) certain of their respective officers and directors in their personal capacities in connection with the CFO Employment Agreement and the Indemnity Agreements, and (iii) Burnham and Gardner, of this Agreement or the Parent Shareholders Agreement, or the Transactions, or as a condition to the legality, validity or enforceability of this Agreement or the Parent Shareholders Agreement

SECTION 5.05. No Conflicts. The execution and delivery of this Agreement and the Parent Shareholders Agreement and the consummation of the Transactions will not, directly or indirectly (with or without notice or lapse of time): (a) breach any provision of any of the Company Governing Documents; (b) breach or give any Governmental Authority or other Person the right to challenge any of the Transactions contemplated by the Agreement or the Parent Shareholders Agreement, or to exercise any remedy or obtain any relief under any Law to which the Company and their respective assets may be subject; (c) contravene, conflict with or result in a violation or breach of any of the terms or requirements of, or give any Governmental Authority the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by the Company; (d) violate or breach any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or payment under, or to cancel, terminate or modify, any contract related to the grant or transfer of land use rights for the projects (collectively, the “Company Contracts”); (e) result in the imposition or creation of any Lien upon or with respect to the assets of the Company; or (f) require the consent of any third party or any Governmental Body under any Law.

SECTION 5.06. Subsidiaries; Operating Companies. The Company has no direct Subsidiaries other than the WFOE, the WFOE has no direct Subsidiaries other than Henan Xinyuan, Henan Xinyuan has no direct Subsidiaries other than the Operating Companies, and none of the Operating Companies (other than Henan Xinyuan) has any Subsidiaries. The Company owns all of the equity of the WFOE, the WFOE owns all of the equity of Henan Xinyuan, and Henan Xinyuan owns all of the equity of the Operating Companies.

 

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SECTION 5.07. Capitalization. The authorized share capital of the Company consists of 450,000,000 Common Shares, of which 75,704,379 are outstanding on the date hereof, and 50,000,000 Preferred Shares, of which 30,805,400 are outstanding on the date hereof. All of the outstanding Common Shares and Preferred Shares have been duly authorized and validly issued, and are fully paid. None of the outstanding Common Shares or Preferred Shares was issued in violation of the Securities Act or any other Law.

SECTION 5.08. OFAC Compliance.

(a) None of the Company nor its Subsidiaries is an OFAC Sanctioned Person. Each of the Company and its Subsidiaries, and each of their respective Affiliates are in compliance with, and have not previously violated, the USA Patriot Act of 2001, as amended, and all other applicable U.S., Cayman Islands, and PRC anti-money laundering laws and regulations. None of (i) the Transactions or (ii) the execution, delivery and performance of this Agreement or the Parent Shareholders Agreement, or the fulfillment of the terms hereof or thereof, will result in a violation by anyone, including the Stockholders, of any of the OFAC Sanctions or of any anti-money laundering laws of the United States, Cayman Islands, or the PRC.

(b) For the purposes of Section 5.08 and 6.09:

(i) “OFAC Sanctions” means any sanctions program administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”) under authority delegated to the Secretary of the Treasury by the President of the United States or provided to the Secretary by statute, and any order or license issued by, or under authority delegated by, the President or provided to the Secretary by statute in connection with a sanctions program thus administered by OFAC. For ease of reference, and not by way of limitation, OFAC Sanctions programs are described on OFAC’s website at www.treas.gov/ofac.

(ii) “OFAC Sanctioned Person” means any government, country, corporation or other entity, group or individual with whom or which the OFAC Sanctions prohibit a U.S. Person from engaging in transactions, and includes without limitation any individual or corporation or other entity that appears on the current OFAC list of Specially Designated Nationals and Blocked Persons (the “SDN List”). For ease of reference, and not by way of limitation, OFAC Sanctioned Persons other than governments and countries can be found on the SDN List on OFAC’s website at www.treas.gov/offices/enforcement/ofac/sdn.

(iii) “U.S. Person” means any U.S. citizen, permanent resident alien, entity organized under the laws of the United States (including foreign branches), or any person (individual or entity) in the United States, and, with respect to the Cuban Assets Control Regulations, also includes any corporation or other entity that is owned or controlled by one of the foregoing, without regard to where it is organized or doing business.

 

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SECTION 5.09. Solvency. Immediately prior to, and immediately subsequent to, the Closing, the Company will be solvent. For purposes of this Agreement, “solvent” shall mean, with respect to any Person, (i) the fair value of the property of such Person is greater than the total amount of liabilities (including contingent liabilities) of such Person, (ii) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such person on its debts as they become absolute and matured, (iii) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person’s property would constitute an unreasonably small capital, and (iv) such Person has the ability to pay its debts as they become due, and does not intend to, or believe or reasonably should have believed that it will, incur debts beyond its ability to repay as they become due.

SECTION 5.10. U.S. Foreign Corrupt Practices Act. None of the Company, the Subsidiaries, nor any their respective Affiliates, directors, officers, agents or employees has made or is currently making, directly or indirectly, any payment or promise to pay, or gift or promise to give or authorized such a promise or gift, of any money or anything of value, directly or indirectly, to (a) any foreign official (as such term is defined in the U.S. Foreign Corrupt Practices Act (the “FCPA”)) for the purpose of influencing any official act or decision of such official or inducing him or her to use his or her influence to affect any act or decision of a governmental authority or (b) any foreign political party or official thereof, candidate for foreign political office, or official of a state-controlled entity or public international organization, for the purpose of influencing any official act or decision of such party, official or candidate or inducing such party, official or candidate to use his, her or its influence to affect any act or decision of a foreign governmental authority, in the case of both (a) and (b) above in order to assist the Company, its Subsidiaries or any of their respective Affiliates to obtain or retain business for, or direct business to the Company, its Subsidiaries or any of their respective Affiliates, as applicable. None of the Company, its Subsidiaries, nor any their respective Affiliates has made or is currently making any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of funds or received or retained any funds in violation of any law, rule or regulation.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF THE PARENT

The Parent represents and warrants to each of the Stockholders and the Company that:

SECTION 6.01. Organization, Good Standing and Qualification. The Parent is a company duly organized, validly existing and in good standing under the laws of the Cayman Islands and is duly qualified to do business as a foreign company in each additional jurisdiction where the failure to so qualify would have a Material Adverse Effect.

SECTION 6.02. Power and Authority. The Parent has all requisite power and authority to own its properties and to carry on its business as now being conducted

 

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and as proposed to be conducted, and to execute, deliver and perform its obligations under this Agreement. All acts required to be taken by the Parent to enter into this Agreement and to carry out the Transactions have been properly taken. This Agreement constitutes a legal, valid and binding obligation of the Parent, enforceable against the Parent in accordance with the terms hereof, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, and (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

SECTION 6.03. Authorization. Execution and Enforceability.

(a) The execution, delivery and performance by the Parent of this Agreement and the Parent Shareholders Agreement have been duly authorized by all necessary corporate or other action on the part of the Parent and its respective shareholders. This Agreement and the Parent Shareholders Agreement are legal, valid and binding obligations of the parties thereto, enforceable in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, and (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

(b) As of the date of Closing, the (i) issuance and sale to each of Blue Ridge China, EI, Zhang and Yang of the Parent Preferred Shares and the Parent Common Shares, (ii) the issuance and sale to each of the Investors of the Parent Investor Warrants, (iii) the issuance of the Parent Investor Warrant Shares upon exercise of the Parent Investor Warrants, (iv) the issuance and sale to each of Burnham and Gardner of the Parent Burnham Warrants, (v) the issuance of the Parent Burnham Warrant Shares upon exercise of the Parent Burnham Warrants, (vi) the issuance of the Parent Common Shares upon conversion of the Parent Preferred Shares and, (vii) the issuance of the Parent Investor Warrants Shares, and (viii) the issuance of the Notes to Blue Ridge China and EI, has been duly authorized and approved by all necessary corporate action of Parent and none of (i) through (viii) above shall, when performed by Parent, violate, conflict with or result in a breach of (A) any of the terms or provisions of the Parent Memorandum of Association, (B) any Law or Order applicable to Parent currently in force, or (C) any existing order or decree of any Governmental Body. Each of the Parent Preferred Shares, the Parent Common Shares and the Parent Investor Warrant Shares, when issued by the Company pursuant to this Agreement or upon (x) the exercise of the Parent Investor Warrants or the Parent Burnham Warrants or (y) the conversion of the Parent Preferred Shares, will be validly issued as fully paid and non-assessable and will be free and clear of any Liens other than those imposed by the holders thereof or pursuant to the Parent Shareholders Agreement or the Parent Memorandum of Association.

SECTION 6.04. Consents. No consent of, notice to, or filing with any Governmental Authority or any other Person, including any creditor or shareholder of the Parent, is required to be made or obtained in connection with the execution, delivery and

 

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performance by any party, other than from (i) the Parties, (ii) certain of their respective officers and directors in their personal capacities in connection with the CFO Employment Agreement and the Indemnity Agreements, and (iii) Burnham and Gardner, of this Agreement or the Parent Shareholders Agreement, or the Transactions, or as a condition to the legality, validity or enforceability of this Agreement or the Parent Shareholders Agreement, or the offer, issuance, sale or delivery of the Parent Securities, except (i) filing of the Parent Memorandum of Association with the Cayman Islands Registrar of Companies, and (ii) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Parent Securities under applicable U.S. federal and state securities laws or the securities laws of the Cayman Islands or any other jurisdiction.

SECTION 6.05. No Conflicts. The execution and delivery of this Agreement and the Parent Shareholders Agreement will not, directly or indirectly (with or without notice or lapse of time): (a) breach any provision of any of the Parent’s Governing Documents; (b) breach or give any Governmental Authority or other Person the right to challenge any of the Transactions contemplated by the Agreement or the Parent Shareholders Agreement, or to exercise any remedy or obtain any relief under any Law to which the Parent and its respective assets may be subject; (c) contravene, conflict with or result in a violation or breach of any of the terms or requirements of, or give any Governmental Authority the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by the Parent; (d) violate or breach any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or payment under, or to cancel, terminate or modify, any Parent Contract; (e) result in the imposition or creation of any Lien upon or with respect to the assets of the Parent; or (f) require the consent of any third party or Governmental Body under any Law.

SECTION 6.06. Subsidiaries. The Parent does not own, directly or indirectly, any capital stock, membership interest, partnership interest, joint venture interest or other equity interest in any Person except for the Company.

SECTION 6.07. Capitalization. The authorized share capital of the Parent consists of 450,000,000 Parent Common Shares, of which 1 Parent Common Share is outstanding on the date hereof, and 50,000,000 Parent Preferred Shares, of which none are outstanding on the date hereof. The outstanding Parent Common Share has been duly authorized and validly issued, and are fully paid. The outstanding Parent Common Share was not issued in violation of the Securities Act or any other Law. Parent has reserved from its duly authorized capital stock a number of Parent Common Shares for issuance of the Parent Common Shares issuable upon (x) exercise of the Parent Investor Warrants or the Parent Burnham Warrants, or (y) the conversion of the Parent Preferred Shares at least equal to the number of Parent Common Shares issuable pursuant to such instruments as of the Closing Date.

SECTION 6.08. Material Liabilities. The Parent was incorporated as an exempted company under the Companies Law (2004 Revision) of the Cayman Islands on March 26, 2007 and has conducted no business or operations as of the date hereof. The Parent has no assets or liabilities on the date hereof and at Closing, its only assets shall be the Company Stock.

 

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SECTION 6.09. OFAC Compliance.

(a) The Parent is not an OFAC Sanctioned Person. The Parent and its respective Affiliates are in compliance with, and have not previously violated, the USA Patriot Act of 2001, as amended, and all other applicable U.S. and Cayman Islands anti- money laundering laws and regulations. None of (i) the Transactions or (ii) the execution, delivery and performance of this Agreement or the Parent Shareholders Agreement, or the fulfillment of the terms hereof or thereof, will result in a violation by anyone, including the Stockholders, of any of the OFAC Sanctions or of any anti-money laundering laws of the United States or the Cayman Islands.

ARTICLE VII

DELIVERIES

SECTION 7.01. Deliveries of the Stockholders.

(a) At Closing, each Stockholder is delivering to the Parent this Agreement, duly executed by the Stockholder.

(b) At or prior to the Closing, each Stockholder shall deliver to the Parent:

(i) certificates representing its Company Stock; and

(ii) duly executed stock powers for transfer by the Stockholder of its Company Stock to the Parent.

SECTION 7.02. Deliveries of the Company. At Closing, the Company is delivering to the Parent this Agreement, duly executed by the Company.

SECTION 7.03. Deliveries of the Investors.

(a) At Closing, each Investor is delivering to the Company for cancellation;

(i)    its Investor Warrants; and

(ii)    its Notes.

SECTION 7.04. Deliveries of the Parent.

(a) At Closing, the Parent is delivering

(i) to each Stockholder and to the Company, this Agreement, duly executed by Parent;

 

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(ii) to each Investor, the Parent Investor Warrants issued to such Investor; and

(iii) to each Investor, the Parent Note issued to such Investor.

(b) As soon as reasonably practicable, but in no event later than five (5) Business Days following the Closing, the Parent shall deliver to each Stockholder, certificates representing the Parent Stock issued to such Stockholder as set forth on Exhibit A.

ARTICLE VIII

CONDITIONS TO STOCKHOLDERS’ AND COMPANY’S CLOSING OBLIGATIONS

The obligations of the Stockholders and the Company to consummate the Transactions to be effected at the Closing are subject to the fulfillment or waiver on or before the Closing Date of each of the conditions set forth in this Article VIII.

SECTION 8.01. Accuracy of Representations. All representations and warranties of the Parent in this Agreement shall have been accurate in all material respects as of the date of this Agreement, and shall be accurate in all material respects as of the time of the Closing Date as if made on and as of such date.

SECTION 8.02. Performance of Covenants. All of the covenants and obligations that the Parent is required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been duly performed and complied with in all material respects.

SECTION 8.03. No Adverse Proceedings. There shall not be existing or threatened against any Stockholder, the Company or the Parent by any Governmental Body any action, claim, suit or other proceeding involving any challenge to, or seeking damages or other relief in connection with, any of the Transactions, or that may have the effect of preventing, delaying, making illegal, imposing limitations or conditions on or otherwise interfering with the Transactions.

SECTION 8.04. Certain Documents. As of the Closing Date, the Parent Shareholders Agreement shall have been duly executed and delivered by the parties thereto, in substance and form satisfactory to the Stockholders and the Company, and such agreement shall be in full force and effect and filed, as required or appropriate, with applicable Governmental Authorities, and no term or condition thereof shall have been supplemented, amended, modified or waived without the Stockholders’ prior written consent, and any transactions contemplated thereby shall have been consummated (or will be consummated concurrently with the Closing) in accordance with the terms and conditions thereof.

SECTION 8.05. Officer’s Certificate. The Parent shall have delivered to each of the Stockholders and the Company a certificate of the President of the Parent, dated the Closing Date, certifying as to the satisfaction of the conditions set forth in Section 8.01 through Section 8.04.

 

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SECTION 8.06. Board of Directors and Officers. The Directors (or such other persons designated by the Investors) and Zhang, Yang, Executive and Mr. Cui Yong shall have been elected to serve as directors on the board of directors of the Parent, and (b) Zhang and Executive shall have been appointed to serve as Chief Executive Officer and Chief Financial Officer of the Parent, respectively, and each Stockholder shall have received a certificate issued by the Secretary of the Company, reasonably satisfactory to the Stockholders, certifying as to the foregoing and attaching copies of required resolutions, and other evidence of effecting the forgoing shall have been delivered to the Stockholders.

SECTION 8.07. Parent Equity Incentive Plan. The Parent shall have implemented the Parent Equity Incentive Plan.

SECTION 8.08. No Conflict. Neither the consummation nor the performance of any of the Transactions will, directly or indirectly (with or without notice or lapse of time), contravene or conflict with or result in a violation of or cause any Stockholder or the Company to suffer any adverse consequence under any applicable Law or Order.

SECTION 8.09. Secretary’s Certificates. The Parent shall have delivered to each of the Stockholders a certificate of the Secretary of the Parent, dated the Closing Date, attaching (i) correct and complete copies of the Governing Documents of the Parent then in effect, (ii) correct and complete copies of all resolutions of the Sole Director of the Parent relating to the Transactions, and a certificate of good standing of the Parent issued by the applicable Governmental Body no earlier than 10 Business Days before the Closing Date.

SECTION 8.10. Opinion of Counsel. On the Closing Date, each Stockholder shall have received from Maples and Calder, counsel to the Parent, an opinion addressed to the Stockholders, in the form attached hereto as Exhibit G, dated as of the Closing Date.

SECTION 8.11. Proceedings and Documents. As of the Closing Date, all corporate and other proceedings taken or to be taken in connection with the Transactions and all documents incidental thereto shall be reasonably satisfactory in form and substance to the Stockholders and their counsel, and the Stockholders and their counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.

SECTION 8.12. Burnham Warrants. The Parent Burnham Warrants shall have been issued to Burnham and Gardner.

 

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SECTION 8.13. Deliveries. The deliveries specified in Sections 7.02 and 7.04(a) shall have been made by the Company and the Parent, respectively.

ARTICLE IX

CONDITIONS TO PARENT’S CLOSING OBLIGATIONS

The obligations of the Parent to consummate the Transactions to be effected at the Closing are subject to the fulfillment or waiver on or before the Closing Date of each of the conditions set forth in this Article IX.

SECTION 9.01. Accuracy of Representations. All representations and warranties of the Stockholders and the Company in this Agreement shall have been accurate in all material respects as of the date of this Agreement, and shall be accurate in all material respects as of the time of the Closing Date as if made on and as of such date.

SECTION 9.02. Performance of Covenants. All of the covenants and obligations that the Stockholders and Company are required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been duly performed and complied with in all material respects.

SECTION 9.03. No Adverse Proceedings. There shall not be existing or threatened against any the Parent by any Governmental Body any action, claim, suit or other proceeding involving any challenge to, or seeking damages or other relief in connection with, any of the Transactions, or that may have the effect of preventing, delaying, making illegal, imposing limitations or conditions on or otherwise interfering with the Transactions.

SECTION 9.04. Certain Documents. As of the Closing Date, the Parent Shareholders Agreement shall have been duly executed and delivered by the parties thereto, in substance and form satisfactory to the Parent, and such agreement shall be in full force and effect and filed, as required or appropriate, with applicable Governmental Authorities, and no term or condition thereof shall have been supplemented, amended, modified or waived without the Parent’s prior written consent, and any transactions contemplated thereby shall have been consummated (or will be consummated concurrently with the Closing) in accordance with the terms and conditions thereof.

SECTION 9.05. Cancellation or Termination of Certain Documents. As of the Closing Date, each of the following documents shall have been duly terminated or cancelled, as the case may be, by the parties thereto, each in substance and form satisfactory to the Parent, in accordance with the terms and conditions thereof:

(a) the Investor Warrants;

(b) the Notes;

(c) the Burnham Warrants;

 

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(d) the Zhang Yong Warrant;

(e) the Shareholders Agreement; and

(f) the Equity Incentive Plan.

SECTION 9.06. Officer’s Certificate. Each of the Company and any Stockholder that is an entity shall have delivered to the Parent a certificate of the President of the Parent, dated the Closing Date, certifying as to the satisfaction of the conditions set forth in Section 9.01 through Section 9.03.

SECTION 9.07. No Conflict. Neither the consummation nor the performance of any of the Transactions will, directly or indirectly (with or without notice or lapse of time), contravene or conflict with or result in a violation of or cause the Parent to suffer any adverse consequence under any applicable Law or Order.

SECTION 9.08. Secretary’s Certificates. The Company shall have delivered to the Parent a certificate of the Secretary of the Company, dated the Closing Date, attaching (i) correct and complete copies of the Company Governing Documents then in effect, (ii) correct and complete copies of all resolutions of the Company relating to the Transactions, (iii) correct and complete copies of the Company’s register of members and (iv) a certificate of good standing of the Company issued by the applicable Governmental Body no earlier than 10 Business Day before the Closing Date.

SECTION 9.09. Proceedings and Documents. As of the Closing Date, all corporate and other proceedings taken or to be taken in connection with the Transactions and all documents incidental thereto shall be reasonably satisfactory in form and substance to the Parent and its counsel, and the Parent and its counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.

SECTION 9.10. Deliveries. The deliveries specified in Sections 7.01, 7.02 and 7.03 shall have been made by the Stockholders, the Company and the Investors respectively.

ARTICLE X

COVENANTS

SECTION 10.01. Required Consents. As promptly as practicable after the date of this Agreement, each of the Stockholders, the Company and the Parent shall make all filings required by Law to be made by it in order to consummate the Transactions, and shall cooperate with each other with respect to all filings that the Parent elects to make or shall be required by Law to make in connection with the Transactions.

SECTION 10.02. Notification. Between the date of this Agreement and the Closing Date, each Party shall promptly notify the other Parties in writing if such Party becomes aware of (a) any fact or condition that makes any of its representations and

 

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warranties untrue as of the date of this Agreement, (b) the occurrence after the date of this Agreement of any fact or condition that would make any of its representations and warranties untrue had such representation or warranty been made as of the date of the occurrence of such fact or condition, (c) any breach of its covenants in this Agreement, or (d) any fact or condition that could reasonably be expected to make the satisfaction of the conditions in Article VIII or Article IX unlikely or impossible.

SECTION 10.03. Tax Free Reorganization. Each of the Parent and the Company shall take all actions, including, without limitation, the execution and filing (within thirty (30) days following the Closing Date) with the Internal Revenue Service of Form 8832 “Entity Classification Election” in respect of the Company (in form and substance reasonably satisfactory to the Investors), reasonably necessary to implement the Transactions so that the Transactions qualify as a tax-free reorganization for United States federal income tax purposes. Notwithstanding the foregoing, neither the Parent nor the Company shall be required to incur unreasonable costs or expenses in fulfilling their obligations under this Section 10.03.

SECTION 10.04. Certain Procedures. From and after the Closing Date, the Parent and the Company shall take all actions, including, without limitation, the determination and implementation of reasonable operating procedures for the boards of directors and management of the Parent and the Company, reasonably necessary to mitigate the risk that either the Parent or the Company would be deemed to be a resident of the PRC for tax purposes or would otherwise become subject to taxation in the PRC or by applicable PRC Governmental Bodies. The Parent, the Company and each of their respective Affiliates shall additionally take all actions reasonably necessary, including, without limitation, establishing one or more wholly-owned special purpose vehicles outside of the PRC, to mitigate tax exposures and minimize taxation relating to the contribution or repatriation of capital, loans, income or any other payments by and between or among them. Notwithstanding the foregoing, neither the Parent nor the Company nor any of their respective Affiliates shall be required to incur unreasonable costs or expenses in fulfilling their obligations under this Section 10.04.

SECTION 10.05. Reasonable Best Efforts.

(a) Each of the Stockholders and the Company shall use its reasonable best efforts to cause the conditions in Article VIII to be satisfied; and

(b) The Parent shall use its reasonable best efforts to cause the conditions in Article IX to be satisfied.

ARTICLE XI

TERMINATION

SECTION 11.01. Termination Events. By notice given prior to the Closing, this Agreement may be terminated as follows:

(a) by mutual agreement of the Stockholders, Company and Parent;

 

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(b) by each of the Stockholders to itself, if a material breach of any provision of this Agreement has been committed by the Parent, which breach shall not be cured within a period of seven (7) Business Days of receipt of written notice thereof from such Stockholder;

(c) by the Company, if a material breach of any provision of this Agreement has been committed by a Stockholder or the Parent, which breach shall not be cured within a period of seven (7) Business Days of receipt of written notice thereof from the Company, which notice shall be sent to each of the Stockholders and the Parent;

(d) by the Parent, if a material breach of any provision of this Agreement has been committed by a Stockholder or the Company, which breach shall not be cured within a period of seven (7) Business Days of receipt of written notice thereof from the Parent, which notice shall be sent to each of the Stockholders and the Company; and

(e) by the Stockholders, the Company or the Parent if the Closing has not occurred on or before April 30, 2007, provided that such right of termination shall not be exercisable by any party which is then in material breach of this Agreement.

SECTION 11.02. Effect of Termination, Each party’s right of termination under Section 11.01 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of such right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 11.01, all obligations of the parties under this Agreement will terminate, except that the obligations of the parties in this Section 11.02 and Article XII shall survive the termination of this Agreement; provided, that no such termination shall relieve any party of liability for any breach of this Agreement.

ARTICLE XII

MISCELLANEOUS

SECTION 12.01. Entire Agreement. This Agreement, together with the Parent Shareholders Agreement, merges all previous negotiations and agreements among the Parties hereto, either oral or written, and constitutes the entire agreement and understanding among the Parties with respect to the subject matter hereof and thereof.

SECTION 12.02. Amendments and Waivers. No amendment, modification, or waiver of any provision of this Agreement shall be valid except by an agreement in writing executed by the Parties hereto. Except as otherwise expressly set forth herein, no failure or delay by any Party hereto in exercising any right, power or privilege hereunder (and no course of dealing between or among any of the parties) shall operate as a waiver of any such right, power or privilege. No waiver of any default on any one occasion shall constitute a waiver of any subsequent or other default. No single or partial exercise of any such right, power or privilege shall preclude the further or full exercise thereof.

SECTION 12.03. Severability. If any provision of this Agreement or the application thereof to any Person or circumstance shall be invalid or unenforceable to any

 

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extent, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by Law, but only as long as the continued validity, legality and enforceability of such provision or application does not materially (a) alter the terms of this Agreement, (b) diminish the benefits of this Agreement or (c) increase the burdens of this Agreement, for any Person.

SECTION 12.04. Assignment. The rights and obligations of the Parties hereunder shall be binding upon and inure to the benefit of the Parties hereto, their successors and permitted assigns. This Agreement may not be assigned (by operation of Law or otherwise) without the prior written consent of the Parties.

SECTION 12.05. Third Parties. Nothing herein, expressed or implied, is intended to or shall confer on any Person other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement.

SECTION 12.06. Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or sent by fax, overnight courier or electronic mail (provided that communications sent by electronic mail are concurrently sent by fax or overnight courier) in accordance with this Section 12.06, to the following addresses:

If to Blue Ridge China to:

Blue Ridge Capital Offshore Holdings LLC

660 Madison Avenue, 20th Floor

New York, New York 10021

U.S.A.

Attention: Richard S. Bello

Fax: (212)446-6201

E-mail: rbello@blueridgelp.com

with required copy (which shall not constitute notice) to:

Blue Ridge Investment Consulting (Beijing) Co., Ltd.

3701 Tower A, Beijing Fortune Plaza

No. 7 Dongsanhuan Rd, Chaoyang District

Beijing, 100020, China

Attention: Justin Tang

Fax: +86(10)6530-8839

E-mail: justin@br-china.com

 

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-and -

Friedman Kaplan Seiler & Adelman LLP

1633 Broadway, 46th Floor

New York, New York 10019

U.S.A.

Attention: Gary D. Friedman, Esq.

Fax: (212)833-1250

E-mail: gfriedman@fklaw.com

If to EI to:

EI Fund II China, LLC

c\o Equity International

Two North Riverside Plaza

Suite 700

Chicago, Illinois 60606

Attention: Ira Chaplik

Fax: (312)454-0157

E-mail: ichaplik@egii.com

with a required copy (which shall not constitute notice) to:

EI Fund II China, LLC

c\o Equity International

Two North Riverside Plaza

Suite 700

Chicago, Illinois 60606

Attention: Brian K. Richter

Fax: (312)454-0157

E-mail: brichter(g)egii.com

If to Zhang or Yang:

Zhang Yong and Yang Yuyan

Xinyuan Real Estate Holdings, Ltd.

No. 18 Xinyuan Road

Zhengzhou, Henan 450011

Attention: Zhang Yong

Fax: +86-0371-65651686

E-mail: zyong63@163.com

 

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with a required copy (which shall not constitute notice) to:

Baker & McKenzie LLP

BCE Place, 181 Bay Street, Suite 2100

Toronto, Canada M5J 2T3

Attention: Omer Ozden, Esq.

Fax: (416)863-6275

Email: omer.ozden@bakernet.com

- and -

Trans Asia Lawyers Beijing

Suite 2218, China World Tower 1

1 Jianguomenwai Avenue

Beijing, 100004, China

Attention: Philip Qu, Esq.

Fax: (8610)6505 8189

E-mail: pqu@TransAsiaLawyers.com

If to the Company to:

Xinyuan Real Estate, Ltd.

No. 18 Xinyuan Road

Zhengzhou, Henan 450011

Attention: Zhang Yong

Fax: +86-0371-65651686

E-mail: zyong63@163.com

with a required copy (which shall not constitute notice) to:

Baker & McKenzie LLP

BCE Place, 181 Bay Street, Suite 2100

Toronto, Canada M5J 2T3

Attention: Omer Ozden, Esq.

Fax: (416)863-6275

Email: omer.ozden@bakernet.com

- and-

TransAsia Lawyers Beijing

Suite 2218, China World Tower 1

1 Jianguomenwai Avenue

Beijing, 100004, China

Attention: Philip Qu, Esq.

Fax: (8610)6505 8189

E-mail: pqu@TransAsiaLawyers.com

 

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If to the Parent:

Xinyuan Real Estate Co., Ltd.

No. 18 Xinyuan Road

Zhengzhou, Henan 450011

Attention: Zhang Yong

Fax: +86-0371-65651686

E-mail: zyong63@163.com

with a required copy (which shall not constitute notice) to:

Baker & McKenzie LLP

BCE Place, 181 Bay Street, Suite 2100

Toronto, Canada M5 J 2T3

Attention: Omer Ozden, Esq.

Fax: (416)863-6275

Email: omer.ozden@bakernet.com

- and -

Trans Asia Lawyers Beijing

Suite 2218, China World Tower 1

1 Jianguomenwai Avenue

Beijing, 100004, China

Attention: Philip Qu, Esq.

Fax: (8610)6505 8189

E-mail: pqu@TransAsiaLawyers.com

The burden of proving notice when notice is transmitted by fax or electronic mail shall be the responsibility of the party providing such notice.

SECTION 12.07. Independent Nature of Stockholders’ Obligations and Rights. The obligations of each Stockholder under this Agreement are several and not joint with the obligations of any other Stockholder, and no Stockholder shall be responsible in any way for the performance of the obligations of any other Stockholder under this Agreement. The decision of each Stockholder to acquire Shares pursuant to this Agreement has been made by such Stockholder independently of any other Stockholder. Nothing contained herein, and no action taken by any Stockholder pursuant hereto, shall be deemed to constitute the Stockholders as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Stockholders are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated herein. Each Stockholder acknowledges that no other Stockholder has acted as agent for such Stockholder in connection with making its investment hereunder and that no Stockholder will be acting as agent of such Stockholder in connection with monitoring its investment in the Shares or enforcing its rights under this Agreement. Each Stockholder shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it

 

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shall not be necessary for any other Stockholder to be joined as an additional party in any proceeding for such purpose. Each of the Company and Parent acknowledge that each of the Stockholders has been provided with this same Agreement for the purpose of closing a transaction with multiple Stockholders and not because it was required or requested to do so by any Stockholder.

SECTION 12.08. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York without application of principles of conflicts of law.

SECTION 12.09. Specific Performance. The Parties agree that irreparable damage will occur in the event that either Party fails to consummate the Transactions in accordance with the terms of this Agreement, and that the Parties shall therefore be entitled to specific performance in such event, in addition to any other remedy at law or in equity.

SECTION 12.10. Submission to Jurisdiction. Any dispute arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be resolved by arbitration. The arbitration shall be administered by the International Chamber of Commerce (the “ICC”) in accordance with its commercial arbitration rules then in effect (the “Rules”). The place of arbitration shall be Hong Kong, Special Administrative Region. The number of arbitrators shall be three. The Company and the Parent, on the one hand, and the Stockholders, on the other hand, shall each appoint one arbitrator, and the two party-appointed arbitrators shall endeavor promptly to appoint the chairperson of the arbitral tribunal. To the extent reasonably feasible, the chairperson and each other arbitrator shall be or shall have been a judge, executive or professional with extensive experience with international commercial transactions that shall be willing to apply the laws of the State of New York to the substance of the dispute. If either the Company and the Parent, on the one hand, or the Stockholders, on the other hand, fail to appoint their respective arbitrator within thirty days after receipt by respondent(s) of the demand for arbitration or if the two party-appointed arbitrators are unable to appoint the chairperson of the arbitral tribunal within thirty days of the appointment of the second arbitrator, then the ICC shall appoint such arbitrator or the chairperson, as the case may be, in accordance with the listing, ranking and striking provisions of the rules. The arbitrators shall apply the law of the State of New York to the substance of the dispute and the arbitration proceedings shall be conducted in English. The arbitrators shall not award punitive, exemplary, multiple or consequential damages. In the absence of fraud, any decision and award rendered by the arbitrators shall be final and binding on all parties, shall not be subject to appeal except as provided by law and may be entered and enforced in any court having jurisdiction. The parties hereby consent to the exclusive jurisdiction of (i) the Supreme Court of the State of New York and the United States District Court for the Southern District of New York, and (ii) courts with appropriate jurisdiction to hear such matters in Hong Kong, Special Administrative Region, for temporary injunctive or other relief in aid of arbitration or to prevent irreparable harm and to the non-exclusive jurisdiction of such courts for enforcement of any award by the arbitrators. Without prejudice to such provisional remedies as may be available under the jurisdiction of such courts, the arbitral tribunal shall have full authority to grant provisional remedies

 

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and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal’s orders to that effect. Each party shall bear its own arbitration expenses, and the Company and Parent, on the one hand, and the Stockholders, on the other hand, shall pay one-half of the ICC’s and the chairperson’s fees and expenses, unless the arbitrators determine that it would be equitable if all or a portion of the prevailing party’s expenses should be borne by the other party.

SECTION 12.11. Interpretation. As all Parties have participated in the drafting of this Agreement, any ambiguity shall not be construed against either party as the drafter. Unless the context of this Agreement clearly requires otherwise, (a) “or” has the inclusive meaning frequently identified with the phrase “and/or”, (b) “including” has the inclusive meaning frequently identified with the phrase “including, but not limited to,” (c) references to “hereof,” “hereunder” or “herein” or words of similar import relate to this Agreement, (d) when a reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or a Section of this Agreement unless otherwise indicated, and (e) the terms defined hereunder shall have the meanings therein specified for all purposes of this Agreement, applicable to both the singular and plural forms of any of the terms defined herein. The section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the Parties and shall not in any way affect the meaning or interpretation of this Agreement. All terms and words used in this Agreement, regardless of the number and gender in which they are used, shall be deemed and construed to include any other number and any other gender as the context of this Agreement requires.

SECTION 12.12. Required Consents and Approvals. The Parties hereby agree that to the extent any approval or consent is required from any Party hereto to consummate the Transactions contemplated hereby, the Memorandum of Association and the Parent Shareholders Agreement, or to assign and assume the Assumed Agreements pursuant to Article III hereof, such Party’s execution of this Agreement shall constitute full and complete satisfaction of such approval or consent requirement from such Party.

SECTION 12.13. Further Actions. The Parties covenant that from time to time after the Closing, as and when requested by any Party, the other Party shall use reasonable best efforts to execute and deliver, or cause to be executed and delivered, all such documents and instruments and shall take, or cause to be taken, all such further or other actions, as such other Party may reasonably deem necessary or desirable to consummate Transactions and all other matters contemplated by this Agreement and the Parent Shareholders Agreement, including without limitation, the assignment and assumption of the Assumed Agreements pursuant to Article III hereof.

The Stockholders covenant that that immediately following the Closing, they shall use reasonable best efforts to cause the Parent and the Company to ratify the actions taken by the Parent or the Company, as the case may be, related to the Transactions and all other matters contemplated by this Agreement and the Parent Shareholders Agreement, including without limitation, the assignment and assumption of the Assumed Agreements pursuant to Article III hereof.

 

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SECTION 12.14. Counterparts. This Agreement may be executed in two or more counterparts, each of which when so executed shall be an original, but all of which together shall constitute one agreement. Facsimile signatures shall be deemed original signatures.

SECTION 12.15. Expenses. Within ten (10) business days after the Closing, the Company shall pay the Investors $50,000 as reimbursement for costs and expenses incurred in connection with the negotiation, execution, delivery and performance of this Agreement and the Parent Shareholder Agreement, and the consummation of the Transactions.

[SIGNATURE PAGES FOLLOW]

 

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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.

 

 

[Signature Page to Share Exchange and Assumption Agreement]

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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.

 

 

[Signature Page to Share Exchange and Assumption Agreement]

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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.

 

 

[Signature Page to Share Exchange and Assumption Agreement]

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[Signature Page to Share Exchange and Assumption Agreement ]

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EXHIBIT A

STOCKHOLDERS OF THE COMPANY

 

Name of Stockholder		Number and Class of Shares of Company Stock Being Exchanged		Number arid Class of Shares of Parent Stock to be Received by Stockholder
ZHANG, Yong		48,000,000 Common Shares		48,000,000 Common Shares
YANG, Yuyan		12,000,000 Common Shares		12,000,000 Common Shares
Blue Ridge China Partners, L.P.		9,422,627 Common Shares		9,422,627 Common Shares
EI Fund II China, LLC		6,281,752 Common Shares		6,281,752 Common Shares
Blue Ridge China Partners, L.P.		18,483,240 Series A Preferred Shares		18,483,240 Series A Preferred Shares
EI Fund II China, LLC		12,322,160 Series A Preferred Shares		12,322,160 Series A Preferred Shares

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EXHIBIT B

PARENT SHAREHOLDERS AGREEMENT

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EXHIBIT C

PARENT MEMORANDUM AND ARTICLES OF ASSOCIATION

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EXHIBIT D

PARENT BURNHAM WARRANTS

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EXHIBIT E

PARENT INVESTOR WARRANTS

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EXHIBIT F

PARENT NOTES

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EXHIBIT G

OPINION OF MAPLES & CALDER

Exhibit 10.10

EXECUTION VERSION

AMENDED AND RESTATED

SHAREHOLDERS AGREEMENT

AMONG

BLUE RIDGE CHINA PARTNERS, L.P.,

EI FUND II CHINA, LLC,

ZHANG YONG, YANG YUYAN,

XINYUAN REAL ESTATE, LTD.,

XINYUAN REAL ESTATE CO., LTD.

AND, TO THE EXTENT SET FORTH HEREIN,

BURNHAM SECURITIES INC. AND JOEL B. GARDNER

DATED AS OF OCTOBER 31, 2007

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AMENDED AND RESTATED

SHAREHOLDERS AGREEMENT

AMENDED AND RESTATED SHAREHOLDERS AGREEMENT (this “Agreement”), dated as of October 31, 2007, is among Blue Ridge China Partners, L.P., a Cayman Islands exempted limited partnership (“Blue Ridge China”), EI Fund II China, LLC, a Delaware limited liability company (“EI”), Zhang Yong, a PRC national, Yang Yuyan, a PRC national (together with Zhang Yong, the “Management Shareholders” and individually, a “Management Shareholder”), Xinyuan Real Estate Co., Ltd., a Cayman Islands company (the “Company”), Xinyuan Real Estate, Ltd., a Cayman Islands company (the “Xinyuan Subsidiary”) and, to the extent set forth herein, Burnham Securities Inc. and Joel B. Gardner (collectively the “Burnham Holders” and individually, a “Burnham Holder”).

WHEREAS, the Company, Xinyuan Subsidiary, Blue Ridge China, EI, the Management Shareholders and the Burnham Holders entered into a Shareholders Agreement, dated as of April 9, 2007 (the “Shareholders Agreement”);

WHEREAS, the Company, Xinyuan Subsidiary, Blue Ridge China, EI, the Management Shareholders and the Burnham Holders wish to amend and restate the Shareholders Agreement in its entirety.

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties agree, and the Shareholders Agreement is hereby amended and restated, as follows:

ARTICLE 1

DEFINITIONS

As used herein, unless the context requires a different meaning, the following terms shall have the following meanings:

“Additional Equity Offeree” has the meaning set forth in Section 4.3.

“Affiliate” means, with respect to a specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Person specified.

“Appraisal Procedure” means a procedure whereby independent accounting or investment banking firms of nationally recognized standing (each, an “Appraiser”) shall agree upon the Fair Market Value of securities or other property in the event that the Company and/or one or more Shareholders cannot reach agreement (for purposes of this definition, the party or parties that first invoke(s) the Appraisal Procedure is referred to, collectively, as the “first party” and the other party or parties to the dispute over Fair Market Value is referred to herein, collectively, as the “second party”). Within ten (10) days after the Appraisal Procedure is invoked, one Appraiser shall be chosen by the first party and a second Appraiser shall be chosen by the second party. If within thirty (30) days after appointment of the two Appraisers they are unable to agree upon the amount in question, an independent accounting or investment banking firm of nationally recognized standing shall be chosen to serve as a third Appraiser within ten

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(10) days thereafter by the mutual consent of such first two Appraisers or, if such first two Appraisers fail to agree upon the appointment of a third Appraiser (or if either party fails to appoint an Appraiser), such appointment shall be made by the American Arbitration Association, or any organization successor thereto, from a panel of arbitrators having experience in the appraisal of the type of property then the subject of appraisal. The decision of the third Appraiser so appointed and chosen shall be given within thirty (30) days after the selection of such third Appraiser. If three Appraisers shall be appointed and the determination of one Appraiser is disparate from the middle determination by more than twice the amount by which the other determination is disparate from the middle determination, then the determination of such Appraiser shall be excluded, the remaining two determinations shall be averaged and such average shall be binding and conclusive on the first party and the second party; otherwise the average of all three determinations shall be binding and conclusive on the first party and the second party. The costs of conducting any Appraisal Procedure shall be borne as follows: (i) the costs of the Appraiser designated by the first party shall be borne by the first party; (ii) the costs of the Appraiser designated by the second party shall be borne by the second party; (iii) other costs separately incurred by the first party and the second party shall be borne separately by them; and (iv) the costs of the third Appraiser, if any, shall be borne equally by the first party and the second party.

“Appraiser” has the meaning set forth in the definition of Appraisal Procedure.

“Blue Ridge China” has the meaning set forth in the preamble.

“Burnham Holder(s)” has the meaning set forth in the preamble.

“Burnham Threshold Shares” means, as to each Burnham Holder, 50% of the number of Equity Securities (or Common Shares issuable upon exercise of such Equity Securities) held by such Burnham Holder on the date hereof.

“Burnham Warrants” means the warrants issued by the Company to each of the Burnham Holders to purchase 926,586 Common Shares each.

“Capital Stock” means the shares of capital stock of any class or classes of the Company.

“Co-Sale Holder” has the meaning set forth in Section 2.3(c).

“Co-Sale Pro Rata Share” has the meaning set forth in Section 2.3(b).

“Committees” has the meaning set forth in Section 3.3(a).

“Common Shares” means Common Shares, par value $0.0001 per share, of the Company, and shall include any shares or other Equity Securities into which such Common Shares shall have been changed or any Equity Securities resulting from any reclassification of such Common Shares, and all other Equity Securities the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference.

“Company” has the meaning set forth in the preamble.

 

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“Company Group” means the Company, the WFOE and the Operating Companies, and any of the foregoing individually may sometimes be referred to as a “Member of the Company Group”.

“Company Indemnitee” has the meaning set forth in Section 5.8(b).

“Demand Registration” has the meaning set forth in Section 5.1(a).

“EI” has the meaning set forth in the preamble.

“Equity Incentive Plan” means the 2007 Equity Incentive Plan of the Company.

“Equity Registration Rights Agreement” means that certain Equity Registration Rights Agreement, dated as of April 13, 2007, by and among the Company, the holders of the Warrants and the holders of the Convertible Notes (in each case as defined therein).

“Equity Securities” means any equity securities of the Company, any security or obligation which is by its terms, directly or indirectly, convertible into or exchangeable or exercisable for equity securities of the Company, including the Series A Preferred Shares, the Common Shares, the Warrants, the Burnham Warrants and any option, warrant or other subscription or purchase right with respect to any Equity Security.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“Fair Market Value” means, as to any property or assets, the cash price at which a willing seller would sell and a willing buyer would buy such property or assets in an arm’s-length negotiated transaction without time constraints.

“FCPA” has the meaning set forth in Article 6.

“Fully Diluted Basis” means, in determining the number of Common Shares of any Shareholder or group of Shareholders deemed to be outstanding as of any date of determination, that such determination assumes the conversion, exercise or exchange, as the case may be, of all Equity Securities of such Shareholder or group of Shareholders that are then outstanding and are convertible, exercisable or exchangeable for Common Shares.

“GAAP” has the meaning set forth in Section 4.1(a)(i).

“Governmental Approval Extension” has the meaning set forth in Section 2.2(f).

“Holder” shall mean any Shareholder and any Person to whom the rights under Article 5 have been transferred or assigned pursuant to Section 5.11.

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder.

 

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“Immediate Family” means, with respect to any individual, his or her spouse, parents, spouse’s parents, siblings, any spouses of such siblings, children, stepchildren, adopted children and grandchildren.

“Investor Common Shares” means the 9,422,627 Common Shares and 6,281,752 Common Shares owned by Blue Ridge and EI, respectively, on the date hereof.

“Jiantou” means Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd.

“Management Shareholder Shares” has the meaning set forth in Section 2.3(a).

“Management Shareholders” has the meaning set forth in the preamble.

“Memorandum of Association” means the Amended and Restated Memorandum and Articles of Association of the Company, as amended from time to time.

“Notice” has the meaning set forth in Section 2.3(a).

“Offerors” has the meaning set forth in Section 5.1(a).

“Operating Company” has the meaning set forth in the Share Exchange and Assumption Agreement.

“Permitted Issuance” has the meaning set forth in Section 4.3.

“Permitted Transferees” has the meaning set forth in Section 2.3(d).

“Person” means any individual or entity, including any corporation, partnership, limited liability company, joint venture, trust, unincorporated organization and government or any department or agency thereof, and any other entity.

“Piggyback Registrations” has the meaning set forth in Section 5.2(a).

“Preferred Directors” has the meaning set forth in Section 3.1.

“Preferred Holders” means Blue Ridge China, EI and any transferee of the Equity Securities thereof pursuant to the terms of this Agreement.

“Preferred Majority” means, as of any date, Preferred Holders holding at least, for so long as Blue Ridge China and EI each hold their respective Preferred Threshold Shares, seventy-five percent (75%), and otherwise, fifty percent (50%) of the Subject Shares.

“Preferred Threshold Shares” means, as to Blue Ridge China or EI, fifty percent (50%) of the Subject Shares owned by it on the date hereof.

“Proposed Management Shareholder Transfer” has the meaning set forth in Section 2.3(a).

“Purchaser Indemnitee” has the meaning set forth in Section 5.8(a).

 

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“Qualified Public Offering” has the meaning ascribed to such term in the Memorandum of Association.

“Registrable Securities” means the Investor Common Shares, any Common Shares issued or issuable upon conversion of the Series A Preferred Shares or exercise of the Warrants or the Burnham Warrants and any Common Shares issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of the shares referenced above, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his rights under this Agreement are not assigned, and excluding Registrable Securities that have been sold in an offering registered under the Securities Act or the relevant securities laws of any applicable non-U.S. jurisdiction or in an open market transaction under Rule 144 of the Securities Act; provided that, for the purposes of Section 5.1 (Demand Registration) and Section 5.3 (S-3 Registration), the definition of Registrable Securities shall not include Common Shares issued or issuable upon exercise of the Burnham Warrants.

“Registration Expenses” has the meaning set forth in Section 5.7(a).

“Registration Statement” means a registration statement or a comparable document under the laws of any other jurisdiction.

“SEC” means the United States Securities and Exchange Commission and any successor agency, or the equivalent regulatory body of any other applicable jurisdiction.

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Section 2.2 Offer” has the meaning set forth in Section 2.2(a).

“Section 2.2 Offered Shares” has the meaning set forth in Section 2.2(a).

“Section 2.2 Proposed Transfer” has the meaning set forth in Section 2.2(a).

“Section 2.2 Purchase Period” has the meaning set forth in Section 2.2(b).

“Section 2.2 Selling Shareholder” has the meaning set forth in Section 2.2(a).

“Section 2.2 RoFR Closing” has the meaning set forth in Section 2.2(f).

“Section 2.2 RoFR Offerees” has the meaning set forth in Section 2.2(a).

“Section 2.2 RoFR Purchaser” has the meaning set forth in Section 2.2(b).

“Section 2.4 Offer” has the meaning set forth in Section 2.4(a).

“Section 2.4 Offered Shares” has the meaning set forth in Section 2.4(a)

“Section 2.4 Proposed Transfer” has the meaning set forth in Section 2.4(a).

 

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“Section 2.4 Purchase Period” has the meaning set forth in Section 2.4(b).

“Section 2.4 Selling Shareholder” has the meaning set forth in Section 2.4(a).

“Section 2.4 RoFR Closing” has the meaning set forth in Section 2.4(d).

“Securities Purchase Agreement” means that certain Securities Purchase Agreement, dated as of August 25, 2006, by and among Blue Ridge China, EI, the Management Shareholders and the Xinyuan Subsidiary.

“Selling Management Shareholder” has the meaning set forth in Section 2.3(a).

“Series A Preferred Shares” means the Series A Convertible Preferred Shares, par value $0.0001 per share of the Company, each having the rights, restrictions, privileges and preferences as set forth in the form of the Memorandum of Association.

“Share Exchange and Assumption Agreement” means the Share Exchange and Assumption Agreement dated as of April 9, 2007, by and among the Company, Xinyuan Subsidiary, Blue Ridge China, EI, and the Management Shareholders.

“Share Purchase Agreement” means that certain Share Purchase Agreement, dated as of November 18, 2006, by and among Blue Ridge China, EI, the Management Shareholders and the Xinyuan Subsidiary.

“Shareholders” means, collectively, Blue Ridge China, EI, the Management Shareholders, any transferee of Equity Securities pursuant to the terms of this Agreement and any other Person who becomes a party hereto, and each of the foregoing individually, a “Shareholder”.

“Significant Officers” means any chief executive officer, chief financial officer, general manager or other key managers and senior officers of any Member of the Company Group identified in writing by Preferred Holders holding at least seventy-five percent (75%) of the Subject Shares.

“Subject Shares” means the aggregate number (without duplication) of the following shares of capital stock of the Company: (a) Series A Preferred Shares; (b) Common Shares issued upon conversion of such Series A Preferred Shares; and (c) solely in the case of Blue Ridge China and EI, such number of the Investor Common Shares then owned by Blue Ridge China and EI, respectively, subject, in the case of clauses (a), (b) and (c), to adjustment for stock splits, reverse stock splits, combinations and the like; provided, however, that (subject to the following proviso) in any case in this Agreement in which the Subject Shares owned by a Preferred Holder are measured “on the date hereof”, Subject Shares shall mean the following aggregate number (without duplication) of the following shares of capital stock of the Company: (a) the Series A Preferred Shares owned by such Holder on the date hereof, (b) the Common Shares issued upon conversion of such Series A Preferred Shares following the date hereof, if any, and (c) solely in the case of Blue Ridge China and EI, the number of Investor Common Shares owned by Blue Ridge China and EI respectively, on the date hereof, subject, in the case of clauses (a), (b) and (c), to adjustment for stock splits, reverse stock splits, combinations and

 

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the like; provided, further, however, where Subject Shares are measured “on the date hereof”, if the Preferred Holder is a transferee of Blue Ridge China, EI or any transferee thereof, the measurement date of clauses (a) and (b) of the definition of Subject Shares in the immediately preceding proviso shall instead be the date on which such Preferred Holder originally acquired such shares rather than the date hereof.

“Subsidiary” means, as to any Person, a corporation or other entity whose shares of capital stock or other ownership interests having ordinary voting power to elect a majority of the directors of such corporation, or other Persons performing similar functions for such entity, are owned or controlled, directly or indirectly, by such Person.

“transfer” means any sale, assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift, transfer by bequest, devise or descent, or other transfer or disposition of any kind, including transfers pursuant to divorce or legal separation, transfers to receivers, levying creditors, trustees or receivers in bankruptcy proceedings, any short sale, collar, hedging or other derivative transaction that has the effect of materially changing the economic benefits and risks of ownership, or general assignments for the benefit of creditors, whether voluntary, involuntarily or by operation of law, directly or indirectly, of any Equity Securities.

“Transferee Agreement” has the meaning set forth in Section 2.1(c).

“Voting Shares” means Equity Securities the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or Persons performing similar functions).

“Warrants” means warrants issued by the Company to each of Blue Ridge China and EI, to purchase additional Series A Preferred Shares.

“WFOE” means Xinyuan Real Estate (Henan) Development, Ltd., a company organized under the laws of the PRC, which is a wholly foreign-owned enterprise 100% held by the Company under the laws of the PRC.

“Xinyuan Subsidiary” has the meaning set forth in the first recital.

“Xinyuan Subsidiary Shareholders Agreement” means the Shareholders Agreement, dated as of August 25, 2006, as amended as of November 21, 2006, among Xinyuan Subsidiary, Blue Ridge China, EI, the Management Shareholders, and the Burnham Holders.

“Zhang Yong Warrant” has the meaning set forth in Article 7.

ARTICLE 2

TRANSFERS OF CAPITAL STOCK

Section 2.1 General Restrictions on Transfer

(a) A Shareholder may not transfer any Equity Securities except in compliance with this Agreement.

 

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(b) A Shareholder that transfers any Equity Securities must deliver to the Company and the other Shareholders (i) except in the case of sales to the public after the consummation of a Qualified Public Officering, a notice describing in reasonable detail the proposed transfer, and (ii) subject to Section 2.4, if reasonably requested by the Company, an opinion of counsel to the Company to the effect that such transfer may be effected without registration under the Securities Act or any applicable securities laws of any state or any other jurisdiction, anywhere in the world.

(c) It shall be a condition to any transfer of Equity Securities (other than a transfer pursuant to a public offering approved by the Company’s Board of Directors) that the transferee agrees in writing to be bound by the provisions of this Agreement pursuant to the transferee agreement in the form set forth as Exhibit A (the “Transferee Agreement”). Upon becoming a party to this Transferee Agreement, the transferee shall be substituted for, and shall enjoy the same rights and be subject to the same obligations as, the transferring Shareholder hereunder with respect to the Equity Securities transferred by such Shareholder.

(d) Any transfer of Equity Securities made in violation of this Article 2 shall be null and void. The Company shall not, shall not be required, and shall not have the right to (i) transfer on its books any Equity Securities transferred in violation of any provisions of this Agreement, or (ii) treat as owner of such Equity Securities, or to accord the right to vote as such owner, or to pay dividends to, any transferee to whom such securities are transferred in violation of this Agreement.

(e) Notwithstanding anything to the contrary set forth in this Article 2 (but subject to Section 2.1(c)), the Management Shareholders shall not, except as set forth in Sections 2.3 (d)(iii) and 2.4 (h)(ii), and the Company shall cause any of its officers, directors, and employees who own Equity Securities not to (except in the case of sales to the public after the consummation of a Qualified Public Offering), transfer any Equity Securities without the prior written consent of the Preferred Majority which consent shall not be unreasonably withheld in the case of any transfer pursuant to Section 2.3(d). So long as Blue Ridge China or EI holds at least its Preferred Threshold Shares or the Burnham Holders hold at least their respective Burnham Threshold Shares, the Common Shares held by the Management Shareholders or a Permitted Transferee shall be subject to the co-sale provisions of Section 2.3.

(f) A transfer of the capital stock or other equity or voting interests in (a) a Management Shareholder, or (b) a Person that directly or indirectly owns equity or voting interests in a Management Shareholder, shall be deemed to be a transfer of the Equity Securities of such Management Shareholder, which transfer shall be subject to the provisions of Sections 2.1 and 2.3. In such event, the Management Shareholder shall be deemed to be the Selling Management Shareholder as referred to in Section 2.3(a) and the capital stock or equity interests proposed to be transferred shall be deemed to be the Management Shareholder Shares.

Section 2.2 Right of First Refusal on Series A Preferred Shares

(a) If a Preferred Holder (a “Section 2.2 Selling Shareholder”) desires to transfer (a “Section 2.2 Proposed Transfer”) all or any portion of its Equity Securities (the “Section 2.2 Offered Shares”), the Section 2.2 Selling Shareholder must first deliver to all other Preferred

 

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Holders (in each case so long as at the time of such notice, such Preferred Holder holds at least fifty percent (50%) of the Subject Shares owned by it on the date hereof) (the “Section 2.2 RoFR Offerees”), with a copy to the Company, a notice identifying the transferee and containing an offer (the “Section 2.2 Offer”) to sell the Section 2.2 Offered Shares at the same price, upon the same terms (subject to paragraph (h) below) and subject to the same conditions as those of the Section 2.2 Proposed Transfer, which shall be accompanied by a copy of the documentation (whether in draft form or otherwise) setting forth the Section 2.2 Proposed Transfer. Notwithstanding the foregoing, in the event that the Section 2.2 Proposed Transfer is a transfer of a majority of the capital stock or other equity or voting interests (i) in a Person that owns Equity Securities, or (ii) in a Person that directly or indirectly owns a majority of the capital stock or other equity or voting interests in a Person that owns Equity Securities as set forth in Section 2.2(i) in connection with a transaction or group of related transactions, and the Fair Market Value of the Section 2.2 Offered Shares proposed to be so transferred is less than 25% of the aggregate Fair Market Value of the assets proposed to be transferred in such transaction or group of substantially simultaneous related transactions as a whole, then the offer with respect thereto shall not be deemed a Section 2.2 Offer for purposes hereof and the provisions of Section 2.2 shall not be applicable thereto.

(b) Any Section 2.2 RoFR Offeree that desires to purchase some or all of the Section 2.2 Offered Shares (each, a “Section 2.2 RoFR Purchaser”) must, within thirty (30) days following delivery of the Section 2.2 Offer (the “Section 2.2 Purchase Period”), deliver to the Section 2.2 Selling Shareholder, with a copy to the Company and the other Section 2.2 RoFR Offerees, a notice setting forth the number of Section 2.2 Offered Shares that such Section 2.2 RoFR Purchaser desires to purchase.

(c) If the Section 2.2 RoFR Purchasers notify the Section 2.2 Selling Shareholder of their desire to purchase in the aggregate the number of Section 2.2 Offered Shares being offered or more, then each Section 2.2 RoFR Purchaser shall be entitled to purchase its pro rata portion of the Section 2.2 Offered Shares. If the Section 2.2 RoFR Purchasers notify the Section 2.2 Selling Shareholder of their desire to purchase in the aggregate less than the number of Section 2.2 Offered Shares being offered, then the Section 2.2 RoFR Purchasers shall have an additional ten (10) days following the expiration of the Section 2.2 Purchase Period to notify the Section 2.2 Selling Shareholder of their desire to purchase their pro rata portion (among those Section 2.2 RoFR Purchasers expressing such desire) or more of the remaining Section 2.2 Offered Shares.

(d) If the Section 2.2 RoFR Purchasers notify the Section 2.2 Selling Shareholder of their desire to purchase in the aggregate the number of remaining Section 2.2 Offered Shares or more, then each Section 2.2 RoFR Purchaser shall be entitled to purchase its pro rata portion of such Section 2.2 Offered Shares. If the Section 2.2 RoFR Purchasers notify the Section 2.2 Selling Shareholder of their desire to purchase in the aggregate less than the number of remaining Section 2.2 Offered Shares, then the Section 2.2 Selling Shareholder may (but shall not be obligated to) transfer all of the Section 2.2 Offered Shares pursuant to paragraph (g) below.

(e) Each Section 2.2 RoFR Purchaser’s pro rata portion of the Section 2.2 Offered Shares shall be equal to a fraction, the numerator of which is the number of Common Shares on a

 

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Fully Diluted Basis held by such Section 2.2 RoFR Purchaser and the denominator of which is the number of Common Shares on a Fully Diluted Basis held (for purposes of paragraph (c) above) by all of the Section 2.2 RoFR Offerees or (for purposes of paragraph (d) above) by all of the Section 2.2 RoFR Purchasers.

(f) The closing of the purchase by the Section 2.2 RoFR Purchasers (the “Section 2.2 RoFR Closing”) shall take place fifteen (15) days after the expiration of the Section 2.2 Purchase Period; provided, that if not all necessary governmental or regulatory approvals, including the expiration of any applicable waiting period under the HSR Act or any other applicable law, have been obtained by the applicable closing date, the Section 2.2 RoFR Closing shall be deferred for up to ninety (90) days in order to obtain such approvals (a “Governmental Approval Extension”). The Section 2.2 RoFR Closing shall be held at such time and place as the parties thereto shall reasonably specify. At the Section 2.2 RoFR Closing, the Section 2.2 Selling Shareholder shall deliver certificates representing the Section 2.2 Offered Shares being sold, against delivery of the purchase price therefor by wire transfer of immediately available funds to an account designated by the Section 2.2 Selling Shareholder.

(g) If the Section 2.2 RoFR Purchasers do not in the aggregate accept the Section 2.2 Offer with respect to all of the Section 2.2 Offered Shares pursuant to paragraphs (c) and (d) above, or if not all necessary governmental or regulatory approvals have been obtained by the expiration of the ninety (90) day period set forth in paragraph (f) above, then the Section 2.2 Selling Shareholder shall be entitled, for a period of thirty (30) days following the Section 2.2 RoFR Closing or, if applicable, ten (10) days following the expiration of the Section 2.2 Purchase Period or, if applicable, ten (10) days following the expiration of the ninety (90) day period set forth in paragraph (f) above, to transfer all (but not less than all) of the Section 2.2 Offered Shares to the transferee identified in the Section 2.2 Offer on terms and subject to conditions that are no more favorable to the transferee than those specified in the Section 2.2 Offer. If such transfer is not consummated within the applicable time period, transfers of the Section 2.2 Offered Shares shall again be subject to the provisions of this Section 2.2.

(h) If the consideration for the Section 2.2 Offered Shares specified in the Section 2.2 Offer consists of property other than cash, the Section 2.2 RoFR Purchasers may elect to pay for the Section 2.2 Offered Shares in cash, in which case the purchase price shall be equal to the Fair Market Value of such consideration. If the Section 2.2 Selling Shareholder and the Section 2.2 RoFR Purchasers cannot agree within ten (10) days after delivery of the Section 2.2 Offer, then such Fair Market Value shall be determined in accordance with the Appraisal Procedure. In such event, the periods set forth in paragraphs (b) and (c) above shall be tolled until the Appraisal Procedure is completed.

(i) A transfer of a majority of the capital stock or other equity or voting interests in (a) a holder of Series A Preferred Shares, or (b) a Person that directly or indirectly owns equity or voting interests in a holder of Series A Preferred Shares, shall be deemed to be a transfer of the Equity Securities of such holder, which transfer shall be subject to the provisions of Sections 2.1 and 2.2 if and to the extent applicable. In such event, the holder of Series A Preferred Shares shall be deemed to be the Section 2.2 Selling Shareholder as referred to in Section 2.2(a) and the capital stock or equity interests proposed to be transferred shall be deemed to be the Section 2.2 Offered Shares.

 

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(j) The right of first refusal under this Section 2.2 shall not apply to any transfer of Equity Securities by a holder of Series A Preferred Shares:

(i) to a member of such Shareholder’s Immediate Family, to such Shareholder as a custodian for members of such Shareholder’s Immediate Family, to a trustee of a trust (including a voting trust) that the governing instrument of which provides that such Shareholder, as trustee, shall retain sole and exclusive control over the voting and disposition of such Equity Securities, to an executor or to another fiduciary for the account of members of his Immediate Family, or to a charitable remainder trust of which such Shareholder is the sole trustee;

(ii) to the public, after the consummation of a Qualified Public Offering;

(iii) that is a corporation, partnership or limited liability company, to a shareholder, partner, or member by way of distribution or dividend substantially pro rata in accordance with its ownership interest, or to one or more of its Affiliates, so long as any such Affiliate is controlled exclusively by the entity making such transfer.

Section 2.3 Co-Sale Right

(a) If, prior to the third anniversary of a Qualified Public Offering, any Management Shareholder (a “Selling Management Shareholder”), subject to the terms and conditions of this Agreement including Section 2.1(e), proposes to transfer (a “Proposed Management Shareholder Transfer”) any Common Shares (the “Management Shareholder Shares”), then the Selling Management Shareholder shall promptly give written notice (the “Notice”) to the Company and the Co-Sale Holders (as defined below) describing in reasonable detail the Proposed Management Shareholder Transfer including, without limitation, the number of Management Shareholder Shares, the nature of such sale or transfer, the consideration to be paid, and the name and the address of each prospective purchaser or transferee, which shall be accompanied by a copy of the documentation (whether in draft form or otherwise) setting forth the Proposed Management Shareholder Transfer. The Notice shall state whether or not the Proposed Management Shareholder Transfer is being made pursuant to the provisions of Section 2.3(d). The Co-Sale Holders shall have the right, exercisable upon written notice to the Selling Management Shareholder within thirty (30) days after receipt of Notice, to participate in the sale of any Management Shareholder Shares on the same terms and conditions indicated in the Notice (or the actual terms of the Proposed Management Shareholder Transfer, if more favorable to the transferor). To the extent the Co-Sale Holders exercise such right of participation in accordance with the terms and conditions set forth below, the number of Management Shareholder Shares that the Selling Management Shareholder may sell in the transaction shall be correspondingly reduced. The foregoing co-sale right of the Co-Sale Holders shall be subject to the following terms and conditions:

(i) The Co-Sale Holders may sell all or any part of their Co-Sale Pro-Rata Share of Management Shareholder Shares.

(ii) The Co-Sale Holders shall deliver only Common Shares to the purchaser. The Company agrees to effect the conversion of the Series A Preferred Shares held by

 

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Blue Ridge China and EI into Common Shares and the exercise of the Burnham Warrants into Common Shares in accordance with the terms and conditions thereof, concurrent with the actual transfer of such shares to the purchaser.

(iii) The Co-Sale Holders shall effect their participation in the sale by promptly delivering to the Selling Management Shareholder for transfer to the prospective purchaser a transfer form signed by any such participating Co-Sale Holder, which indicates:

(A) the type and number of Equity Securities which such Co-Sale Holder elects to sell;

(B) that number of Series A Preferred Shares which is at such time convertible into the number of Common Shares that Blue Ridge China or EI elects to sell along with a notice of conversion of such number of Series A Preferred Shares; or

(C) to the extent applicable to such Co-Sale Holder, any combination of the foregoing.

(iv) The share certificate or certificates such Co-Sale Holder delivers to the Selling Management Shareholder pursuant to paragraph 2.3(a)(iii) shall be transferred to the prospective purchaser upon consummation of the sale of the Management Shareholder Shares pursuant to the terms and conditions specified in the Notice (or the actual terms of the Proposed Management Shareholder Transfer, if more favorable to the transferor), and the Selling Management Shareholder shall concurrently therewith remit to such Co-Sale Holder that portion of the sale proceeds to which such Co-Sale Holder is entitled by reason of its participation in such sale. To the extent that any prospective purchaser or purchasers prohibits such assignment or otherwise refuses to purchase shares or other securities from such Co-Sale Holder exercising its rights of co-sale hereunder, the Selling Management Shareholder shall not sell to such prospective purchaser or purchasers any Common Shares unless and until, simultaneously with such sales, the Selling Management Shareholder shall purchase such shares or other securities from such Co-Sale Holder.

(v) To the extent none of the Co-Sale Holders elect to participate in the sale of the Common Shares subject to the Notice, the Selling Management Shareholder may, not later than ninety (90) days following delivery to Co-Sale Holders of the Notice, conclude a transfer of the Common Shares covered by the Notice and not elected to be purchased by the Co-Sale Holders, on terms and conditions not more favorable to the transferor than those described in the Notice. Any Proposed Management Shareholder Transfer on terms and conditions more favorable than those described in the Notice, as well as any subsequent proposed transfer of any Common Shares by the Selling Management Shareholder, shall again be subject to the co-sale rights of the Co-Sale Holders and shall require compliance by the Selling Management Shareholder with the procedures described in this Section 2.3.

 

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(b) “Co-Sale Pro-Rata Share” of a Co-Sale Holder shall mean the ratio that (i) the sum of the number of Common Shares then held by such Co-Sale Holder which were issued pursuant to the Share Exchange and Assumption Agreement or upon conversion of the Series A Preferred Shares or upon exercise of the Warrants or the Burnham Warrants, as applicable, plus the number of Common Shares issuable upon conversion of the Series A Preferred Shares or upon exercise of the Warrants (only to the extent exercisable) or the Burnham Warrants then held by such Co-Sale Holder bears to (ii) the sum of the total number of Common Shares held by the Management Shareholders plus the total number of Common Shares then held by all of the Co-Sale Holders which were issued pursuant to the Share Exchange and Assumption Agreement or upon conversion of the Series A Preferred Shares and upon exercise of the Warrants and the Burnham Warrants plus the number of Common Shares issuable upon conversion of the Series A Preferred Shares and upon exercise of the Warrants (only to the extent exercisable) and the Burnham Warrants held by all of the Co-Sale Holders.

(c) “Co-Sale Holder” shall mean (i) Blue Ridge China so long it holds its Preferred Threshold Shares, (ii) EI so long it holds its Preferred Threshold Shares, and (iii) the Burnham Holders so long as they hold their respective Burnham Threshold Shares.

(d) Notwithstanding the foregoing, the co-sale rights of the Co-Sale Holders shall not apply to any transfer of Common Shares (i) to a Person owned entirely by such Management Shareholder, (ii) to the Management Shareholder’s Immediate Family, or to trusts for the benefit of such persons, or to a charitable remainder trust of which the Management Shareholder is the sole trustee, and (iii) if after a Qualified Public Offering, of an amount which is less than twenty percent (20%) of the number of Common Shares held by such Selling Management Shareholder on the date hereof (collectively, “Permitted Transferees”), provided that in the case of Section 2.3 (d) (i) and (ii) only (x) the transferring Management Shareholder shall inform Blue Ridge China and EI (so long as such party holds its Preferred Threshold Shares) and the Burnham Holders (so long as they hold their respective Burnham Threshold Shares), of such transfer prior to effecting it, including reasonable detail regarding the identity of the Permitted Transferee and his or her relationship to the Management Shareholder, and (y) the transferee shall furnish the other Shareholders with an executed Transferee Agreement.

Section 2.4 Right of First Refusal on Common Shares held by Certain Shareholders

(a) If any Shareholder, other than a holder of Series A Preferred Shares or a Management Shareholder (a “Section 2.4 Selling Shareholder”) desires to transfer (a “Section 2.4 Proposed Transfer”) all or any portion of its Equity Securities (the “Section 2.4 Offered Shares”), the Section 2.4 Selling Shareholder must first deliver to the Company, with a copy to the Company, a notice identifying the transferee and containing an offer (the “Section 2.4 Offer”) to sell the Section 2.4 Offered Shares at the same price, upon the same terms (subject to paragraph (f) below) and subject to the same conditions as those of the Section 2.4 Proposed Transfer, which shall be accompanied by a copy of the documentation (whether in draft form or otherwise) setting forth the Section 2.4 Proposed Transfer.

(b) If the Company desires to purchase all but not less than all of the Section 2.4 Offered Shares, the Company must, within thirty (30) days following delivery of the Section 2.4 Offer (the “Section 2.4 Purchase Period”), deliver to the Section 2.4 Selling Shareholder a notice so stating.

 

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(c) If the Company notifies the Section 2.4 Selling Shareholder of its desire to purchase all but not less than all of the Section 2.4 Offered Shares pursuant to Section 2.4(b) above, the Section 2.4 Selling Shareholder shall be obligated to sell such shares to the Company. If the Company does not so notify the Section 2.4 Selling Shareholder, then the Section 2.4 Selling Shareholder may (but shall not be obligated to) transfer all of the Section 2.4 Offered Shares pursuant to paragraph (e) below.

(d) The closing of the purchase by the Company (the “Section 2.4 RoFR Closing”) shall take place fifteen (15) days after the expiration of the Section 2.4 Purchase Period; provided, that if not all necessary governmental or regulatory approvals, including the expiration of any applicable waiting period under the HSR Act or any other applicable law, have been obtained by the applicable closing date, the Section 2.4 RoFR Closing shall be subject to a Governmental Approval Extension. The Section 2.4 RoFR Closing shall be held at such time and place as the parties thereto shall reasonably specify. At the Section 2.4 RoFR Closing, the Section 2.4 Selling Shareholder shall deliver certificates representing the Section 2.4 Offered Shares being sold, against delivery of the purchase price therefor by wire transfer of immediately available funds to an account designated by the Section 2.4 Selling Shareholder.

(e) If the Company does not accept the Section 2.4 Offer with respect to all of the Section 2.4 Offered Shares pursuant to paragraphs (c) and (d) above, or if not all necessary governmental or regulatory approvals have been obtained by the expiration of the Governmental Approval Extension, then the Section 2.4 Selling Shareholder shall be entitled, for a period of thirty (30) days following the Section 2.4 RoFR Closing or, if applicable, ten (10) days following the expiration of the Section 2.4 Purchase Period or, if applicable, ten (10) days following the expiration of the Governmental Approval Extension, to transfer all (but not less than all) of the Section 2.4 Offered Shares to the transferee identified in the Section 2.4 Offer on terms and subject to conditions that are no more favorable to the transferee than those specified in the Section 2.4 Offer. If such transfer is not consummated within the applicable time period, transfers of the Section 2.4 Offered Shares shall again be subject to the provisions of this Section 2.4.

(f) If the consideration for the Section 2.4 Offered Shares specified in the Section 2.4 Offer consists of property other than cash, the Company may elect to pay for the Section 2.4 Offered Shares in cash, in which case the purchase price shall be equal to the Fair Market Value of such consideration. If the Section 2.4 Selling Shareholder and the Company cannot agree within ten (10) days after delivery of the Section 2.4 Offer, then such Fair Market Value shall be determined in accordance with the Appraisal Procedure. In such event, the periods set forth in paragraph (b) above shall be tolled until the Appraisal Procedure is completed.

(g) A transfer of a majority of the capital stock or other equity or voting interests in (a) a Section 2.4 Selling Shareholder, or (b) a Person that directly or indirectly owns equity or voting interests in a Section 2.4 Selling Shareholder, shall be deemed to be a transfer of the Equity Securities of such holder, which transfer shall be subject to the provisions of Sections 2.1 and 2.4 if and to the extent applicable. In such event, the Section 2.4 Selling Shareholder shall

 

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be deemed to be the Section 2.4 Selling Shareholder as referred to in Section 2.4(a) and the capital stock or equity interests proposed to be transferred shall be deemed to be the Section 2.4 Offered Shares.

(h) The right of first refusal under this Section 2.4 shall not apply to any transfer of Equity Securities by a Section 2.4 Selling Shareholder:

(i) to a member of such Shareholder’s Immediate Family, to such Shareholder as a custodian for members of such Shareholder’s Immediate Family, to a trustee of a trust (including a voting trust) that the governing instrument of which provides that such Shareholder, as trustee, shall retain sole and exclusive control over the voting and disposition of such Equity Securities, to an executor or to another fiduciary for the account of members of his Immediate Family, or to a charitable remainder trust of which such Shareholder is the sole trustee;

(ii) to the public, after the consummation of a Qualified Public Offering;

(iii) that is a corporation, partnership or limited liability company, to a shareholder, partner, or member by way of distribution or dividend substantially pro rata in accordance with its ownership interest, or to one or more of its Affiliates, so long as any such Affiliate is controlled exclusively by the entity making such transfer.

Section 2.5 Securities Act Legend

(a) Subject to the provisions of paragraph (b) below, and subject to any additional legend which may be required in accordance with the Share Exchange and Assumption Agreement, each Equity Security held by the Shareholders (including all shares owned on the date hereof by the Shareholders) will be imprinted with a legend substantially in the following form:

“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OF THE UNITED STATES, AS AMENDED OR THE LAWS OF ANY OTHER JURISDICTION. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT OR A COMPARABLE DOCUMENT UNDER THE LAWS OF ANY OTHER JURISDICTION IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. THE OFFERING OF THIS SECURITY HAS NOT BEEN REVIEWED OR APPROVED BY ANY STATE OR ANY OTHER JURISDICTION’S SECURITIES ADMINISTRATOR.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE AMENDED AND RESTATED SHAREHOLDERS AGREEMENT, DATED AS OF OCTOBER 31,

 

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2007, AS MAY BE AMENDED, AMONG THE COMPANY AND CERTAIN OF ITS SHAREHOLDERS, A COPY OF WHICH IS ON FILE WITH THE COMPANY. NO SALE, ASSIGNMENT, TRANSFER, PLEDGE, ENCUMBRANCE OR OTHER DISPOSITION OF THE SECURITIES REPRESENTED HEREBY SHALL BE EFFECTIVE UNLESS AND UNTIL THE TERMS AND CONDITIONS OF SAID SHAREHOLDERS AGREEMENT SHALL HAVE BEEN COMPLIED WITH IN FULL.”

(b) If a Shareholder delivers to the Company an opinion of counsel (who may be an employee of such Shareholder) in form and substance reasonably satisfactory to the Company, that transfers of some or all of the Equity Securities held by such Shareholder do not require registration under the Securities Act, any applicable state securities laws or the securities law of any other applicable jurisdiction, the Company will promptly deliver new certificates for such shares of Equity Securities which, if supported by such opinion, do not bear the Securities Act legend set forth in the first paragraph of Section 2.4(a) above.

ARTICLE 3

BOARD MEMBERS; OBSERVER RIGHTS

Section 3.1 Board Members

So long as Blue Ridge China or EI holds at least its Preferred Threshold Shares, the Company’s Board of Directors shall have no more than seven members and, provided that the Board of Directors consists of not less than three members, EI, so long as it holds at least its Preferred Threshold Shares, shall be entitled to designate one (1) individual, and Blue Ridge China, so long as it holds at least its Preferred Threshold Shares, shall be entitled to designate two (2) individuals (the three (3) such designees being collectively referred to herein as the “Preferred Directors”) to be elected to the Company’s Board of Directors at each annual meeting of the shareholders of the Company or at any special meeting at which directors are elected. The Shareholders hereby agree (i) to vote all of their Voting Shares (now owned or hereafter acquired) for the election of the Preferred Directors, and (ii) not to vote any of their Voting Shares (now owned or hereafter acquired) for the removal of the Preferred Directors. Each of Blue Ridge China and EI shall have the right to replace its designated Preferred Director(s) (with or without cause, or if such director ceases to be a member of the Board of Directors by reason of death, disability or for any other reason) at any time upon written notice to the Company, and the Shareholders hereby agree to vote all of their Voting Shares (now owned or hereafter acquired) for the election of any such replacement so designated by Blue Ridge China or EI, as the case may be. The Company shall reimburse the Preferred Directors for all reasonable out-of-pocket expenses incurred in connection with their attendance at meetings of the Board of Directors. The Preferred Directors shall also receive an annual director’s fee equal to the fee (if any) paid to other outside directors of the Company. Notwithstanding anything to the contrary contained herein, Blue Ridge China shall be permitted to take the actions set forth in that certain letter agreement, attached hereto as Exhibit B (the “Letter Agreement”), dated as of the date of the Shareholders Agreement, by and between the Company and Blue Ridge China with respect to one of the two individuals to be designated as a Preferred Director by Blue Ridge China hereunder. Pursuant to and in accordance with the terms of the Letter Agreement, the Company

 

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shall notify Blue Ridge China in writing promptly following the expiration or early termination of the Applicable Period (as defined in the Letter Agreement). Each of the Company and the Management Shareholders hereby agree that they shall promptly exercise their respective contractual rights and take all other actions reasonably requested by Blue Ridge China to forthwith cause the removal of the Note Holder Nominee (as defined in the Letter Agreement) if such nominee does not immediately resign upon expiration or early termination of the Applicable Period.

Section 3.2 Boards of Subsidiaries and Other Entities

(a) So long as Blue Ridge China or EI holds at least its Preferred Threshold Shares, the Board of Directors (or equivalent governing body) of each of its Subsidiaries, and any Committee (as defined below) of such Board of Directors (or equivalent governing body), shall have the same members (and no additional members) as the Board of Directors and any Committee of the Board of Directors, respectively, of the Company.

(b) So long as Blue Ridge China or EI holds at least its Preferred Threshold Shares, if the Company is entitled to designate two or more individuals to serve as members of the board of directors (or equivalent governing body) of any Person that is not a Subsidiary of the Company, then to the extent practicable the Company shall, at the request of each such party holding its Preferred Threshold Shares or either of them, designate one of the Preferred Directors to serve as a member of the board of directors (or equivalent governing body) of such Person.

Section 3.3 Committees

(a) So long as Blue Ridge China or EI holds at least its Preferred Threshold Shares, each such party holding its Preferred Threshold Shares shall be entitled to representation (by designation of the Preferred Directors to serve) on each committee formed by the Board of Directors of the Company and any of its Subsidiaries (“Committees”) in proportion to its shareholding in the Company.

(b) So long as Blue Ridge China or EI holds at least its Preferred Threshold Shares, if the Company is entitled to the representation of two or more individuals on a committee formed by the Board of Directors of any Person that is not a Subsidiary, then to the extent practicable, the Company shall, at the request of each such party holding its Preferred Threshold Shares, designate such party’s Preferred Director to serve on such committee.

Section 3.4 Observer Rights

So long as Blue Ridge China or EI holds at least its Preferred Threshold Shares, each such party holding its Threshold Shares shall be entitled, in lieu of designating members of the Board of Directors of the Company and its Subsidiaries pursuant to Section 3.1 and Section 3.2, and any Committees pursuant to Section 3.3, to send observers to meetings of such Boards of Directors and Committees (with no more than observers for each Board of Directors or Committee than the number of Directors Blue Ridge China and EI would otherwise be entitled to) for informational purposes only. Such observers (or Blue Ridge China or EI if there is no such observer) shall be entitled to receive (and the Company and each Subsidiary, as applicable,

 

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shall deliver to such observers or to Blue Ridge China or EI, as applicable) all notices and materials which the elected members of the Board of Directors or Committees, as applicable, receive (and at the time they are so received) but such observers shall not have any right to vote in any such meeting; provided, however that such observer agrees to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided. Any such observers shall be reimbursed by the Company or the Subsidiary, as applicable, for all reasonable out-of-pocket expenses incurred in connection with their attendance at meetings of the Board of Directors and Committees, as applicable.

Section 3.5 Rights of Blue Ridge China and EI under Article 3

For greater certainty and notwithstanding anything to the contrary in this Article 3, except for Section 3.5 (c):

(a) Blue Ridge China shall be entitled to its rights set forth in Sections 3.1 through 3.4 so long as it holds at least its Preferred Threshold Shares and EI shall be entitled to its rights set forth in Sections 3.1 through 3.4 so long as it holds at least its Preferred Threshold Shares;

(b) in the event either Blue Ridge China or EI acquires Equity Securities from the other and, as a consequence, such other party no longer holds at least its Preferred Threshold Shares, the acquiring party shall be entitled to its rights set forth in Sections 3.1 through 3.4 and the rights of such other party set forth therein;

(c) the rights set forth in this Article 3 shall terminate upon the consummation of any Qualified Public Offering.

ARTICLE 4

COVENANTS

Section 4.1 Delivery of Financial Statements

(a) So long as a Preferred Holder holds at least 25% of the Subject Shares owned by it on the date hereof and prior to the consummation of any Qualified Public Offering, the Company shall deliver to such holder:

(i) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet and statement of shareholders’ equity as of the end of such year, and a statement of cash flows for such year, such year end financial reports to be on a consolidated basis for the Company and its Subsidiaries and for the Operating Companies in reasonable detail, prepared in accordance with United States generally accepted accounting principles, consistently applied (“GAAP”), and audited and certified by independent public accountants of nationally recognized standing selected by the Company;

(ii) as soon as practicable, but in any event within thirty (30) days after the end of each of each calendar month, an unaudited income statement, unaudited statement of cash flows for such month and an unaudited balance sheet, in each case, on a consolidated basis for the Company and its Subsidiaries and for the Operating Companies as of the end of such month;

 

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(iii) as soon as practicable, but in any event at least thirty (30) days prior to the end of each fiscal year, a consolidated budget and business plan for the following fiscal year for the Company and its Subsidiaries and for the Operating Companies, prepared on a monthly basis;

(iv) with respect to the financial statements called for in paragraph (a) above, an instrument executed by the Chief Financial Officer or President (or an officer in a comparable position) of the Company certifying that such financials were prepared in accordance with GAAP applied consistently with prior practice for earlier periods (with the exception of footnotes that may be required by GAAP) and fairly present in all material respects the financial condition and results of operation for the Company and its Subsidiaries and the Operating Companies for the period specified, subject to year end audit adjustment; and

(v) all notices, request for consents, financial statements and other materials provided to the holders of Equity Securities at any time and at the same time such holders are so furnished, and such other information relating to the financial condition, business or corporate affairs of the Company Group as holders of at least 10% of the then outstanding Series A Preferred Shares may from time to time reasonably request.

(b) The Company, each of its Subsidiaries and each of the Operating Companies shall evaluate the effectiveness of its respective system of internal accounting controls as of the end of each fiscal quarter for such entity. As soon as practicable, but in any event within sixty (60) days thereafter, the Company shall notify Blue Ridge China and EI in writing of any (i) deficiencies in such controls, and (ii) significant changes in such controls or in other factors that could significantly affect such controls.

(c) The Company may require any party (other than Blue Ridge China and EI) entitled to the information rights of this Section 4.1 to execute a confidentiality and non-disclosure agreement at any time with respect to such rights.

(d) Not later than 20 business days prior to the date on which the Burnham Warrants expire or terminate pursuant to the terms thereof, the Company shall deliver to the Burnham Holders the information set out in Sections 4.1(a)(i) through (iv), subject to Section 4.1(c).

(e) Within 5 business days following receipt by the Company of a notice from either of the Burnham Holders to the effect that it intends, in good faith, to exercise its Burnham Warrant, in whole or in part, subject to a review of the Company’s financial condition and performance, the Company shall furnish to such Burnham Holder the information set out in Section 4.1(a)(i) through (iv), subject to Section 4.1(c).

(f) In the event that the Company becomes subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended, or a similar public securities reporting statute in another jurisdiction:

(i) as a result of any transaction approved by the Company’s Board of Directors, the requirements of this Section 4.1 shall terminate; or

 

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(ii) for any other reason, the requirements of this Section 4.1 shall continue, provided, and to the extent that they do not contravene applicable public securities law.

Section 4.2 Inspection

Prior to the consummation of any Qualified Public Offering, the Company shall permit any Preferred Holder holding at least 25% of the Subject Shares to visit and inspect the properties of each Member of the Company Group, to examine their respective books of account and records, and to discuss its affairs, finances and accounts with their respective directors, officers, employees, attorneys, accountants, representatives, consultants and other agents, all at such reasonable times and reasonable frequency as may be requested by such Preferred Holder; provided, however, that the Company may require any such Preferred Holder (other than Blue Ridge China and EI) to execute a confidentiality and non-disclosure agreement prior to any such visit and inspection.

Section 4.3 Additional Equity Financings; Qualified Public Offering

Prior to the consummation of any Qualified Public Offering, each holder of Series A Preferred Shares (or any Common Shares issued upon conversion thereof) (each, an “Additional Equity Offeree”) shall have the right to purchase any Equity Securities that the Company may propose to offer and sell from time to time, up to that portion of such Equity Securities that equals the proportion that the number of Common Shares issued and held, or issuable upon conversion of any Equity Securities then held, by such Additional Equity Offeree bears to the total number of Common Shares of the Company then outstanding (assuming full conversion and exercise of all Equity Securities), except there shall be no such right to purchase Equity Securities issued (i) upon exchange, exercise or conversion of previously outstanding Equity Securities (including the Series A Preferred Shares, the Warrants and the Burnham Warrants), (ii) pursuant to the conversion or exercise of convertible or exercisable Equity Securities; (iii) in pro rata distributions to the Shareholders, (iv) pursuant to the Company’s Equity Incentive Plan to be implemented within a reasonable time after the Closing Date, provided that no more than 6,802,495 Common Shares (or other Equity Securities convertible or exercisable into such number of Common Shares) may be issued pursuant thereto or, prior to the consummation of a Qualified Public Offering, any other Company equity incentive plan approved by the Preferred Holders or (v) as consideration for any securities or other assets acquired by the Company whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, provided that any such issuances do not exceed in the aggregate 25% of the issued and outstanding Capital Stock at any time (each a “Permitted Issuance”). If the Company proposes to issue any Equity Securities that are subject to the rights set forth in this Section 4.3, it shall give each Additional Equity Offeree written notice of its intention, describing the Equity Securities, the price, and the terms and conditions upon which the Company proposes to issue the same. Each Additional Equity Offeree shall have ten (10) days from the receipt of such notice to elect to purchase such Equity Securities on a pro rata basis, for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased. If any Additional Equity Offeree fails

 

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to timely exercise such rights with respect to any Equity Securities to be offered by the Company, the Company shall have 90 days thereafter to sell such Equity Securities at a price and upon terms and conditions no more favorable to the purchasers thereof than the price, terms and conditions specified in the Company’s notice to the Additional Equity Offerees; provided, however, that it shall be a condition to any issuance of Equity Securities by the Company pursuant to this Section 4.3 to any person who is not a party to this Agreement, that such person agrees in writing to be bound by the provisions of this Agreement pursuant to the Transferee Agreement. If the Company has not sold such Equity Securities within such 90-days period, the Company shall not thereafter issue or sell any Equity Securities without first offering such securities to the Additional Equity Offerees in the manner provided in this Section 4.3.

Section 4.4 Non-Compete; Non-Solicitation

No Shareholder (other than Blue Ridge China, EI and the Burnham Holders), nor any of the Affiliates, officers, directors, employees, shareholders or members of such Shareholder, shall, during the period commencing on the date hereof and ending two years after the date on which such Shareholder and its respective Affiliates ceases to hold any Equity Securities (i) directly or indirectly, compete with the business of the Company Group or engage in the business of the Company Group for its own account or for the account of any other Person; nor shall any of the foregoing own any equity interest in any person or entity which, directly or indirectly, competes with or is engaged in the business of the Company Group; provided, however, that any of the foregoing may own, directly or indirectly, solely as a passive investment, securities of any entity which are traded on any national securities exchange or NASDAQ or other internationally recognized securities exchange, so long as it is not a controlling person of, or a member of a group which controls, such entity, and does not, directly or indirectly, own 2% or more of any class of securities of such entity; provided that the Burnham Holders may, in the normal course of their business, represent and advise as clients any persons or entities who compete with or are engaged in the business of the Company, and may beneficially own, directly or indirectly, solely as a passive investment, securities of any such entity; or (ii) solicit for employment or other business relationship or assist in such solicitation by any other Person of, induce or encourage to terminate his or her employment, or attempt to hire or hire, any Person who is or was (during the one-year period immediately preceding the date on which such Shareholder or any of its Affiliates cease to hold any Equity Securities in the Company) a director, officer, or employee of any Member of the Company Group, except pursuant to a general solicitation not targeted specifically to any employee of the Company Group.

Section 4.5 Approval Rights

The Company shall not (and shall not permit any Member of the Company Group to), directly or indirectly, without first obtaining the approval, by vote or written consent, in the manner provided by law, of the Preferred Holders holding at least, for so long as Blue Ridge China and EI each hold their respective Preferred Threshold Shares, seventy-five percent (75%), and otherwise, fifty percent (50%) of the Subject Shares, voting together as a single class:

(a) undertake or effect any (i) liquidation, dissolution or winding-up, (ii) consolidation or merger with or into another entity, or (iii) transaction or series of related

 

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transactions which result in the Company’s shareholders immediately prior to such transactions not holding at least fifty and one tenth (50.1%) of the equity and voting power of the surviving or continuing entity (in substantially the same proportions as such shareholders held Capital Stock immediately prior to such transaction or series of related transactions);

(b) directly or indirectly, sell, transfer, lease, charge, encumber or otherwise dispose of all or substantially all of the assets of any Member of the Company Group;

(c) sell, transfer, license, charge, encumber or otherwise dispose of any trademarks, technology, patents or other intellectual property of any Member of the Company Group;

(d) directly or indirectly, sell, transfer, lease, charge, encumber or otherwise dispose of any business or assets outside the ordinary course of business in excess of, individually or in the aggregate, $250,000 in any calendar year;

(e) establish any Subsidiaries or Affiliates that would have a material effect on the business, financial condition or prospects of the Company or any Member of the Company Group or the rights of any holder of Series A Preferred Shares;

(f) amend, modify, repeal or waive this Agreement or its Memorandum of Association or other constituent documents, including, by filing any amendment thereto;

(g) alter or change the powers, preferences or rights of the Series A Preferred Shares or the Warrants or the qualifications, limitations, or restrictions thereof or otherwise to adversely affect the Series A Preferred Shares or the Warrants;

(h) authorize any public offering (whether a Qualified Public Offering or otherwise) of any Equity Securities, or select a manager/arranger or underwriter with respect thereto;

(i) directly or indirectly, enter into, approve, terminate or materially amend the terms of any agreement or transaction with, make any payments to (other than payments contemplated herein), or provide any guarantees on behalf of, any Member of the Company Group or any Affiliate thereof;

(j) materially change the nature of the business in which it is engaged or purchase or invest, directly or indirectly, in any assets or property, other than assets or property which are useful in or necessary for and are to be used in such business;

(k) acquire any capital stock of or other interest in any corporation, partnership, firm, joint venture, association, limited liability company, joint stock company, trust, estate, unincorporated organization or other entity;

(l) redeem or repurchase any Equity Securities (other than (i) repurchases of shares from employees pursuant to repurchase rights under vesting provisions related to the length of period of employment of such employees at purchase prices equal to the lesser of the price initially paid by such employees for such shares or the fair market value thereof, or (ii) repurchases pursuant to the exercise of contractual rights of first refusal over such shares);

 

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(m) sell, transfer, charge, encumber or otherwise dispose of or dilute any direct or indirect interest in any Member of the Company Group;

(n) increase beyond seven or decrease the number of members of the Board of Directors;

(o) appoint, or determine the terms of the appointment of, or terminate any Significant Officer;

(p) enter into, or materially modify or amend, any agreement or transaction (including but not limited to the making of any loans or advances, whether directly or indirectly, or the provision of any guarantee, indemnity or security for or in connection with any indebtedness of liabilities) with, make any payments to, or provide any guarantees on behalf of (in each case directly or indirectly), other than pursuant to employment or other arrangements previously approved hereunder, any shareholder, partner, member or Significant Officer of any Member of the Company Group, and any member or former member of the family of any individual shareholder, partner, member, or Significant Officer of any Member of the Company Group;

(q) increase the allocation of shares and options of any employee incentive programs (including any outstanding options), or any bonus or profit sharing scheme for, or convertible or exercisable into an amount of more than 6,802,495 Common Shares;

(r) increase or decrease the authorized capital of any Member of the Company Group or authorize the issuance of or issue any Equity Securities or any equity or voting interest in any Member of the Company Group (excluding Equity Securities issued pursuant to a Permitted Issuance to Persons who become a party to this Agreement pursuant to execution of the Transferee Agreement, issuances pursuant to the Equity Incentive Plan, issuances pursuant to the Warrants, the Burnham Warrants or pursuant to the conversion or exercise of convertible or exercisable Equity Securities, provided, that the issuance of such convertible or exercisable Equity Securities were approved in accordance with this Section 4.5));

(s) grant any registration rights;

(t) in any fiscal year, acquire any investment or make any loan, or incur, assume or guarantee any indebtedness or other obligation (other than projects subject to paragraph (u) below), the aggregate principal amount of which is in excess of $1,000,000 at any time in respect of any one transaction or in excess of $2,000,000 at any time in respect of all such transactions, except as set forth in any annual budget approved in accordance with the terms of this Section 4.5;

(u) acquire any new real estate project or land for the development of any real estate project, in each case in excess of RMB100 million;

(v) establish new businesses, lines of business, or brands;

(w) appoint or change the auditors of any Member of the Company Group;

 

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(x) declare or pay dividends or make any distributions on or in respect of any Equity Securities (other than Series A Preferred Shares); or

(y) approve or amend any annual business plan or operating or capital budget; or

(z) commit to do any of the foregoing;

provided, that all such approval rights set forth in this Section 4.5 shall terminate upon the consummation of any Qualified Public Offering.

Section 4.6 U.S. Shareholders

Each Shareholder other than Blue Ridge China, EI and the Burnham Holders shall promptly notify Blue Ridge China and EI if any person transfers or acquires any direct or indirect interest in such Shareholder, or upon the occurrence of any other event that would result in any person becoming a United States Shareholder (a defined in Section 951(b) of the U.S. Internal Revenue Code of 1986, as amended (“IRC”)) with respect to either the Company or any of its Subsidiaries by reason of such person owning (or being treated as constructively owning upon application of the attribution and constructive ownership rules set forth in IRC section 958 and the Treasury Regulations thereunder) any interest in the Company or any of its Subsidiaries through such Shareholder; provided that such Shareholder shall so notify Blue Ridge China and EI with respect to U.S. Shareholders of publicly-traded shares of such Shareholder only upon it becoming aware of such transfer or event; provided, further that such Shareholder shall not be required to comply with this Section 4.6 in the event compliance therewith would violate applicable public securities law.

Section 4.7 Additional Investments

Prior to the consummation of any Qualified Public Offering and subject to the approval rights set forth in Section 4.5, in the event the Company identifies additional opportunities for investing in real estate properties or projects in the PRC, Blue Ridge China, EI and their respective Affiliates will consider in good faith providing all or a portion of any funding required for the investment up to an amount of $50,000,000 in such properties or projects through the Company, the WFOE, the Operating Company or any of their Subsidiaries, all on terms acceptable to Blue Ridge China, EI and their respective Affiliates in their sole discretion. In the event such investment is approved in accordance with Section 4.5, but Blue Ridge China, EI and their respective Affiliates determine not to provide such funding, Blue Ridge China and EI will use reasonable efforts to assist the Company in finding third party financing for such investment, all on terms acceptable to the Company, Blue Ridge China and EI. Notwithstanding the foregoing, Blue Ridge China, EI and their respective Affiliates shall have no liability to the Company or its Affiliates if Blue Ridge China and EI determine not to provide such funding, or if the Company is unable to obtain third party funding, for any such investment.

Section 4.8 Management Shareholder Restrictions

Prior to the consummation of any Qualified Public Offering, the Management Shareholders shall not take any action in respect of Jiantou or any other Person in which they or the Company or any Member of the Company Group holds an equity interest in excess of 20% of

 

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such Person’s outstanding voting shares which the Company would be restricted from taking pursuant to Section 4.5, as if Jiantou or such Person were included as a Member of the Company Group, without first obtaining the approval, by vote or written consent, in manner provided by law, of the Preferred Holders holding at least, for so long as Blue Ridge China and EI each hold their respective Preferred Threshold Shares, seventy-five percent (75%), and otherwise, fifty percent (50%) of the Subject Shares, voting together as a single class.

ARTICLE 5

REGISTRATION RIGHTS

Section 5.1 Demand Registrations

(a) Right to Demand Registration

At any time on and after the earlier of (i) August 25, 2009, or (ii) six months after the date on which the Company has effected an initial public offering of any share capital (or securities convertible into or exchangeable or exercisable for any share capital) under the Securities Act or the securities laws of any other jurisdiction, the Preferred Holders holding not less than 50% of the Subject Shares may request registration under the Securities Act or the securities laws of such other jurisdiction of all or part of their Registrable Securities, so long as such registration would result in aggregate proceeds to the Company, net of underwriting discounts and commissions, of at least $7,500,000. Within seven (7) days after receipt of any such request, the Company will give written notice of such request to all other Holders of Registrable Securities and will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within twenty (20) days after the receipt of the Company’s notice; provided, that if such registration is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities requested to be included exceeds the number of securities which can be sold in such offering without materially adversely affecting such sale, the Company will include in such registration the number of Registrable Securities requested to be included which in the opinion of such managing underwriters can be sold pro rata among the respective Holders of such Registrable Securities on the basis of the amount of such securities owned by each such Holder of Registrable Securities as of the date of the Company’s notice. The Company shall use its reasonable best efforts to cause any Demand Registration to be filed as soon as practicable after it receives a request for registration under this Section 5.1(a).

A registration requested pursuant to this Section 5.1(a) is referred to herein as a “Demand Registration” and the Holders of Registrable Securities initiating any such Registration are referred to herein as the “Offerors” with respect to such Registration. A request pursuant to this Section 5.1 shall state the number of Registrable Securities requested to be registered, the intended method of disposition thereof and the jurisdictions in which registration is desired. In connection with any registration subject to this Section 5.1, the holders of Registrable Securities included in such registration shall enter into such underwriting, lockup and other agreements, and shall execute and complete such questionnaires and other documents, as are customary in a primary offering.

 

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(b) Registration Expenses

Subject to Section 5.7, the Registration Expenses will be paid by the Company in all Demand Registrations whether or not such registration becomes effective.

(c) Number of Demand Registrations

The Preferred Holders holding not less than 50% of the Subject Shares will be entitled to request two Demand Registrations; provided that the Company shall not be required to effect more than one Demand Registration during any six month period. A registration will not constitute a Demand Registration (i) until it has become effective, (ii) if the Offerors for such Demand Registration are not able to sell at least 80% of the Registrable Securities requested to be included in such registration, or (iii) if after it has become effective, the offering of Registrable Securities pursuant to such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court.

(d) Priority on Demand Registrations

The Company will not include in any Demand Registration any securities which are not Registrable Securities without the written consent of the Offerors not to be unreasonably withheld. If other securities are permitted to be included in a Demand Registration which is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities and other securities requested to be included exceeds the number of securities which can be sold in such offering without materially adversely affecting such sale, the Company will include in such registration prior to the inclusion of any securities which are not Registrable Securities the number of Registrable Securities requested to be included which in the opinion of such managing underwriters can be sold pro rata among the respective Holders of such Registrable Securities on the basis of the amount of such securities owned.

(e) Restrictions on Demand Registrations

The Company may postpone for up to three months in the aggregate during any twelve (12) month period any filing or the effectiveness of any Registration Statement for a Demand Registration if the Board of Directors of the Company, in good faith, determines (and the Company so certifies by written notice to the Offerors) that such Demand Registration might reasonably be expected to have an adverse effect on any proposal or plan by the Company or any of its Subsidiaries to engage in any material corporate transaction; provided, that in such event, the Offerors initiating the request for such Demand Registration will be entitled to withdraw such request and will retain their right to such Demand Registration under this Section 5.1. Notwithstanding anything contained herein to the contrary, the Company may not postpone or withdraw a filing under this Section 5.1(e) more than once during any 12-month period.

(f) Selection of Underwriters

In the case of a Demand Registration, the Offerors will have the right to select the investment banker(s) and manager(s) to administer the offering, subject to the Company’s approval which will not be unreasonably withheld, delayed or conditioned.

 

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Section 5.2 Piggyback Registrations

(a) Right to Piggyback Registrations

Whenever the Company proposes to register any of its share capital (or securities convertible into or exchangeable or exercisable for any shares of share capital) under the Securities Act or the securities laws or any other jurisdiction (other than a Registration Statement on Form S-4 or Form S-8 or any successor form thereto or such other registration statement in another jurisdiction exclusively relating to the sale of securities of employees issued pursuant to an employee incentive plan), the Company will give prompt written notice (in any event within ten (10) days after its receipt of notice of any exercise of other demand registration rights and at least thirty (30) days prior to the anticipated filing date) to the Holders of Registrable Securities of its intention to effect such a registration, which will specify the proposed offering price (if determined at the time) the kind and number of securities to be registered and the distribution arrangement. The Company will use its reasonable best efforts to include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within twenty (20) days after the receipt of the Company’s notice by such Holders (or at such later time if the Company and the process of such registration will not be materially prejudiced thereby); provided, that if such registration is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities requested to be included exceeds the number of securities which can be sold in such offering without materially adversely affecting such sale, the Company will include in such registration the number of Registrable Securities requested to be included which in the opinion of such managing underwriters can be sold, pro rata among the respective Holders of such Registrable Securities on the basis of the amount of such securities owned by such Holders of Registrable Securities as of the date of the Company’s notice. A request pursuant to this Section 5.2 shall state the number of Registrable Securities requested to be registered. In connection with any registration subject to this Section 5.2, the Holders of Registrable Securities included in such registration shall enter into such underwriting, lockup and other agreements, and shall execute and complete such questionnaires and other documents, as are customary in a secondary offering. All registrations requested pursuant to this Section 5.2(a) are referred to herein as “Piggyback Registrations”. No registration effected under this Section 5.2 shall relieve the Company of its obligation to effect a Demand Registration pursuant to Section 5.1.

(b) Registration Expenses

Subject to Section 5.7, the Registration Expenses will be paid by the Company in all Piggyback Registrations whether or not such registration becomes effective.

(c) Priority on Primary Registrations

If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold without materially adversely affecting such offering, the Company will include in such registration (regardless of whether any holder initially requested such registration) (i) first, the securities the Company proposes to sell, (ii) second, Registrable Securities, and (iii) third

 

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(but only if all of the securities referred to in the immediately preceding clause (ii) have been included in the registration), all other securities requested to be included in such registration, all pro rata among the holders thereof on the basis of the number of shares owned by such holders of Registrable Securities or non-Registrable Securities, as the case may be, as of the date of the Company’s notice.

(d) Priority on Secondary Registrations

If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company’s securities other than Registrable Securities (and in which the Company is not issuing any securities under such registration), and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold without materially adversely affecting such offering, the Company will include in such registration (i) first, all or such portion of the securities requested to be included in such registration by the holder or holders who requested such registration (such holders being entitled to participate in accordance with the relative priorities, if any, as may exist among them) and Registrable Securities, pro rata among the holders thereof on the basis of the number of shares owned by such holders of Registrable Securities or non-Registrable Securities, as the case may be, as of the date of the Company’s notice, (ii) second (but only if all of the securities referred to in the immediately preceding clause (i) have been included in the registration), Registrable Securities, and (iii) third (but only if all of the securities referred to in the immediately preceding clause (ii) have been included in the registration), all or such portion of any other securities requested to be included in such registration, in each case to the extent that securities can be included in the underwriting as determined by the managing underwriter(s).

(e) Selection of Underwriters

In the case of a Piggyback Registration which is a primary registration on behalf of the Company, the Company will have the right to select any investment banker(s) and manager(s) of nationally recognized standing to administer the offering.

Section 5.3 S-3 Registration

(a) Request for S-3 Registration

At any time when the Company is eligible for use of Form S-3 (or any successor form then in effect or comparable document under the laws of any other jurisdiction), Blue Ridge China and EI, for so long as each such party owns its Preferred Threshold Shares, shall be entitled to request that the Company register under the Securities Act on Form S-3 or F-3, as applicable (or any successor form then in effect or comparable document under the laws of any other jurisdiction) (an “S-3 Registration”) all or a part of such Holder’s Registrable Securities; provided, however, that (i) each such Holder shall be entitled to request, and the Company shall be obligated to cause, not more than three S-3 Registrations pursuant to this Section 5.3(a), and (ii) the Company shall not be required to effect any S-3 Registration for an aggregate amount of less than $1,000,000 or more than one S-3 Registration in any three month period. Whenever the Company is required by this Section 5.1 to effect an S-3 Registration, each of the procedures,

 

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requirements and other provisions applicable to a Demand Registration set forth in Section 5.1 (including the obligation to notify all other Holders of Registrable Securities) shall apply to an S-3 Registration, except that a registration effected pursuant to this Section 5.3 shall not be counted as a Demand Registration effected pursuant to Section 5.1.

(b) Shelf Registration

Any S-3 Registration provided by this Section 5.3 may be a “shelf-registration” under Rule 415 of the Securities Act (or a comparable registration under the securities laws of any other applicable jurisdiction). The Company shall use its reasonable best efforts to keep such Registration Statement continuously effective for a period ending on the earlier of (i) two years from the date on which the SEC declares such a Registration Statement effective under the Securities Act (or the securities laws of such other applicable jurisdiction) and (ii) the date on which all of the Registrable Securities covered by such Registration Statement have been sold.

(c) Deferral

The Company may defer the filing (but not the preparation) or the request for effectiveness of a Registration Statement required by this Section 5.3 until a date not later than 90 days after the date which is 90 days after the request for an S-3 Registration if (i) the Company or any of its Subsidiaries are engaged in confidential negotiations or other confidential business activities, disclosure of which would be required in such Registration Statement (but would not be required if such Registration Statement were not filed), and the Board of Directors determines in good faith that such disclosure would be materially detrimental to the Company and its stockholders, or (ii) prior to receiving the S-3 Registration request, the Board of Directors had determined to effect a registered underwritten public offering of the Company’s securities for the Company’s account and the Company had taken substantial steps (including, but not limited to, selecting a managing underwriter for such offering) and is proceeding with reasonable diligence to effect such offering. In order to defer the filing or effectiveness of a Registration Statement pursuant to this Section 5.3(c), the Company shall promptly (but in any event within 10 days), upon determining to seek such deferral, deliver to each Holder requesting to have shares registered pursuant to the S-3 Registration a certificate signed by an executive officer of the Company stating that the Company is deferring such filing or effectiveness pursuant to this Section 5.3(c) and a general statement of the reason for such deferral and an approximation of the anticipated delay. The Company may defer the filing or effectiveness of a particular Registration Statement pursuant to this Section 5.3(c) only once.

Section 5.4 Additional Registration Rights; No Inconsistent Agreement

Other than the registration rights specifically stated in this Agreement, no registration rights equal or senior to the registration rights set forth in this Article 5 may be granted by the Company to any party without the prior consent of the Preferred Holders holding at least, for so long as Blue Ridge China and EI each hold their respective Preferred Threshold Shares, seventy-five percent (75%), and otherwise, fifty percent (50%) of the Subject Shares. If any such consent is granted, then unless otherwise agreed upon by the Preferred Holders holding at least, for so long as Blue Ridge China and EI each hold their respective Preferred Threshold Shares, seventy-five percent (75%), and otherwise, fifty percent (50%) of the Subject Shares, any right given by

 

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the Company to any holder or prospective holder of the Company’s securities in connection with the registration of securities shall (i) be conditioned such that it shall be consistent with the rights of the holders of Registrable Securities provided in this Agreement, and (ii) shall not materially adversely affect the right of the Holders of Registrable Securities to participate in Piggyback Registrations in the manner set forth in this Agreement. The Company represents and warrants that except as provided for herein, and in the Equity Registration Rights Agreement, no holder of the Company’s securities owns or possesses any registration rights with respect to any of the Company’s securities. Notwithstanding anything to the contrary contained herein, the Preferred Holders holding at least seventy-five percent (75%) of the Subject Shares hereby consent to the Equity Registration Rights Agreement and the registration rights granted by the Company therein.

Section 5.5 Lockup Agreement

(a) Each of the Holders of Registrable Securities agrees that, if the Company is issuing equity securities to the public in an underwritten offering, and if requested by the Company and the managing underwriters, not to sell or otherwise transfer or dispose of any Equity Securities of the Company ten (10) days prior to or during the one hundred and eighty (180) day period following the effective date of a Registration Statement of the Company filed under the Securities Act or the securities laws of any other applicable jurisdiction; provided, that all officers, directors and shareholders owning one percent (1%) or more of the Common Shares (assuming the conversion, exercise or exchange, as the case may be, of all Equity Securities that are then outstanding and are convertible, exercisable or exchangeable into Common Shares during such one hundred and eighty (180) day period), shall enter into similar agreements. Such agreement shall be in writing in a form satisfactory to the Company and such underwriter. The Company may impose stop transfer instructions with respect to the securities subject to the foregoing restriction until the end of said one hundred and eighty (180) day period.

(b) The Company agrees not to effect any public sale or distribution of its Capital Stock, or any securities convertible into or exchangeable or exercisable for Capital Stock, during the ten (10) days prior to and during the 90-day period beginning on the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration (except as part of such underwritten registration or pursuant to registrations on Form S-4 or Form S-8 or any successor form or forms or comparable documents under the laws of any other applicable jurisdiction), unless all of the Registrable Securities included in such Registration have been sold.

Section 5.6 Registration Procedures

Whenever the Offerors have requested that any Registrable Securities be registered pursuant to this Agreement, the Company will use its reasonable best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company will expeditiously:

(a) prepare and file with the SEC a Registration Statement with respect to such Registrable Securities and use its reasonable best efforts to cause such Registration Statement to become and remain effective for a period of not less than three months; provided, that before

 

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filing a Registration Statement or prospectus or any amendments or supplements thereto, the Company will furnish to the counsel selected by the Offerors requesting such Registration Statement copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel before such filing is made, and the Company will comply with any reasonable request made by such counsel to make changes to the extent such documents do not comply in all material respects with the Securities Act or the securities laws of any other applicable jurisdiction;

(b) prepare and file with the SEC such amendments (including post effective amendments) and supplements to such Registration Statement and the prospectus used in connection therewith, which documents will be subject to the review of such counsel before such filing is made, and the Company will comply with any reasonable request made by such counsel to make changes to the extent such documents do not comply in all material respects with the Securities Act or the securities laws of any other applicable jurisdiction, as may be necessary to keep such Registration Statement effective for a period of not less than three (3) months and to comply with the provisions of the Securities Act and the securities laws of any other applicable jurisdiction with respect to the disposition of all securities covered by such Registration Statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement;

(c) furnish to each Holder selling Registrable Securities such number of conformed copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits), the prospectus included in such Registration Statement (including each preliminary prospectus) and such other customary documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller;

(d) use its reasonable best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable each Holder selling Registrable Securities to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to service of process except as required by the securities or blue sky laws in any such jurisdiction);

(e) use its reasonable best efforts to cause the Registrable Securities covered by such Registration Statement to be registered with, or approved by, such other public, governmental or regulatory authorities as may be necessary to facilitate the disposition of such Registrable Securities in accordance with the intended methods of disposition;

(f) notify each Holder selling Registrable Securities, (A) when prospectus or any prospectus supplement has been filed with the SEC, and, with respect to such Registration Statement or any post-effective amendment thereto, when the same has been declared effective by the SEC, (B) of any request by the SEC for amendments or supplements to such Registration Statement or related prospectus, or for additional information, (C) of the issuance by the SEC of any stop order or the initiation of any proceedings for such or a similar purpose (and the

 

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Company shall use its reasonable best efforts to obtain the withdrawal of any such order as soon as practicable), (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale of any jurisdiction or the initiation or threatening of any proceeding for such purpose (and the Company shall use its reasonable best efforts to obtain the withdrawal of any such suspension as soon as practicable), (E) of the occurrence of any event that requires the making of any changes to such Registration Statement or related prospectus so that such documents will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances under which they were made, not misleading (and the Company shall, promptly prepare and furnish to each Holder selling Registrable Securities a reasonable number of copies of a supplemented or amended prospectus such that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading), and (F) of the Company’s determination that the filing of a post-effective amendment to such registration statement shall be necessary or appropriate;

(g) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC, as the same may hereafter be amended;

(h) use its reasonable best efforts to cause all such Registrable Securities covered by such Registration Statement to be listed or quoted on the principal securities exchange or national automated quotation system on which similar securities issued by the Company are then listed or quoted or, if not then listed or quoted, use its reasonable best efforts to cause such Registrable Securities to be listed on a national securities exchange or quoted on a national automated quotation system;

(i) provide a transfer agent and registrar for all such Registrable Securities covered by such Registration Statement not later than the effective date of such Registration Statement;

(j) cooperate with each Holder selling Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold; and use its best efforts to cause the registrar and transfer agent for the Company to issue, upon request of such seller, certificates for such number of Registrable Securities registered in such names as such seller may reasonably request at least three (3) days prior to any sale of Registrable Securities;

(k) in the event the offering is an underwritten offering, obtain a “cold comfort” letter from the independent public accountants for the Company, which accountants shall be of nationally recognized standing and shall have certified the Company’s financial statements included in the Registration Statement or any amendment thereto, in customary form and covering such matters of the type customarily covered by such letters;

(l) furnish, at the request of any Holder selling Registrable Securities on the date such securities are delivered to the underwriters for sale pursuant to such registration or, if such securities are not being sold through underwriters, on the date the Registration Statement with

 

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respect to such securities becomes effective, an opinion, dated such date, of counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the seller making such request, covering such legal matters with respect to the registration in respect in which such opinion is being given as the underwriters, if any, and such seller may reasonably request and are customarily included in such opinions;

(m) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the Holders of not less than a majority of the Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities (including effecting a stock split or a combination of shares and causing its officers and directors to participate in “road shows” and other informational meetings organized by the underwriters); and

(n) upon execution and delivery of such customary confidentiality agreements as the Company shall reasonably request, make available for inspection by any Holder selling Registrable Securities covered by such Registration Statement, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by any such seller or underwriter, all pertinent financial and other records, pertinent corporate documents and properties of the Company, and cause the Company’s officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such Registration Statement; provided that the Company shall not be required to make any such information or records available in the event doing so would constitute a violation of any applicable public securities law.

(o) The Company will make generally available to each Holder proposing to sell Registrable Securities, as soon as reasonably practicable, an earnings statement (which need not be audited) for the twelve months beginning after the effective date of a Registration Statement as soon as reasonably practicable after the end of such period, which earnings statement shall satisfy Section 11(a) of the Securities Act and Rule 158 thereunder; provided that, the Company shall not be required to make such statement available in the event doing so would constitute a violation of Regulation FD of the SEC or any other applicable public securities law.

(p) The Company will, at all times after the Company has filed a Registration Statement with the SEC pursuant to the requirements of the Securities Act, the Exchange Act, or the securities laws of any other jurisdiction, file all reports required to be filed by it under the Securities Act, the Exchange Act, and the securities laws of such other jurisdiction and the rules and regulations adopted by the SEC thereunder, and take such further action as any Holder or Holders of Registrable Securities may reasonably request, all to the extent required to enable such holders to be eligible to sell Registrable Securities pursuant to (i) Rule 144 of the Securities Act, or any similar rule or regulation hereafter adopted by the SEC, or (ii) a Registration Statement on Form S-3 or F-3, as applicable, or any similar registration form hereafter adopted by the SEC. Upon request, the Company will deliver to Holders of Registrable Securities a written statement as to whether it has complied with such requirements. In connection with any transfer by any Holder of any Registrable Securities pursuant to Rule 144 of the Securities Act, the Company shall cooperate with such Holder to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, and enable certificates for such

 

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Registrable Securities to be for such number of shares and registered in such names as the Holder may reasonably request in writing at least three (3) days prior to the transfer of such Registrable Securities.

Section 5.7 Registration Expenses

(a) All expenses incident to the Company’s performance of or compliance with this Article 5, including all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, all listings, transfer and/or exchange agent and registrar fees, word processing, duplicating and printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for the Company and all independent certified public accountants (including but not limited to fees and disbursements relating to the “cold comfort” letter described in Section 5.6(k)) and other Persons retained by the Company (all such expenses being herein called “Registration Expenses”, provided, that discounts and commissions to underwriters shall not be considered Registration Expenses for purposes of this Agreement), will be borne by the Company as provided in this Article 5, and the Company will, in any event, pay its internal expenses (including all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on a national automated quotation system.

(b) In connection with each Demand Registration, Piggyback Registration and S-3 Registration, the Company will reimburse the Holders of Registrable Securities covered by such registration for all out-of-pocket expenses incurred by such Holders in connection with such Demand Registration, Piggyback Registration or S-3 Registration, including the reasonable fees and disbursements of one counsel chosen by the Offerors holding at least a majority of the Registrable Securities, in the case of a Demand Registration, or by the Holders holding at least a majority of the Registrable Securities included in such registration, in the case of a Piggyback Registration or S-3 Registration; provided, however, that (i) in the case of a Demand Registration the amount of such reimbursement shall not exceed $50,000 per Demand Registration, (ii) in the case of a Piggyback Registration or S-3 Registration the amount of such reimbursement shall not exceed $10,000 per Piggyback Registration or S-3 Registration for which the Company is obligated to make under this Agreement, and (iii) in the event that any request for a Demand Registration, Piggyback Registration is withdrawn by the Holders that requested such Demand Registration, Piggyback Registration or S-3 Registration for any reason other than a determination by such Holders that information previously disclosed about the Company was not accurate, then the Company shall not reimburse such expenses.

(c) To the extent expenses are not required to be paid by the Company, each holder of securities included in any registration hereunder will pay those expenses allocable to the registration of such holder’s securities so included, and any expenses not so allocable will be borne by all sellers of securities included in such registration in proportion to the aggregate selling price of the securities to be so registered.

 

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Section 5.8 Indemnification

(a) In the event of any registration of any Registrable Securities under the Securities Act or the securities laws of any other jurisdiction pursuant to this Agreement, the Company agrees to indemnify, to the fullest extent permitted by law, each Holder of Registrable Securities covered by the applicable Registration Statement, its respective officers and directors or general or limited partners (and directors and officers thereof and, if such holder is a portfolio or investment fund, its investment advisers or agents) or directors and employees and each Person who directly or indirectly controls such holder within the meaning of the Securities Act or the applicable securities law of such other jurisdiction (each, a “Purchaser Indemnitee”), as follows:

(i) against all losses, claims, damages, liabilities and expenses to which a Purchaser Indemnitee may become subject under the Securities Act or the securities laws of such other jurisdiction, common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses arise out of or are caused by any untrue or alleged untrue statement of material fact contained in any Registration Statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto relating to such securities or any document incorporated by reference relating thereto, or any filing made in connection with the registration or qualification of the offering under “blue sky” or other securities laws of jurisdictions in which Registrable Securities are offered, or any omission or alleged omission of a material fact required to be stated in any of the foregoing or necessary to make the statements therein not misleading in light of the circumstances under which they were made, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such Holder expressly for use therein or by such holder’s failure to deliver a copy of the Registration Statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same;

(ii) against all losses, claims, damages, liabilities and expenses to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement of a material fact or omission of a material fact, or any such alleged untrue statement of a material fact or omission of a material fact, if such settlement is effected with the prior written consent of such Holder; and

(iii) against all expenses reasonably incurred by such Holder in connection with investigating, preparing or defending against any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement of a material fact or omission of a material fact, or any such alleged untrue statement of a material fact or omission of a material fact, to the extent that any such expense is not paid under clause (i) or (ii) above.

In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors and each Person who controls such underwriters within the meaning of the Securities Act or the applicable securities law of such other jurisdiction to the same extent as provided above with respect to the indemnification of the Purchaser Indemnitees.

 

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(b) In connection with any Registration Statement in which a Holder of Registrable Securities is participating, each such Holder will furnish to the Company in writing such information and affidavits relating to such Holder as the Company reasonably requests for use in connection with any such Registration Statement or prospectus and, to the extent permitted by law, will indemnify the Company, its directors and each officer that has signed the Registration Statement and each Person who controls the Company within the meaning of the Securities Act or the applicable securities law of such other jurisdiction (each, a “Company Indemnitee”) against any losses, claims, damages, liabilities and expenses resulting from any untrue statement of material fact contained in the Registration Statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder expressly for use in the preparation of such Registration Statement, prospectus or preliminary prospectus; provided, that the obligation to indemnify will be several, not joint and several, among such Holders of Registrable Securities and the liability of each such Holder of Registrable Securities will be in proportion to and limited to the net amount received by such Holder from the sale of Registrable Securities pursuant to such Registration Statement, prospectus or preliminary prospectus.

(c) Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification, and (ii) unless in such indemnified party’s reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified hereunder by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim in which case such indemnified party shall have the right to employ one counsel. Failure to give prompt written notice shall not release the indemnifying party from its obligations hereunder, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice.

(d) The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and will survive the transfer of securities. The Company also agrees to make such provisions as are reasonably requested by any indemnified party for contribution to such party in the event the Company’s indemnification is unavailable for any reason.

Section 5.9 Contribution

In order to provide for just and equitable contribution in circumstances under which the indemnity contemplated by Section 5.8 is for any reason not available, the parties required to

 

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indemnify by the terms thereof shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnity agreement incurred by any Purchaser Indemnitee, any Company Indemnitee and one or more of the underwriters, except to the extent that contribution is not permitted under Section 11(f) of the Securities Act or under the securities laws of any other applicable jurisdiction. In determining the amounts which the respective parties shall contribute, there shall be considered the parties’ relative fault concerning the matter with respect to which the claim was asserted, knowledge and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or omission and any other equitable considerations appropriate under the circumstances; provided, that as applicable law or a court of competent jurisdiction requires that the relative benefits received by each party from the offering of the Registrable Securities be taken into account in determining the amounts which the respective parties shall contribute, the parties agree that it would be unjust and inequitable not to take into account the benefits received by the Company Indemnitees in connection with the transactions contemplated by the Securities Purchase Agreement, the Share Purchase Agreement and the Share Exchange and Assumption Agreement, including but not limited to the proceeds of the securities sold by the Company to the Purchasers under the Securities Purchase Agreement and the Share Purchase Agreement. The Company and each Person selling securities agree with each other that no seller of Registrable Securities shall be required to contribute any amount in excess of the amount such seller would have been required to pay to an indemnified party if the indemnity under Section 5.8 were available. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Company and each such seller agree with each other, and the underwriters of the Registrable Securities if requested by such underwriters, that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the underwriters were treated as one entity for such purpose) or for the underwriters’ portion of such contribution to exceed the percentage that the underwriting discount bears to the initial public offering price of the Registrable Securities. For purposes of this Section 5.9, each Person, if any, who controls an underwriter within the meaning of Section 15 of the Securities Act or the applicable securities law of any other jurisdiction shall have the same rights to contribution as such underwriter, and each director and each officer of the Company who signed the Registration Statement, and each Person, if any, who controls the Company or a seller of Registrable Securities within the meaning of Section 15 of the Securities Act or the applicable securities law of such other jurisdiction, shall have the same rights to contribution as the Company or a seller of Registrable Securities, as the case may be.

Section 5.10 Participation in Underwritten Registrations

No Person may participate in any registration hereunder which is underwritten unless such Person (a) agrees to sell such Person’s securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements, and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements.

 

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Section 5.11 Transfer of Registration Rights

The rights to cause the Company to register securities pursuant to this Article 5 may be assigned to a transferee or assignee of Registrable Securities; provided, that, the transferee or assignee agrees in writing to be bound by the provisions of this Agreement pursuant to the Transferee Agreement.

Section 5.12 Termination

(a) No Holder shall be entitled to exercise any rights to registration pursuant to Section 5.1, Section 5.2 or Section 5.3 after ten (10) years following the consummation of a Qualified Public Offering.

(b) Notwithstanding the foregoing provisions of this Agreement, the rights to registration pursuant to Section 5.1, Section 5.2, and Section 5.3, the obligations of each of the Shareholders pursuant to Section 5.5(a), and the obligations of the Company pursuant to Section 5.5(b) shall terminate as to any particular Registrable Securities that shall have been (i) sold in a registered public offering, (ii) sold through a broker, dealer or underwriter in a public distribution or a public securities transaction in which the transferee receives a certificate without a securities legend or (iii) sold or distributed pursuant to Rule 144 of the Securities Act, or any similar rule or regulation hereafter adopted by the SEC.

(c) Subject to Section 5.12(a), the provisions of this Article 5 shall survive any termination of this Agreement.

ARTICLE 6

FOREIGN CORRUPT PRACTICES ACT

The Company shall not, and shall cause all Members of the Company Group and the respective Affiliates, directors, officers, agents or employees of any thereof not to, make, directly or indirectly, any payment or promise to pay, or gift or promise to give or authorize such a promise or gift, of any money or anything of value, directly or indirectly, to (a) any foreign official (as such term is defined in the U.S. Foreign Corrupt Practices Act (the “FCPA”)) for the purpose of influencing any official act or decision of such official or inducing him or her to use his or her influence to affect any act or decision of a governmental authority or (b) any foreign political party or official thereof, candidate for foreign political office, or official of a state-controlled entity or public international organization, for the purpose of influencing any official act or decision of such party, official or candidate or inducing such party, official or candidate to use his, her or its influence to affect any act or decision of a foreign governmental authority, in the case of both (a) and (b) above in order to assist the Company Group or any its Affiliates to obtain or retain business for, or direct business to, the Company Group or its Affiliates, as applicable. The Company shall not, and shall cause all Members of the Company Group and the respective Affiliates, directors, officers, agents or employees of the Company and its Subsidiaries not to, make any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of funds or receive or retain any funds in violation of any law, rule or regulation.

 

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ARTICLE 7

ZHANG YONG WARRANT

The Company agrees, and the other parties hereto acknowledge that to the extent any amount of the Burnham Warrants remain unexercised upon termination thereof, Zhang Yong shall be entitled to purchase, within a period not exceeding sixty (60) days after such termination, the Common Shares underlying such remaining unexercised amount, in the manner provided by law, for a purchase price of $0.0001 per share (the “Zhang Yong Warrant”).

ARTICLE 8

XINYUAN SUBSIDIARY SHAREHOLDERS AGREEMENT

Xinyuan Subsidiary, Blue Ridge China, EI, the Management Shareholders and the Burnham Holders hereby each confirm, acknowledge and agree that the Xinyuan Subsidiary Shareholder Agreement has been terminated and is of no further force and effect, effective as of the consummation of the transactions contemplated by the Share Exchange and Assumption Agreement.

ARTICLE 9

MISCELLANEOUS

Section 9.1 Entire Agreement

This Agreement constitutes the entire agreement and understanding among the parties with respect to the subject matter hereof and thereof, and supersedes all previous negotiations and agreements among the parties hereto, either oral or written.

Section 9.2 Amendments

No amendment or modification of this Agreement shall be valid unless set forth in a writing executed by the Company, the Management Shareholders and the Preferred Holders holding at least, for so long as Blue Ridge China and EI each hold their respective Preferred Threshold Shares, seventy-five percent (75%), and otherwise, fifty percent (50%) of the Subject Shares, and such amendment or modification must be approved by each of Blue Ridge China and EI (for so long as they hold at least their respective Preferred Threshold Shares); provided, however, that no amendment or modification that could reasonably be expected to have a materially disproportionate effect on, or to materially increase the obligations of, any Shareholder (including, for purposes of this Section 9.2, the Burnham Holders) shall bind such Shareholder without such Shareholder’s written consent.

Section 9.3 Waivers

Except as otherwise expressly set forth herein, no failure or delay by any party hereto in exercising any right, power or privilege hereunder (and no course of dealing between or among any of the parties) shall operate as a waiver of any such right, power or privilege. No waiver of any default on any one occasion shall constitute a waiver of any subsequent or other default. No single or partial exercise of any such right, power or privilege shall preclude the further or full exercise thereof.

 

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Section 9.4 Severability

If any provision of this Agreement or the application thereof to any Person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law, but only as long as the continued validity, legality and enforceability of such provision or application does not materially (a) alter the terms of this Agreement, (b) diminish the benefits of this Agreement or (c) increase the burdens of this Agreement, for any Person.

Section 9.5 Assignment

The rights and obligations of the parties hereunder shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns. None of the parties hereto may assign their rights or delegate their duties hereunder without the prior written consent of the other parties hereto, except (i) in connection with a transfer of such party’s Equity Securities in accordance with Article 2 and (ii) that each of Blue Ridge China and EI may assign its rights and delegate its duties hereunder to any of their respective Affiliates. All provisions of this Agreement applicable to the Equity Securities shall also apply to any class or series of Capital Stock into which such Equity Securities shall have been changed or any Capital Stock resulting from any reclassification of such Equity Securities.

Section 9.6 Third Parties

Except as otherwise provided herein, nothing herein, expressed or implied, is intended to or shall confer on any person other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement.

Section 9.7 Notices

All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or sent by fax, overnight courier or electronic mail (provided that communications sent by electronic mail are concurrently sent by fax or overnight courier) in accordance with this Section 9.7, to the following addresses:

If to Blue Ridge China:

Blue Ridge Capital Offshore Holdings LLC

660 Madison Avenue, 20th Floor

New York, New York 10065

U.S.A.

Attention: Richard S. Bello

Fax: (212) 446-6201

E-mail: rbello@blueridgelp.com

 

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with required copy (which shall not constitute notice) to:

Blue Ridge Investment Consulting (Beijing) Co., Ltd.

3701 Tower A, Beijing Fortune Plaza

No. 7 Dongsanhuan Rd, Chaoyang District

Beijing, 100020, China

Attention: Justin Tang

Fax: +86 (10) 6530-8839

E-mail: justin@br-china.com

with a required copy (which shall not constitute notice) to:

Friedman Kaplan Seiler & Adelman, LLP

1633 Broadway, 46th Floor

New York, NY 10019

Attention: Gary D. Friedman, Esq.

Fax: (212) 833-1250

E-mail: gfriedman@fklaw.com

If to EI:

EI Fund II China, LLC

c\o Equity International

Two North Riverside Plaza

Suite 700

Chicago, Illinois 60606

Attention: Ira Chaplik

Fax: (312) 454-0157

E-mail: ichaplik@egii.com

with a required copy (which shall not constitute notice) to:

EI Fund II China, LLC

c\o Equity International

Two North Riverside Plaza

Suite 700

Chicago, Illinois 60606

Attention: Brian K. Richter

Fax: (312) 454-0157

E-mail: brichter@egii.com

If to a Management Shareholder:

Xinyuan Real Estate Co., Ltd.

No. 18 Xinyuan Road

Zhengzhou, Henan 450011

Attention: Zhang Yong

Fax: +86-0371-65651686

E-mail: zyong63@163.com

 

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with a required copy (which shall not constitute notice) to:

Baker & McKenzie LLP

BCE Place, 181 Bay Street, Suite 2100

Toronto, Canada M5J 2T3

Attention: Omer Ozden, Esq.

Fax: (416) 863-6275

Email: omer.ozden@bakernet.com

and

TransAsia Lawyers Beijing

Suite 2218, China World Tower 1

1 Jianguomenwai Avenue

Beijing, 100004, China

Attention: Philip Qu, Esq.

Fax: (8610) 6505 8189

E-mail: pqu@TransAsiaLawyers.com

If to a Burnham Holder:

Joel B. Gardner

Burnham Securities Inc.

1325 Avenue of the Americas

New York, N.Y. 10019

Fax: 212-603-7560

E-mail: jgardner@bsibam.com

with a required copy (which shall not constitute notice) to:

Stephen Banker

Skadden, Arps, Slate, Meagher & Flom, LLP

4 Times Square

New York, N.Y. 10036

Fax: 917-777-2760

E-mail: sbanker@skadden.com

If to any other Shareholder, at the address of such Person set forth in the records of the Company.

If to the Company:

Xinyuan Real Estate Co., Ltd.

No. 18 Xinyuan Road

Zhengzhou, Henan 450011

Attention: Zhang Longgen

Fax: +86-0371-65651686

E-mail: longgen_64@yahoo.com

 

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with a required copy (which shall not constitute notice) to:

Baker & McKenzie LLP

BCE Place, 181 Bay Street, Suite 2100

Toronto, Canada M5J 2T3

Attention: Omer Ozden, Esq.

Fax: (416) 863-6275

Email: omer.ozden@bakernet.com

If to the Xinyuan Subsidiary:

Xinyuan Real Estate, Ltd.

No. 18 Xinyuan Road

Zhengzhou, Henan 450011

Attention: Zhang Longgen

Fax: +86-0371-65651686

E-mail: longgen_64@yahoo.com

with a required copy (which shall not constitute notice) to:

Baker & McKenzie LLP

BCE Place, 181 Bay Street, Suite 2100

Toronto, Canada M5J 2T3

Attention: Omer Ozden, Esq.

Fax: (416) 863-6275

Email: omer.ozden@bakernet.com

The burden of proving notice when notice is transmitted by fax or electronic mail shall be the responsibility of the party providing such notice.

Section 9.8 Arbitration

Any dispute between the parties hereto arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be resolved by arbitration. The arbitration shall be administered by the International Chamber of Commerce (the “ICC”) in accordance with its commercial arbitration rules then in effect (the “Rules”). The place of arbitration shall be Hong Kong, Special Administrative Region. The number of arbitrators shall be three. The parties to the dispute shall each appoint one arbitrator, and the two party-appointed arbitrators shall endeavor promptly to appoint the chairperson of the arbitral tribunal. To the extent reasonably feasible, the chairperson and each other arbitrator shall be or shall have been a judge, executive or professional with extensive experience with international commercial transactions who shall be willing to apply the laws of the State of New York to the substance of the dispute. If either

 

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party to the dispute fails to appoint an arbitrator within thirty days after receipt by respondent(s) of the demand for arbitration, or if the two party-appointed arbitrators are unable to appoint the chairperson of the arbitral tribunal within thirty days of the appointment of the second arbitrator, then the ICC shall appoint such arbitrator or the chairperson, as the case may be, in accordance with the listing, ranking and striking provisions of the rules. The arbitrators shall apply the law of the State of New York to the substance of the dispute and the arbitration proceedings shall be conducted in English. The arbitrators shall not award punitive, exemplary, multiple or consequential damages. In the absence of fraud, any decision and award rendered by the arbitrators shall be final and binding on all parties, shall not be subject to appeal except as provided by law and may be entered and enforced in any court having jurisdiction. The parties hereby consent to the exclusive jurisdiction of (i) the Supreme Court of the State of New York and the United States District Court for the Southern District of New York, and (ii) courts with appropriate jurisdiction to hear such matters in Hong Kong, Special Administrative Region, for temporary injunctive or other relief in aid of arbitration or to prevent irreparable harm and to the non-exclusive jurisdiction of such courts for enforcement of any award by the arbitrators. Without prejudice to such provisional remedies as may be available under the jurisdiction of such courts, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal’s orders to that effect. Each party shall bear its own arbitration expenses and one-half of the ICC’s and the chairperson’s fees and expenses, unless the arbitrators determine that it would be equitable if all or a portion of the prevailing party’s expenses should be borne by the other party.

Section 9.9 Governing Law

This Agreement shall be governed by and construed in accordance with the laws of the State of New York without application of principles of conflicts of law.

Section 9.10 Specific Performance

The parties hereby declare that it is impossible to measure in money the damages which will accrue to a party hereto by reason of a failure to perform any of the obligations under this Agreement. Therefore, the parties hereto shall have the right to specific performance of the obligations of the other parties under this Agreement (without the imposition of any bond or security), and if any party hereto shall institute any action or proceeding to enforce the provisions hereof, any Person (including the Company) against whom such action or proceeding is brought hereby waives the claim or defense therein that such party has or have an adequate remedy at law, and such Person shall not urge in any such action or proceeding the claim or defense that such remedy at law exists.

Section 9.11 Interpretation

As all parties have participated in the drafting of this Agreement, any ambiguity shall not be construed against any party as the drafter. Unless the context of this Agreement clearly requires otherwise, (a) “including” has the inclusive meaning frequently identified with the phrase “including, but not limited to,” (b) references to “hereof,” “hereunder” or “herein” or

 

44

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words of similar import relate to this Agreement, (c) when a reference is made in this Agreement to an Article or Section, such reference shall be to an Article or Section of this Agreement unless otherwise indicated, and (d) the terms defined hereunder shall have the meanings therein specified for all purposes of this Agreement, applicable to both the singular and plural forms of any of the terms defined herein. The section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. All terms and words used in this Agreement, regardless of the number and gender in which they are used, shall be deemed and construed to include any other number and any other gender as the context of this Agreement requires. Each of the recitals, preamble and exhibits to this Agreement are incorporated by reference herein as if fully recited herein in its entirety.

Section 9.12 Counterparts

This Agreement may be executed in two or more counterparts, each of which when so executed shall be an original, but all of which together shall constitute one agreement. Facsimile signatures shall be deemed original signatures.

Section 9.13 Further Documentation

Each of the parties hereto shall execute and deliver such other agreements and instruments as from time to time may be deemed advisable or appropriate to effect the intent and purpose of this Agreement.

Section 9.14 Termination

(a) This Agreement shall continue in full force and effect for so long as any party hereto or any successor or transferee thereof has any obligation hereunder; provided, that, except as otherwise provided herein, this Agreement shall terminate upon the expiration of any period of four consecutive weeks following the completion of a Qualified Public Offering during which the weekly trading volume in each such week of the Common Shares on the New York Stock Exchange, the National Association of Securities Dealers Automated Quotation System or applicable major international securities exchange exceeds one-half the number of Common Shares (on a Fully Diluted Basis) then held by Blue Ridge China and EI immediately after giving effect to such Qualified Public Offering.

(b) The rights and obligations of any Shareholder hereunder shall terminate with respect to any Equity Securities transferred by it in compliance with this Agreement upon consummation of such transfer.

Section 9.15 Rights of Shareholders

Except as otherwise provided herein, whenever this Agreement provides for the Shareholders to make a payment, or to make a determination or give their consent with respect to any matter, such payment shall be made by the Shareholders in proportion to the relative number of Common Shares on a Fully Diluted Basis then held by the Shareholders, and such determination shall be made or consent given (or withheld) by holders of at least a majority of the total number of Common Shares on a Fully Diluted Basis.

 

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Section 9.16 Aggregation of Shares

For purposes of determining the availability of any rights under this Agreement, the holdings of Equity Securities of any Shareholder shall be aggregated with the holdings of its transferees that are (i) Affiliates of such Shareholder, and (ii) shareholders, partners or members of such Shareholder or any Affiliate of such Shareholder (or former shareholders, partners, members of such Shareholder) or any Affiliate of such Shareholder that received their Equity Securities by way of distribution or dividend from such Shareholder or its Affiliates, members of the Immediate Family of any such shareholders, partners or members of such Shareholder or any Affiliate of such Shareholder, and estate-planning vehicles established for the benefit of any such shareholders, partners or members of such Shareholder or any Affiliate of such Shareholder.

Section 9.17 Recapitalization

Whenever the number of outstanding shares of the Company is changed by reason of a stock split, stock dividend, stock combination, recapitalization, reorganization or similar event, each specified number of shares referred to in this Agreement shall be adjusted accordingly.

Section 9.18 Certificate

Whenever the number of shares of authorized Common Shares is not sufficient in order to issue Common Shares upon conversion of Series A Preferred Shares in accordance with the Memorandum of Association, (i) the Company shall promptly amend the Memorandum of Association in order to authorize a sufficient number of Common Shares, and (ii) each Shareholder agrees to vote such Shareholder’s Voting Shares (now owned or hereafter acquired) in favor of such amendment.

Section 9.19 Conflict

In the event of a conflict between this Agreement and the Memorandum of Association of the Company, the provisions of this Agreement shall prevail as between the Shareholders only, who hereby undertake to use their voting powers as Shareholders to amend the Memorandum of Association to the fullest extent permissible by law to remove the conflict.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

 

[Signature Page to Amended and Restated Shareholders Agreement]

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[Signature Page to Amended and Restated Shareholders Agreement]

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EXHIBIT A

TRANSFEREE AGREEMENT

THIS TRANSFEREE AGREEMENT is made this          day of                     , 200    , and between [                                        ] with an address at [                    ] (the “Transferee”) and Xinyuan Real Estate Co., Ltd., a Cayman Islands company (the “Company”).

WHEREAS, the Transferee has or expects to receive shares of the Company’s equity securities from a Shareholder or the Company; and

WHEREAS, the parties hereto wish to provide for the continuity of ownership of the shares of equity securities under the circumstances stated in the Shareholders Agreement, dated as of October 31, 2007 (the “Shareholders Agreement”), by and among Blue Ridge China Partners, L.P., a Cayman Islands exempted limited partnership, EI Fund II China, LLC, a Delaware limited liability company, Zhang Yong, a PRC national, Yang Yuyan, a PRC national, and other parties thereto (collectively the “Shareholders”), the Company and Xinyuan Real Estate, Ltd., a copy of which Agreement is attached hereto and made a part hereof; and

WHEREAS, the Company, on behalf of itself and each of the Shareholders, and the Transferee wish to comply with the provisions of the Shareholders Agreement by entering into this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained in this Agreement, the parties covenant and agree as follows:

Section 1. Automatically on the full execution of this Agreement by the parties hereto, the Transferee will be deemed to be a “Shareholder” under the Shareholders Agreement to the same extent and effect as if the Transferee were an original party to the Shareholders Agreement such that each of the obligations and, except as otherwise specifically set forth in the Shareholders Agreement, rights of a “Shareholder” under this Agreement will automatically become binding upon the Transferee.

Section 2. With respect to all shares of equity securities of the Company and all interests therein now or at any time in the future held by the Transferee (the “Equity Securities”), the Transferee agrees that the Equity Securities are subject to each of the restrictions as to transfer and each of the other terms and conditions contained in the Shareholders Agreement.

Section 3. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective legal representatives, successors, assigns and heirs.

Section 4. This Agreement shall be governed by and will be construed in accordance with the laws of the State of New York without regard to principles of conflicts of law.

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IN WITNESS WHEREOF, the parties have duly executed or caused to be executed this Agreement on the date set forth above.

 

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EXHIBIT B

LETTER AGREEMENT

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TABLE OF CONTENTS

 

						Page
Article 1 Definitions						1
Article 2 Transfers of Capital Stock						7
		Section 2.1		General Restrictions on Transfer		7
		Section 2.2		Right of First Refusal on Series A Preferred Shares		8
		Section 2.3		Co-Sale Right		11
		Section 2.4		Right of First Refusal on Common Shares held by Certain Shareholders		13
		Section 2.5		Securities Act Legend		15
Article 3 Board Members; Observer Rights						16
		Section 3.1		Board Members		16
		Section 3.2		Boards of Subsidiaries and Other Entities		17
		Section 3.3		Committees		17
		Section 3.4		Observer Rights		17
		Section 3.5		Rights of Blue Ridge China and EI under Article 3		18
Article 4 Covenants						18
		Section 4.1		Delivery of Financial Statements		18
		Section 4.2		Inspection		20
		Section 4.3		Additional Equity Financings; Qualified Public Offering		20
		Section 4.4		Non-Compete; Non-Solicitation		21
		Section 4.5		Approval Rights		21
		Section 4.6		U.S. Shareholders		24
		Section 4.7		Additional Investments		24
		Section 4.8		Management Shareholder Restrictions		24
Article 5 Registration Rights						25
		Section 5.1		Demand Registrations		25
		Section 5.2		Piggyback Registrations		27
		Section 5.3		S-3 Registration		28
		Section 5.4		Additional Registration Rights; No Inconsistent Agreement		30
		Section 5.5		Lockup Agreement		30
		Section 5.6		Registration Procedures		31
		Section 5.7		Registration Expenses		34
		Section 5.8		Indemnification		35
		Section 5.9		Contribution		37
		Section 5.10		Participation in Underwritten Registrations		38
		Section 5.11		Transfer of Registration Rights		38
		Section 5.12		Termination		38
Article 6 Foreign Corrupt Practices Act						38

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Article 7 ZHANG YONG WARRANT						39
Article 8 xinyuan subsidiary shareholders agreement						39
Article 9 Miscellaneous						39
		Section 9.1		Entire Agreement		39
		Section 9.2		Amendments		39
		Section 9.3		Waivers		40
		Section 9.4		Severability		40
		Section 9.5		Assignment		40
		Section 9.6		Third Parties		40
		Section 9.7		Notices		40
		Section 9.8		Arbitration		44
		Section 9.9		Governing Law		45
		Section 9.10		Specific Performance		45
		Section 9.11		Interpretation		45
		Section 9.12		Counterparts		45
		Section 9.13		Further Documentation		45
		Section 9.14		Termination		46
		Section 9.15		Rights of Shareholders		46
		Section 9.16		Aggregation of Shares		46
		Section 9.17		Recapitalization		46
		Section 9.18		Certificate		46
		Section 9.19		Conflict		47
Exhibit A    Transferee Agreement

 

ii

Exhibit 10.11

THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE LAWS OF ANY OTHER JURISDICTION. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR A COMPARABLE DOCUMENT UNDER THE LAWS OF ANY OTHER JURISDICTION OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED.

Warrant No. P-2/A

XINYUAN REAL ESTATE CO., LTD.

August 28, 2007

AMENDED AND RESTATED WARRANT TO PURCHASE

SERIES A CONVERTIBLE PREFERRED SHARES

This Amended and Restated Warrant is issued to EI Fund II China, LLC (the “Holder”) by Xinyuan Real Estate Co., Ltd., a company organized and existing under the laws of the Cayman Islands (the “Company”), in connection with the receipt by the Holder of Series A Convertible Preferred Shares, par value $0.0001 per share (“Preferred Shares”), of the Company pursuant to that certain Share Exchange and Assumption Agreement, dated as of April 9, 2007, by and among the Holder, the Company and the other parties thereto, pursuant to which the Company assumed and undertook to satisfy, perform, discharge and fulfill all of the covenants, terms, conditions, obligations and liabilities of Xinyuan Real Estate, Ltd., a company organized and existing under the laws of the Cayman Islands (the “Xinyuan Subsidiary”) under that certain Securities Purchase Agreement, dated as of August 22, 2006 (the “Purchase Agreement”), as amended, by and among the Holder, the Xinyuan Subsidiary and the other parties thereto. Capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Purchase Agreement.

1. Exercise of Warrant. Subject to the terms and conditions set forth herein, the Holder shall be entitled, at any time during the Exercise Period, to purchase from the Company, at a price of $0.01 per share (the “Exercise Price”), up to that number of fully paid Preferred Shares that, if issued to the Holder on the date hereof, would result in the Percentage Interest of the Holder being equal to a fraction, expressed as a percentage, the numerator of which is $10,000,000 and the denominator of which is equal to (i) $80,717,000, minus (ii) the excess (if any) of $32,000,000 over 2007 Net Income, minus (iii) the excess (if any) of $48,000,000 over 2008 Net Income; provided, that if the resulting Percentage Interest is greater than 14.4%, the Percentage Interest of the Holder shall be deemed to be 14.4% for purposes of this calculation.

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2. Termination of Warrant. The Exercise Period shall not commence, and this Warrant shall terminate and shall not be exercisable, if either (i) the Company consummates a Qualified Public Offering (as defined in the Amended and Restated Articles of Association of the Company) prior to March 31, 2008 or (ii) it is determined in accordance with Section 3 that the Profit Target has been achieved. The “Profit Target” shall be deemed to have been achieved if (i) both (A) 2007 Net Income equals or exceeds $32,000,000 and (B) the sum of 2008 Net Income plus the excess (if any) of 2007 Net Income over $32,000,000 equals or exceeds $48,000,000 or (ii) the sum of 2007 Net Income plus 2008 Net Income equals or exceeds $80,000,000.

3. Determination of Net Income

(a) 2007 Net Income. As soon as practicable, but in any event within 90 days after the end of the 2007 fiscal year, the Company shall deliver to the Holder (i) an income statement for such fiscal year, a balance sheet and statement of shareholders’ equity as of the end of such year, and a statement of cash flows for such year, such financial reports to be on a consolidated basis for the Company and its subsidiaries, prepared in accordance with United States generally accepted accounting principles (“GAAP”), consistently applied, and audited and certified by independent public accountants of nationally recognized standing selected by the Company and (ii) a certificate of the chief financial officer of the Company setting forth in reasonable detail the calculation of 2007 Net Income. The Holder shall have the right to object to the determination of 2007 Net Income in accordance with paragraph (c) below.

(b) 2008 Net Income and Profit Target. As soon as practicable, but in any event within 90 days after the end of the 2008 fiscal year, the Company shall deliver to the Holder (i) an income statement for such fiscal year, a balance sheet and statement of shareholders’ equity as of the end of such year, and a statement of cash flows for such year, such financial reports to be on a consolidated basis for the Company and its subsidiaries, prepared in accordance with GAAP, consistently applied, and audited and certified by independent public accountants of nationally recognized standing selected by the Company and (ii) a certificate of the chief financial officer of the Company setting forth in reasonable detail the calculation of 2008 Net Income and the calculation showing the achievement (or not) of the Profit Target; provided, that if the Company fails to deliver such financial statements or such certificate within 120 days after the end of the 2008 fiscal year, the Profit Target will be deemed not to have been met, and the Exercise Period will commence on the business day next following such 120^th day. The Holder shall have the right to object to the determination of 2008 Net Income or the achievement of the Profit Target in accordance with paragraph (c) below.

(c) Objection Procedure

(i) Unless the Holder gives written notice to the Company of its objection (an “Objection”) to the Company’s calculation of 2007 Net Income, 2008 Net Income or the achievement of the Profit Target within 30 days following its receipt of the applicable financial statements and accompanying chief financial officer’s certificate, the Company’s calculation shall be final and

 

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binding upon the parties for purposes of this Warrant. If the Holder waives in writing its right to deliver an Objection with respect to any such determination, the applicable determination shall be final and binding upon the parties as of the date of delivery of such waiver. Any Objection shall specify in reasonable detail the nature of any disagreement so asserted. Upon request of the Holder, the Company shall promptly provide a representative of the Holder such access to the books and records of the Company and its subsidiaries as are reasonably necessary to confirm the Company’s calculation of 2007 Net Income, 2008 Net Income or the achievement of the Profit Target, as the case may be, and the Holder agrees to maintain any such information in strict confidence (except for such disclosure to advisors or otherwise as appropriate in connection with the proceedings referred to below in clause (ii)). During the 15-day period following the delivery of an Objection, the Company and the Holder shall attempt in good faith to resolve any differences which they may have with respect to any matter specified in the Objection.

(ii) If at the end of such 15-day period, the Company and the Holder shall have failed to reach written agreement with respect to all matters specified in any Objection, any matter that remains in dispute shall promptly be submitted to an independent accounting firm of nationally recognized standing (the “Accountant”) designated by the Company and the Holder within ten days after the expiration of such 15-day period, or, if they cannot agree on an accounting firm, such dispute shall be promptly referred to the American Arbitration Association (the “AAA”) and an independent accounting firm of nationally recognized standing shall be appointed thereby. The Accountant shall consider only the matters specified in the Objection. The Accountant shall act promptly to resolve all matters specified in the Objection, and shall give its decision within 30 days after the referral of the matter to it. Upon resolution by the Accountant of all matters specified in the Objection, the Accountant shall determine the 2007 Net Income, the 2008 Net Income or whether the Profit Target has been achieved, as the case may be, on the basis of the matters it has resolved. The Accountant’s decisions and determinations with respect to all matters specified in the Objection and its determination as to whether the Profit Target has been achieved shall be final and binding upon the Company and the Holder. The costs and expenses of the Accountant shall be borne equally by the Company, on the one hand, and the Holder and any other holder of a substantially identical warrant originally issued as of the date hereof making a similar objection under such warrant (pro rata in accordance with the respective number of warrant shares issuable under each such warrant), on the other hand.

4. Negative Covenants.

Without limiting any other covenant of the Company to operate its business in the ordinary course of business consistent with past practice, under its Articles of Association and the Shareholders Agreement dated as of April 9, 2007, between the Company, the Holder and the other parties thereto, until the end of the Company’s 2008 fiscal year, the Company shall not:

(a) change any method of accounting or accounting practice or policy, other than those (i) required by GAAP, consistently applied during the relevant time period, (ii) pursuant to guidance provided by the Securities and Exchange Commission or other applicable regulatory authority, with the Holder’s consent, which consent shall not be unreasonably withheld, or (iii) as recommended by the Company’s independent auditors, with the Holder’s consent, which consent shall not be unreasonably withheld; and

 

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(b) (i) give or offer discounts or provide other similar benefits, (ii) reduce, defer or capitalize expenses, or (iii) otherwise artificially affect the 2007 Net Income or the 2008 Net Income, except in the ordinary course of business consistent with past practice.

5. Definitions. As used herein, the following terms shall have the following meanings:

“2007 Net Income” means Consolidated Net Income for the 2007 fiscal year of the Company.

“2008 Net Income” means Consolidated Net Income for the 2008 fiscal year of the Company.

“Affiliate” means, with respect to any given person, any person controlling, controlled by or under common control with the given person. The term “control” (including the terms “controlling”, “controlled by,” and “under common control with”) shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a specified entity, whether through the ownership of voting securities, by contract or otherwise.

“Consolidated Net Income” means, for any period, the consolidated net income of the Company and its subsidiaries for such period as set forth in the income statement included in the applicable financial statements deliverable to the Holder pursuant to Section 3(a) and 3(b), provided, that Consolidated Net Income (i) shall be limited to net income from continuing operations, and shall exclude nonrecurring items of income and gain that are treated as “extraordinary” under GAAP, and (ii) shall exclude items of income and gain arising out of transactions with Affiliates that are not on arm’s-length terms commercially available from unaffiliated third parties.

“Exercise Period” means the period beginning on the date (if any) that it is determined in accordance with Section 3 that the Profit Target has not been achieved and ending at 5:00 p.m., Hong Kong time on August 25, 2014, or if such date shall in Hong Kong, Special Administrative Region be a holiday or a day on which banks are authorized to close, then 5:00 p.m., Hong Kong time the next following day which in Hong Kong, Special Administrative Region is not a holiday or a day on which banks are authorized to close.

“Percentage Interest” of the Holder means, as of the date of the Closing Date, the quotient obtained by dividing (i) the number of Common Shares then owned by the Holder on a fully-diluted and as-converted basis (giving effect to the conversion,

 

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exchange and exercise of all securities or rights of the Holder that are convertible or exchangeable into or exercisable for Common Shares) by (ii) the number of Common Shares then outstanding on a fully-diluted and as-converted basis (giving effect to the conversion, exchange and exercise of all securities or rights that are convertible or exchangeable into or exercisable for Common Shares).

6. Methods of Exercise

During the Exercise Period, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby by either of the following methods:

(a) Cash Exercise. The Holder may exercise, in whole or in part, the purchase rights evidenced hereby by:

(i) surrendering this Warrant, together with a notice of exercise in the form attached as Exhibit A hereto, to the Company at its principal offices; and

(ii) paying to the Company an amount in cash equal to the aggregate Exercise Price for the number of Preferred Shares being purchased.

(b) Net Exercise. Alternatively, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby by:

(i) surrendering this Warrant, together with a notice of exercise in the form attached as Exhibit A hereto, to the Company at its principal offices; and

(ii) receiving such lesser number of Preferred Shares calculated in accordance with the formula below representing the satisfaction of the payment to the Company of an amount equal to the aggregate Exercise Price for the number of Preferred Shares being purchased.

In the event a Holder chooses to exercise the purchase rights evidenced hereby in accordance with this Section 6(b) (a “Net Exercise”), the Company shall issue to such Holder a number of Preferred Shares computed using the following formula:

X = [Y * (A-B)]/A

where:

X = the number of Preferred Shares to be issued to the Holder

Y = the number of Preferred Shares purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the number of Preferred Shares for which this Warrant is being exercised (at the date of such calculation)

A = the fair market value of one Preferred Share (at the date of such calculation)

B = the Exercise Price (as adjusted to the date of such calculation).

 

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For purposes of this Section 6(b), the fair market value of a Preferred Share shall be the average of the closing prices of the Preferred Shares (or a number of Common Shares into which the Preferred Shares are convertible) quoted (i) in the over-the-counter market in which the Preferred Shares (or Common Shares) are traded, or (ii) on any exchange or electronic securities market on which the Preferred Shares (or Common Shares) are listed for trading, as applicable, for the 30 trading days prior to the date of determination of fair market value (or such shorter period of time during which such Preferred Shares (or Common Shares) were traded over-the-counter or on such exchange). If the Preferred Shares (or Common Shares) are not traded on the over-the-counter market, an exchange or an electronic securities market, the fair market value of a Preferred Share shall be determined by dividing:

(i) the cash price at which a willing seller would sell and a willing buyer would buy all of the issued and outstanding Preferred Shares in a transaction negotiated at arm’s length by unaffiliated third parties, each being apprised of and considering all relevant facts, circumstances and factors, and neither acting under compulsion or time constraints, by

(ii) the number of then issued and outstanding Preferred Shares.

In the case of any determination of the fair market value of the Preferred Shares pursuant to this Section 6(b), fair market value shall not include any discount (i) by reason of such Preferred Shares representing a minority interest, or (ii) to reflect the fact that such Preferred Shares are illiquid and subject to the restrictions on transfer set forth in this Warrant and the Shareholders Agreement.

If the Company and the Holder cannot agree on the fair market value of a Preferred Share within 30 days after the date upon which the Holder surrenders this Warrant, together with a notice of exercise in the form attached as Exhibit A hereto, to the Company at its principal offices (the “Negotiation Period”), the valuation shall be made by an appraiser of nationally recognized standing designated jointly by the Company and the Holder within ten days after the expiration of the Negotiation Period or, if they cannot so agree on an appraiser, such dispute shall be promptly referred to the AAA and an appraiser of nationally recognized standing shall be appointed thereby. The valuation shall be made by such appraiser within 20 days of its designation by the AAA. Any valuation made by an appraiser under this Section 6(b) shall be determinative of such value and binding upon the Company and the Holder. The cost of such valuation shall be borne equally by the Company and the Holder, but each party shall bear its own legal expenses, if any, incurred in connection therewith.

(c) Partial Exercise. This Warrant may be exercised for less than the full number of Preferred Shares, in which case the number of Preferred Shares receivable upon the exercise of this Warrant as a whole, and the sum payable upon the exercise of this Warrant as a whole, shall be proportionately reduced. Upon any such partial exercise, the Company at its expense will forthwith issue to the Holder a new Warrant or

 

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Warrants of like tenor exercisable for the number of Preferred Shares as to which the Holder’s purchase rights have not been exercised, such Warrant or Warrants to be issued in the name of the Holder or his or its nominee (upon payment by the Holder of any applicable transfer taxes).

(d) This Warrant may be exercised upon surrender of this Warrant pursuant to the Notice provisions of Section 16 hereof to the Chief Financial Officer of the Company, No. 18 Xinyuan Road, Zhengzhou, Henan, People’s Republic of China 450011, Facsimile: +86-371-6565-1686 or such other person as the Company may designate, together with a duly completed and executed form of exercise attached hereto and, if applicable, payment of an amount equal to the then applicable Exercise Price multiplied by the number of Common Shares then being purchased upon such exercise. The payment of the Exercise Price shall be in cash or by certified check or official bank check, payable to the order of the Company.

7. Certificates for Preferred Shares. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the number of Preferred Shares so purchased shall be issued and delivered by the Company to the Holder as soon as practicable thereafter, and in any event within ten days of the delivery by the Holder to the Company of the notice of exercise in the form attached as Exhibit A hereto, together with, in lieu of any fractional Preferred Share to which the Holder would otherwise be entitled, cash in an amount determined in accordance with Section 10.

8. Adjustment of Exercise Price and Number of Preferred Shares. The Holder and the Company agree that the adjustments provided for in this Section 8 are not intended to be duplicative of any corresponding adjustments provided for by the terms of the Preferred Shares issuable upon exercise of this Warrant, and accordingly no such duplicative adjustments shall be made hereunder. The number of and kind of securities purchasable upon exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time as follows:

(a) Subdivisions, Combinations and Other Issuances. If the Company shall at any time prior to the expiration of this Warrant subdivide the Preferred Shares, by split-up or otherwise, or combine the Preferred Shares, or issue additional Preferred Shares as a dividend, the number of Preferred Shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the purchase price payable per Preferred Share, but the aggregate purchase price payable for the total number of Preferred Shares purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 8(a) shall become effective at the close of business on the date the subdivision or combination becomes effective, or as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend.

(b) Reclassification, Reorganization, Consolidation, Merger or Sale of Assets. In case of any reclassification, capital reorganization, or change in the capital stock of the Company (other than as a result of a subdivision, combination, or stock dividend

 

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provided for in Section 8(a) above), or consolidation or merger of the Company with or into another corporation, or the sale of all or substantially all of the assets of the Company to another corporation pursuant to which the holders of Preferred Shares shall be entitled to receive stock, securities, cash or other property with respect to or in exchange for Preferred Shares, then, as a condition to such reclassification, reorganization, change, consolidation, merger or sale, the Company shall make appropriate provision so that the holder of this Warrant shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of stock, securities, cash or other property receivable in connection with such reclassification, reorganization, change, consolidation, merger or sale by a holder of the same number of Preferred Shares as were purchasable by the holder of this Warrant immediately prior to such reclassification, reorganization, change, consolidation, merger or sale. In any such case, appropriate provisions shall be made with respect to the rights and interest of the holder of this Warrant so that the provisions hereof shall thereafter be applicable with respect to any stock, securities, cash or other property deliverable upon exercise hereof, and appropriate adjustments shall be made to the purchase price per Preferred Share payable hereunder, provided the aggregate purchase price shall remain the same.

The Company will not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets in such sale shall assume, by written instrument mailed or delivered to the Holder at the last address of the Holder appearing on the books of the Company, the obligation to deliver to the Holder such shares of stock, securities, cash or other property as, in accordance with the foregoing provisions, the Holder may be entitled to purchase. If a purchase, tender or exchange offer is made to and accepted by the holders of more than 50% of the outstanding Preferred Shares, the Company shall not effect any consolidation, merger or sale with the person having made such offer or with any Affiliate of such person, unless prior to the consummation of such consolidation, merger or sale the Holder shall have been given a reasonable opportunity to then elect to receive upon the exercise of this Warrant either the stock, securities, cash or other property then issuable with respect to the Preferred Shares or the stock, securities, cash or other property, or the equivalent, issued to holders of Preferred Shares in accordance with such offer.

(c) Notice of Adjustment. When any adjustment is required to be made in the number or kind of shares purchasable upon exercise of this Warrant, or in the Exercise Price, the Company shall provide the Holder with not less than 20 days’ prior written notice of the date on which the event requiring such adjustment is to take place and information, reasonably detailed, regarding the pertinent facts of such event, as well as the calculation of the adjusted Exercise Price and the adjusted number of Preferred Shares or securities, cash or other property thereafter purchasable upon exercise of this Warrant.

(d) Adjustment by Board of Directors. If any event occurs as to which, in the opinion of the Board of Directors of the Company, the provisions of this Section 8 are not strictly applicable or if strictly applicable would not fairly protect the rights of the Holder

 

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in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as aforesaid, but in no event shall any adjustment have the effect of increasing the Exercise Price as otherwise determined pursuant to any of the provisions of this Section 8, except in the case of a combination of shares of a type contemplated in Section 8(a), and then in no event to an amount larger than the Exercise Price as adjusted pursuant to Section 8(a).

(e) Officer’s Statement as to Adjustments. Whenever the Exercise Price shall be adjusted as provided in this Section 8, the Company shall forthwith file at each office designated for the exercise of this Warrant, a statement, signed by the Chief Financial Officer of the Company (or an officer holding a comparable position), showing in reasonable detail the facts requiring such adjustment and the Exercise Price that will be effective after such adjustment.

9. No Dilution or Impairment. The Company will not, by amendment of its memorandum or articles of association, or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing, the Company will not increase the par value of any shares of capital stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise, and at all times will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid shares of stock upon the exercise of this Warrant.

10. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor on the basis of the Exercise Price then in effect.

11. Representations, Warranties and Covenants of the Company

(a) Corporate Actions. The Company represents and warrants to the Holder that all corporate actions on the part of the Company, its officers, directors and shareholders necessary for the sale and issuance of this Warrant have been taken.

(b) Issuance of Shares. The Company covenants that the Preferred Shares (and the Common Shares issuable upon exercise thereof), when issued pursuant to the exercise of this Warrant, will be duly authorized, validly issued, and fully paid, and free from all taxes, liens, and charges with respect thereto or the issuance thereof.

(c) Covenants as to Exercise of Warrant. The Company covenants that the Company will, at all times during the Exercise Period, have authorized a sufficient number of Preferred Shares (and Common Shares issuable upon exercise thereof) to

 

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provide for the exercise of the rights represented by this Warrant. If at any time during the Exercise Period the number of authorized but unissued Preferred Shares shall not be sufficient to permit exercise of this Warrant, or the number of authorized but unissued Common Shares shall not be sufficient to permit the conversion of the Preferred Shares issuable upon exercise hereof, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued Preferred Shares (or Common Shares) as shall be sufficient for such purposes.

12. Representations and Warranties by the Holder. The Holder represents and warrants to the Company as follows:

(a) This Warrant and the Preferred Shares issuable upon exercise hereof are being acquired for its own account, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the United States Securities Act of 1933, as amended (the “Act”). Upon exercise of this Warrant, the Holder shall, if so requested by the Company, confirm in writing, in a form satisfactory to the Company, that the securities issuable upon exercise of this Warrant are being acquired for investment and not with a view toward distribution or resale.

(b) The Holder understands that this Warrant and the Preferred Shares issuable upon exercise hereof have not been registered under the Act by reason of their issuance in a transaction exempt from the registration and prospectus delivery requirements of the Act pursuant to Section 4(2) thereof, and that they must be held by the Holder indefinitely, and that the Holder must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Act or is exempted from such registration.

(c) The Holder has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the purchase of this Warrant and the Preferred Shares purchasable pursuant to the terms of this Warrant and of protecting its interests in connection therewith.

(d) The Holder is able to bear the economic risk of the purchase of the Preferred Shares pursuant to the terms of this Warrant.

(e) The Holder is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Act.

13. Restrictive Legend. The Preferred Shares shall be stamped or imprinted with a legend in substantially the following form (unless registered under the Act or if the Holder delivers to the Company an opinion of counsel (who may be an employee of the Holder) reasonably satisfactory in form and substance to the Company, that the Preferred Shares do not require registration under the Act or any applicable state securities laws):

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR THE LAWS OF ANY OTHER JURISDICTION. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN

 

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THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR A COMPARABLE DOCUMENT UNDER THE LAWS OF ANY OTHER JURISDICTION OR AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. THE OFFERING OF THESE SECURITIES HAS NOT BEEN REVIEWED OR APPROVED BY ANY STATE SECURITIES ADMINISTRATOR.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A SHAREHOLDERS AGREEMENT, DATED AS OF APRIL 9, 2007, AS AMENDED, AMONG THE COMPANY AND CERTAIN OF ITS SHAREHOLDERS, A COPY OF WHICH IS ON FILE WITH THE COMPANY. NO SALE, ASSIGNMENT, TRANSFER, PLEDGE, ENCUMBRANCE OR OTHER DISPOSITION OF THE SECURITIES REPRESENTED HEREBY SHALL BE EFFECTIVE UNLESS AND UNTIL THE TERMS AND CONDITIONS OF SAID SHAREHOLDERS AGREEMENT SHALL HAVE BEEN COMPLIED WITH IN FULL.

Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution pursuant to a registration statement under the Act) shall also bear such legend unless, in the opinion of counsel selected by the Holder (who may be an employee of the Holder) and reasonably acceptable to the Company, the securities represented thereby need no longer be subject to restrictions on resale under the Act.

14. Warrant and Shares Transferable

(a) Subject to compliance with the terms and conditions of the Shareholders Agreement and this Section 14, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the holder hereof (except for transfer taxes), upon surrender of this Warrant properly endorsed or accompanied by written instructions of transfer. With respect to any offer, sale or other disposition of this Warrant or any Preferred Shares acquired pursuant to the exercise of this Warrant prior to registration of such Warrant or Preferred Shares, the holder hereof agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder’s counsel, or other evidence, if reasonably requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any U.S. federal or state or Cayman Islands securities law then in effect) of this Warrant or the Preferred Shares and indicating whether or not under the Act certificates for this Warrant or the Preferred Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with such law. Upon receiving such written notice and reasonably satisfactory opinion or other evidence, if so requested, the Company, as promptly as practicable, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such Preferred Shares, all in

 

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accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 14 that the opinion of counsel for the holder or other evidence is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly with details thereof after such determination has been made. Each certificate representing this Warrant or the Preferred Shares transferred in accordance with this Section 14 shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.

(b) Notwithstanding anything to the contrary contained herein, the Holder may, at any time and from time to time, transfer this Warrant or any Preferred Shares acquired pursuant to the exercise of this Warrant and all rights hereunder and thereunder, in whole or in part, without charge to the Holder (except for transfer taxes) to any of the Holder’s shareholders, partners or members by way of distribution or dividend, or to one or more of the Holder’s Affiliates, so long as any such Affiliate is controlled exclusively by the entity making such transfer. Any such transfer shall solely require that the Holder give written notice thereof to the Company; for greater certainty, none of the terms and conditions set forth in Section 14(a) shall be applicable to any transfer governed by this Section 14(b).

15. Rights of Shareholders. No holder of this Warrant shall be entitled, as a Warrant holder, to vote or receive dividends or be deemed the holder of the Preferred Shares or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of Preferred Shares, change of par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised and the Preferred Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein.

16. Notices. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given upon receipt or, if earlier, (a) five days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid or (d) one business day after the business day of facsimile transmission, if delivered by facsimile transmission with copy by first class mail, postage prepaid, and shall be addressed (i) if to the Holder, at the Holder’s address as set forth in the Shareholders Agreement, and (ii) if to the Company, at the address of its principal corporate offices (attention: Chief Executive Officer), or at such other address as a party may designate by ten days advance written notice to the other party pursuant to the provisions above.

 

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17. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement in an amount reasonably satisfactory to it, or (in the case of mutilation) upon surrender and cancellation thereof, the Company will issue, in lieu thereof, a new Warrant of like tenor.

18. Subdivision of Rights. This Warrant (as well as any new warrants issued pursuant to the provisions of this Section 18) is exchangeable, upon the surrender hereof by the Holder, at the principal office of the Company for any number of new warrants of like tenor and date representing in the aggregate the right to subscribe for and purchase the number of Preferred Shares which may be subscribed for and purchased hereunder.

19. “Market Stand-Off” Agreement. The Holder hereby agrees that, during the period of time specified by the Company and an underwriter of Preferred Shares or other securities of the Company, following the effective date of (i) a registration statement of the Company filed under the Act, or (ii) a comparable offering document filed under the applicable laws and regulations of any foreign governmental authority, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period, except Preferred Shares (or Common Shares issued upon conversion thereof) included in such registration or offering; provided, however, that:

(a) all officers and directors of the Company, and each person who holds one percent (1%) or more of the Company’s outstanding capital stock, enter into similar agreements;

(b) such market stand-off time period shall not exceed 180 days; and

(c) the foregoing agreement shall not prohibit privately negotiated transfers of Preferred Shares among the Holder and its Affiliates.

The Holder agrees to provide to the underwriters of any public offering such further agreements as such underwriters may reasonably request in connection with this market stand-off agreement, provided that the terms of such agreements are substantially consistent with the provisions of this Section 19. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the securities of the Company held by the Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period.

Notwithstanding the foregoing, the obligations described in this Section 19 shall not apply to (i) a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the future, (ii) a registration relating solely to a transaction under Rule 145 of the Act, or (iii) any offering which would the equivalent of clause (i) or (ii) under the applicable laws and regulations of any foreign governmental authority.

 

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20. Change, Waiver, Etc. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally except by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought.

21. Remedies. The Company stipulates that the remedies at law of the Holder in the event of any default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that the same may be specifically enforced.

22. Governing Law. This Warrant and all actions arising out of or in connection with this Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflicts of law provisions of the State of New York or of any other state.

23. Rights and Obligations Survive Exercise of Warrant. Unless otherwise provided herein, the rights and obligations of the Company, of the holder of this Warrant and of the holder of the Preferred Shares issued upon exercise of this Warrant, shall survive the exercise of this Warrant.

[Signature page follows]

 

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Issued this      day of August 28, 2007.

 

Acknowledged and Agreed:

 

EI FUND II CHINA, LLC
By:
Name:
Title:

 

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EXHIBIT A

NOTICE OF EXERCISE

 

To:		Xinyuan Real Estate Co., Ltd.
		Attention: Chief Financial Officer

24. The undersigned hereby elects to purchase                      Series A Convertible Preferred Shares (“Preferred Shares”) pursuant to the terms of the attached Warrant.

25. The undersigned shall exercise the attached Warrant (i) by means of a cash payment, and tenders herewith, payment in full for the purchase price of the Preferred Shares being purchased, or (ii) by means of a Net Exercise in accordance with the terms of Section 3(b) of said Warrant, together with all applicable taxes, if any.

26. Please issue a certificate or certificates representing said Preferred Shares in the name of the undersigned or in such other name as is specified below:

 

(Name)
(Address)

27. The undersigned hereby represents and warrants that the aforesaid Preferred Shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale, in connection with the distribution thereof, and that the undersigned has no present intention of distributing or reselling such shares and all representations and warranties of the undersigned set forth in Section 12 of the attached Warrant (including Section 12(e) thereof) are true and correct as of the date hereof.

 

				(Signature)
				(Name)
(Date)
				(Title)

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EXHIBIT B

FORM OF TRANSFER

(To be signed only upon transfer of Warrant)

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto                                                               the right represented by the attached Warrant to purchase                      Series A Convertible Preferred Shares of XINYUAN REAL ESTATE CO., LTD. to which the attached Warrant relates, and appoints                                  Attorney to transfer such right on the books of                     , with full power of substitution in the premises.

Dated:

 

 

Signed in the presence of:

Exhibit 10.12

THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE LAWS OF ANY OTHER JURISDICTION. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR A COMPARABLE DOCUMENT UNDER THE LAWS OF ANY OTHER JURISDICTION OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED.

Warrant No. P-1/A

XINYUAN REAL ESTATE CO., LTD.

August 28, 2007

AMENDED AND RESTATED WARRANT TO PURCHASE

SERIES A CONVERTIBLE PREFERRED SHARES

This Amended and Restated Warrant is issued to Blue Ridge China Partners, L.P. (the “Holder”) by Xinyuan Real Estate Co., Ltd., a company organized and existing under the laws of the Cayman Islands (the “Company”), in connection with the receipt by the Holder of Series A Convertible Preferred Shares, par value $0.0001 per share (“Preferred Shares”), of the Company pursuant to that certain Share Exchange and Assumption Agreement, dated as of April 9, 2007, by and among the Holder, the Company and the other parties thereto, pursuant to which the Company assumed and undertook to satisfy, perform, discharge and fulfill all of the covenants, terms, conditions, obligations and liabilities of Xinyuan Real Estate, Ltd., a company organized and existing under the laws of the Cayman Islands (the “Xinyuan Subsidiary”) under that certain Securities Purchase Agreement, dated as of August 22, 2006 (the “Purchase Agreement”), as amended, by and among the Holder, the Xinyuan Subsidiary and the other parties thereto. Capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Purchase Agreement.

1. Exercise of Warrant. Subject to the terms and conditions set forth herein, the Holder shall be entitled, at any time during the Exercise Period, to purchase from the Company, at a price of $0.01 per share (the “Exercise Price”), up to that number of fully paid Preferred Shares that, if issued to the Holder on the date hereof, would result in the Percentage Interest of the Holder being equal to a fraction, expressed as a percentage, the numerator of which is $15,000,000 and the denominator of which is equal to (i) $80,717,000, minus (ii) the excess (if any) of $32,000,000 over 2007 Net Income, minus (iii) the excess (if any) of $48,000,000 over 2008 Net Income; provided, that if the resulting Percentage Interest is greater than 21.6%, the Percentage Interest of the Holder shall be deemed to be 21.6% for purposes of this calculation.

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2. Termination of Warrant. The Exercise Period shall not commence, and this Warrant shall terminate and shall not be exercisable, if either (i) the Company consummates a Qualified Public Offering (as defined in the Amended and Restated Articles of Association of the Company) prior to March 31, 2008 or (ii) it is determined in accordance with Section 3 that the Profit Target has been achieved. The “Profit Target” shall be deemed to have been achieved if (i) both (A) 2007 Net Income equals or exceeds $32,000,000 and (B) the sum of 2008 Net Income plus the excess (if any) of 2007 Net Income over $32,000,000 equals or exceeds $48,000,000 or (ii) the sum of 2007 Net Income plus 2008 Net Income equals or exceeds $80,000,000.

3. Determination of Net Income

(a) 2007 Net Income. As soon as practicable, but in any event within 90 days after the end of the 2007 fiscal year, the Company shall deliver to the Holder (i) an income statement for such fiscal year, a balance sheet and statement of shareholders’ equity as of the end of such year, and a statement of cash flows for such year, such financial reports to be on a consolidated basis for the Company and its subsidiaries, prepared in accordance with United States generally accepted accounting principles (“GAAP”), consistently applied, and audited and certified by independent public accountants of nationally recognized standing selected by the Company and (ii) a certificate of the chief financial officer of the Company setting forth in reasonable detail the calculation of 2007 Net Income. The Holder shall have the right to object to the determination of 2007 Net Income in accordance with paragraph (c) below.

(b) 2008 Net Income and Profit Target. As soon as practicable, but in any event within 90 days after the end of the 2008 fiscal year, the Company shall deliver to the Holder (i) an income statement for such fiscal year, a balance sheet and statement of shareholders’ equity as of the end of such year, and a statement of cash flows for such year, such financial reports to be on a consolidated basis for the Company and its subsidiaries, prepared in accordance with GAAP, consistently applied, and audited and certified by independent public accountants of nationally recognized standing selected by the Company and (ii) a certificate of the chief financial officer of the Company setting forth in reasonable detail the calculation of 2008 Net Income and the calculation showing the achievement (or not) of the Profit Target; provided, that if the Company fails to deliver such financial statements or such certificate within 120 days after the end of the 2008 fiscal year, the Profit Target will be deemed not to have been met, and the Exercise Period will commence on the business day next following such 120^th day. The Holder shall have the right to object to the determination of 2008 Net Income or the achievement of the Profit Target in accordance with paragraph (c) below.

(c) Objection Procedure

(i) Unless the Holder gives written notice to the Company of its objection (an “Objection”) to the Company’s calculation of 2007 Net Income, 2008 Net Income or the achievement of the Profit Target within 30 days following its receipt of the applicable financial statements and accompanying chief financial officer’s certificate, the Company’s calculation shall be final and

 

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binding upon the parties for purposes of this Warrant. If the Holder waives in writing its right to deliver an Objection with respect to any such determination, the applicable determination shall be final and binding upon the parties as of the date of delivery of such waiver. Any Objection shall specify in reasonable detail the nature of any disagreement so asserted. Upon request of the Holder, the Company shall promptly provide a representative of the Holder such access to the books and records of the Company and its subsidiaries as are reasonably necessary to confirm the Company’s calculation of 2007 Net Income, 2008 Net Income or the achievement of the Profit Target, as the case may be, and the Holder agrees to maintain any such information in strict confidence (except for such disclosure to advisors or otherwise as appropriate in connection with the proceedings referred to below in clause (ii)). During the 15-day period following the delivery of an Objection, the Company and the Holder shall attempt in good faith to resolve any differences which they may have with respect to any matter specified in the Objection.

(ii) If at the end of such 15-day period, the Company and the Holder shall have failed to reach written agreement with respect to all matters specified in any Objection, any matter that remains in dispute shall promptly be submitted to an independent accounting firm of nationally recognized standing (the “Accountant”) designated by the Company and the Holder within ten days after the expiration of such 15-day period, or, if they cannot agree on an accounting firm, such dispute shall be promptly referred to the American Arbitration Association (the “AAA”) and an independent accounting firm of nationally recognized standing shall be appointed thereby. The Accountant shall consider only the matters specified in the Objection. The Accountant shall act promptly to resolve all matters specified in the Objection, and shall give its decision within 30 days after the referral of the matter to it. Upon resolution by the Accountant of all matters specified in the Objection, the Accountant shall determine the 2007 Net Income, the 2008 Net Income or whether the Profit Target has been achieved, as the case may be, on the basis of the matters it has resolved. The Accountant’s decisions and determinations with respect to all matters specified in the Objection and its determination as to whether the Profit Target has been achieved shall be final and binding upon the Company and the Holder. The costs and expenses of the Accountant shall be borne equally by the Company, on the one hand, and the Holder and any other holder of a substantially identical warrant originally issued as of the date hereof making a similar objection under such warrant (pro rata in accordance with the respective number of warrant shares issuable under each such warrant), on the other hand.

4. Negative Covenants.

Without limiting any other covenant of the Company to operate its business in the ordinary course of business consistent with past practice, under its Articles of Association and the Shareholders Agreement dated as of April 9, 2007, between the Company, the Holder and the other parties thereto, until the end of the Company’s 2008 fiscal year, the Company shall not:

(a) change any method of accounting or accounting practice or policy, other than those (i) required by GAAP, consistently applied during the relevant time period, (ii) pursuant to guidance provided by the Securities and Exchange Commission or other applicable regulatory authority, with the Holder’s consent, which consent shall not be unreasonably withheld, or (iii) as recommended by the Company’s independent auditors, with the Holder’s consent, which consent shall not be unreasonably withheld; and

 

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(b) (i) give or offer discounts or provide other similar benefits, (ii) reduce, defer or capitalize expenses, or (iii) otherwise artificially affect the 2007 Net Income or the 2008 Net Income, except in the ordinary course of business consistent with past practice.

5. Definitions. As used herein, the following terms shall have the following meanings:

“2007 Net Income” means Consolidated Net Income for the 2007 fiscal year of the Company.

“2008 Net Income” means Consolidated Net Income for the 2008 fiscal year of the Company.

“Affiliate” means, with respect to any given person, any person controlling, controlled by or under common control with the given person. The term “control” (including the terms “controlling”, “controlled by,” and “under common control with”) shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a specified entity, whether through the ownership of voting securities, by contract or otherwise.

“Consolidated Net Income” means, for any period, the consolidated net income of the Company and its subsidiaries for such period as set forth in the income statement included in the applicable financial statements deliverable to the Holder pursuant to Section 3(a) and 3(b), provided, that Consolidated Net Income (i) shall be limited to net income from continuing operations, and shall exclude nonrecurring items of income and gain that are treated as “extraordinary” under GAAP, and (ii) shall exclude items of income and gain arising out of transactions with Affiliates that are not on arm’s-length terms commercially available from unaffiliated third parties.

“Exercise Period” means the period beginning on the date (if any) that it is determined in accordance with Section 3 that the Profit Target has not been achieved and ending at 5:00 p.m., Hong Kong time on August 25, 2014, or if such date shall in Hong Kong, Special Administrative Region be a holiday or a day on which banks are authorized to close, then 5:00 p.m., Hong Kong time the next following day which in Hong Kong, Special Administrative Region is not a holiday or a day on which banks are authorized to close.

“Percentage Interest” of the Holder means, as of the date of the Closing Date, the quotient obtained by dividing (i) the number of Common Shares then owned by the Holder on a fully-diluted and as-converted basis (giving effect to the conversion,

 

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exchange and exercise of all securities or rights of the Holder that are convertible or exchangeable into or exercisable for Common Shares) by (ii) the number of Common Shares then outstanding on a fully-diluted and as-converted basis (giving effect to the conversion, exchange and exercise of all securities or rights that are convertible or exchangeable into or exercisable for Common Shares).

6. Methods of Exercise

During the Exercise Period, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby by either of the following methods:

(a) Cash Exercise. The Holder may exercise, in whole or in part, the purchase rights evidenced hereby by:

(i) surrendering this Warrant, together with a notice of exercise in the form attached as Exhibit A hereto, to the Company at its principal offices; and

(ii) paying to the Company an amount in cash equal to the aggregate Exercise Price for the number of Preferred Shares being purchased.

(b) Net Exercise. Alternatively, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby by:

(i) surrendering this Warrant, together with a notice of exercise in the form attached as Exhibit A hereto, to the Company at its principal offices; and

(ii) receiving such lesser number of Preferred Shares calculated in accordance with the formula below representing the satisfaction of the payment to the Company of an amount equal to the aggregate Exercise Price for the number of Preferred Shares being purchased.

In the event a Holder chooses to exercise the purchase rights evidenced hereby in accordance with this Section 6(b) (a “Net Exercise”), the Company shall issue to such Holder a number of Preferred Shares computed using the following formula:

X = [Y * (A-B)]/A

where:

X = the number of Preferred Shares to be issued to the Holder

Y = the number of Preferred Shares purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the number of Preferred Shares for which this Warrant is being exercised (at the date of such calculation)

A = the fair market value of one Preferred Share (at the date of such calculation)

B = the Exercise Price (as adjusted to the date of such calculation).

 

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For purposes of this Section 6(b), the fair market value of a Preferred Share shall be the average of the closing prices of the Preferred Shares (or a number of Common Shares into which the Preferred Shares are convertible) quoted (i) in the over-the-counter market in which the Preferred Shares (or Common Shares) are traded, or (ii) on any exchange or electronic securities market on which the Preferred Shares (or Common Shares) are listed for trading, as applicable, for the 30 trading days prior to the date of determination of fair market value (or such shorter period of time during which such Preferred Shares (or Common Shares) were traded over-the-counter or on such exchange). If the Preferred Shares (or Common Shares) are not traded on the over-the-counter market, an exchange or an electronic securities market, the fair market value of a Preferred Share shall be determined by dividing:

(i) the cash price at which a willing seller would sell and a willing buyer would buy all of the issued and outstanding Preferred Shares in a transaction negotiated at arm’s length by unaffiliated third parties, each being apprised of and considering all relevant facts, circumstances and factors, and neither acting under compulsion or time constraints, by

(ii) the number of then issued and outstanding Preferred Shares.

In the case of any determination of the fair market value of the Preferred Shares pursuant to this Section 6(b), fair market value shall not include any discount (i) by reason of such Preferred Shares representing a minority interest, or (ii) to reflect the fact that such Preferred Shares are illiquid and subject to the restrictions on transfer set forth in this Warrant and the Shareholders Agreement.

If the Company and the Holder cannot agree on the fair market value of a Preferred Share within 30 days after the date upon which the Holder surrenders this Warrant, together with a notice of exercise in the form attached as Exhibit A hereto, to the Company at its principal offices (the “Negotiation Period”), the valuation shall be made by an appraiser of nationally recognized standing designated jointly by the Company and the Holder within ten days after the expiration of the Negotiation Period or, if they cannot so agree on an appraiser, such dispute shall be promptly referred to the AAA and an appraiser of nationally recognized standing shall be appointed thereby. The valuation shall be made by such appraiser within 20 days of its designation by the AAA. Any valuation made by an appraiser under this Section 6(b) shall be determinative of such value and binding upon the Company and the Holder. The cost of such valuation shall be borne equally by the Company and the Holder, but each party shall bear its own legal expenses, if any, incurred in connection therewith.

(c) Partial Exercise. This Warrant may be exercised for less than the full number of Preferred Shares, in which case the number of Preferred Shares receivable upon the exercise of this Warrant as a whole, and the sum payable upon the exercise of this Warrant as a whole, shall be proportionately reduced. Upon any such partial exercise, the Company at its expense will forthwith issue to the Holder a new Warrant or

 

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Warrants of like tenor exercisable for the number of Preferred Shares as to which the Holder’s purchase rights have not been exercised, such Warrant or Warrants to be issued in the name of the Holder or his or its nominee (upon payment by the Holder of any applicable transfer taxes).

(d) This Warrant may be exercised upon surrender of this Warrant pursuant to the Notice provisions of Section 16 hereof to the Chief Financial Officer of the Company, No. 18 Xinyuan Road, Zhengzhou, Henan, People’s Republic of China 450011, Facsimile: +86-371-6565-1686 or such other person as the Company may designate, together with a duly completed and executed form of exercise attached hereto and, if applicable, payment of an amount equal to the then applicable Exercise Price multiplied by the number of Common Shares then being purchased upon such exercise. The payment of the Exercise Price shall be in cash or by certified check or official bank check, payable to the order of the Company.

7. Certificates for Preferred Shares. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the number of Preferred Shares so purchased shall be issued and delivered by the Company to the Holder as soon as practicable thereafter, and in any event within ten days of the delivery by the Holder to the Company of the notice of exercise in the form attached as Exhibit A hereto, together with, in lieu of any fractional Preferred Share to which the Holder would otherwise be entitled, cash in an amount determined in accordance with Section 10.

8. Adjustment of Exercise Price and Number of Preferred Shares. The Holder and the Company agree that the adjustments provided for in this Section 8 are not intended to be duplicative of any corresponding adjustments provided for by the terms of the Preferred Shares issuable upon exercise of this Warrant, and accordingly no such duplicative adjustments shall be made hereunder. The number of and kind of securities purchasable upon exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time as follows:

(a) Subdivisions, Combinations and Other Issuances. If the Company shall at any time prior to the expiration of this Warrant subdivide the Preferred Shares, by split-up or otherwise, or combine the Preferred Shares, or issue additional Preferred Shares as a dividend, the number of Preferred Shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the purchase price payable per Preferred Share, but the aggregate purchase price payable for the total number of Preferred Shares purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 8(a) shall become effective at the close of business on the date the subdivision or combination becomes effective, or as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend.

(b) Reclassification, Reorganization, Consolidation, Merger or Sale of Assets. In case of any reclassification, capital reorganization, or change in the capital stock of the Company (other than as a result of a subdivision, combination, or stock dividend

 

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provided for in Section 8(a) above), or consolidation or merger of the Company with or into another corporation, or the sale of all or substantially all of the assets of the Company to another corporation pursuant to which the holders of Preferred Shares shall be entitled to receive stock, securities, cash or other property with respect to or in exchange for Preferred Shares, then, as a condition to such reclassification, reorganization, change, consolidation, merger or sale, the Company shall make appropriate provision so that the holder of this Warrant shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of stock, securities, cash or other property receivable in connection with such reclassification, reorganization, change, consolidation, merger or sale by a holder of the same number of Preferred Shares as were purchasable by the holder of this Warrant immediately prior to such reclassification, reorganization, change, consolidation, merger or sale. In any such case, appropriate provisions shall be made with respect to the rights and interest of the holder of this Warrant so that the provisions hereof shall thereafter be applicable with respect to any stock, securities, cash or other property deliverable upon exercise hereof, and appropriate adjustments shall be made to the purchase price per Preferred Share payable hereunder, provided the aggregate purchase price shall remain the same.

The Company will not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets in such sale shall assume, by written instrument mailed or delivered to the Holder at the last address of the Holder appearing on the books of the Company, the obligation to deliver to the Holder such shares of stock, securities, cash or other property as, in accordance with the foregoing provisions, the Holder may be entitled to purchase. If a purchase, tender or exchange offer is made to and accepted by the holders of more than 50% of the outstanding Preferred Shares, the Company shall not effect any consolidation, merger or sale with the person having made such offer or with any Affiliate of such person, unless prior to the consummation of such consolidation, merger or sale the Holder shall have been given a reasonable opportunity to then elect to receive upon the exercise of this Warrant either the stock, securities, cash or other property then issuable with respect to the Preferred Shares or the stock, securities, cash or other property, or the equivalent, issued to holders of Preferred Shares in accordance with such offer.

(c) Notice of Adjustment. When any adjustment is required to be made in the number or kind of shares purchasable upon exercise of this Warrant, or in the Exercise Price, the Company shall provide the Holder with not less than 20 days’ prior written notice of the date on which the event requiring such adjustment is to take place and information, reasonably detailed, regarding the pertinent facts of such event, as well as the calculation of the adjusted Exercise Price and the adjusted number of Preferred Shares or securities, cash or other property thereafter purchasable upon exercise of this Warrant.

(d) Adjustment by Board of Directors. If any event occurs as to which, in the opinion of the Board of Directors of the Company, the provisions of this Section 8 are not strictly applicable or if strictly applicable would not fairly protect the rights of the Holder

 

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in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as aforesaid, but in no event shall any adjustment have the effect of increasing the Exercise Price as otherwise determined pursuant to any of the provisions of this Section 8, except in the case of a combination of shares of a type contemplated in Section 8(a), and then in no event to an amount larger than the Exercise Price as adjusted pursuant to Section 8(a).

(e) Officer’s Statement as to Adjustments. Whenever the Exercise Price shall be adjusted as provided in this Section 8, the Company shall forthwith file at each office designated for the exercise of this Warrant, a statement, signed by the Chief Financial Officer of the Company (or an officer holding a comparable position), showing in reasonable detail the facts requiring such adjustment and the Exercise Price that will be effective after such adjustment.

9. No Dilution or Impairment. The Company will not, by amendment of its memorandum or articles of association, or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing, the Company will not increase the par value of any shares of capital stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise, and at all times will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid shares of stock upon the exercise of this Warrant.

10. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor on the basis of the Exercise Price then in effect.

11. Representations, Warranties and Covenants of the Company

(a) Corporate Actions. The Company represents and warrants to the Holder that all corporate actions on the part of the Company, its officers, directors and shareholders necessary for the sale and issuance of this Warrant have been taken.

(b) Issuance of Shares. The Company covenants that the Preferred Shares (and the Common Shares issuable upon exercise thereof), when issued pursuant to the exercise of this Warrant, will be duly authorized, validly issued, and fully paid, and free from all taxes, liens, and charges with respect thereto or the issuance thereof.

(c) Covenants as to Exercise of Warrant. The Company covenants that the Company will, at all times during the Exercise Period, have authorized a sufficient number of Preferred Shares (and Common Shares issuable upon exercise thereof) to

 

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provide for the exercise of the rights represented by this Warrant. If at any time during the Exercise Period the number of authorized but unissued Preferred Shares shall not be sufficient to permit exercise of this Warrant, or the number of authorized but unissued Common Shares shall not be sufficient to permit the conversion of the Preferred Shares issuable upon exercise hereof, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued Preferred Shares (or Common Shares) as shall be sufficient for such purposes.

12. Representations and Warranties by the Holder. The Holder represents and warrants to the Company as follows:

(a) This Warrant and the Preferred Shares issuable upon exercise hereof are being acquired for its own account, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the United States Securities Act of 1933, as amended (the “Act”). Upon exercise of this Warrant, the Holder shall, if so requested by the Company, confirm in writing, in a form satisfactory to the Company, that the securities issuable upon exercise of this Warrant are being acquired for investment and not with a view toward distribution or resale.

(b) The Holder understands that this Warrant and the Preferred Shares issuable upon exercise hereof have not been registered under the Act by reason of their issuance in a transaction exempt from the registration and prospectus delivery requirements of the Act pursuant to Section 4(2) thereof, and that they must be held by the Holder indefinitely, and that the Holder must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Act or is exempted from such registration.

(c) The Holder has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the purchase of this Warrant and the Preferred Shares purchasable pursuant to the terms of this Warrant and of protecting its interests in connection therewith.

(d) The Holder is able to bear the economic risk of the purchase of the Preferred Shares pursuant to the terms of this Warrant.

(e) The Holder is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Act.

13. Restrictive Legend. The Preferred Shares shall be stamped or imprinted with a legend in substantially the following form (unless registered under the Act or if the Holder delivers to the Company an opinion of counsel (who may be an employee of the Holder) reasonably satisfactory in form and substance to the Company, that the Preferred Shares do not require registration under the Act or any applicable state securities laws):

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR THE LAWS OF ANY OTHER JURISDICTION. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE

 

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OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR A COMPARABLE DOCUMENT UNDER THE LAWS OF ANY OTHER JURISDICTION OR AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. THE OFFERING OF THESE SECURITIES HAS NOT BEEN REVIEWED OR APPROVED BY ANY STATE SECURITIES ADMINISTRATOR.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A SHAREHOLDERS AGREEMENT, DATED AS OF APRIL 9, 2007, AS AMENDED, AMONG THE COMPANY AND CERTAIN OF ITS SHAREHOLDERS, A COPY OF WHICH IS ON FILE WITH THE COMPANY. NO SALE, ASSIGNMENT, TRANSFER, PLEDGE, ENCUMBRANCE OR OTHER DISPOSITION OF THE SECURITIES REPRESENTED HEREBY SHALL BE EFFECTIVE UNLESS AND UNTIL THE TERMS AND CONDITIONS OF SAID SHAREHOLDERS AGREEMENT SHALL HAVE BEEN COMPLIED WITH IN FULL.

Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution pursuant to a registration statement under the Act) shall also bear such legend unless, in the opinion of counsel selected by the Holder (who may be an employee of the Holder) and reasonably acceptable to the Company, the securities represented thereby need no longer be subject to restrictions on resale under the Act.

14. Warrant and Shares Transferable

(a) Subject to compliance with the terms and conditions of the Shareholders Agreement and this Section 14, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the holder hereof (except for transfer taxes), upon surrender of this Warrant properly endorsed or accompanied by written instructions of transfer. With respect to any offer, sale or other disposition of this Warrant or any Preferred Shares acquired pursuant to the exercise of this Warrant prior to registration of such Warrant or Preferred Shares, the holder hereof agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder’s counsel, or other evidence, if reasonably requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any U.S. federal or state or Cayman Islands securities law then in effect) of this Warrant or the Preferred Shares and indicating whether or not under the Act certificates for this Warrant or the Preferred Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with such law. Upon receiving such written notice and reasonably satisfactory opinion or other evidence, if so requested, the Company, as promptly as practicable, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such Preferred Shares, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 14 that the opinion of counsel for the holder or other evidence is not reasonably satisfactory to the Company, the Company shall so notify the

 

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holder promptly with details thereof after such determination has been made. Each certificate representing this Warrant or the Preferred Shares transferred in accordance with this Section 14 shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.

(b) Notwithstanding anything to the contrary contained herein, the Holder may, at any time and from time to time, transfer this Warrant or any Preferred Shares acquired pursuant to the exercise of this Warrant and all rights hereunder and thereunder, in whole or in part, without charge to the Holder (except for transfer taxes) to any of the Holder’s shareholders, partners or members by way of distribution or dividend, or to one or more of the Holder’s Affiliates, so long as any such Affiliate is controlled exclusively by the entity making such transfer. Any such transfer shall solely require that the Holder give written notice thereof to the Company; for greater certainty, none of the terms and conditions set forth in Section 14(a) shall be applicable to any transfer governed by this Section 14(b).

15. Rights of Shareholders. No holder of this Warrant shall be entitled, as a Warrant holder, to vote or receive dividends or be deemed the holder of the Preferred Shares or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of Preferred Shares, change of par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised and the Preferred Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein.

16. Notices. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given upon receipt or, if earlier, (a) five days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid or (d) one business day after the business day of facsimile transmission, if delivered by facsimile transmission with copy by first class mail, postage prepaid, and shall be addressed (i) if to the Holder, at the Holder’s address as set forth in the Shareholders Agreement, and (ii) if to the Company, at the address of its principal corporate offices (attention: Chief Executive Officer), or at such other address as a party may designate by ten days advance written notice to the other party pursuant to the provisions above.

17. Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant

 

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and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement in an amount reasonably satisfactory to it, or (in the case of mutilation) upon surrender and cancellation thereof, the Company will issue, in lieu thereof, a new Warrant of like tenor.

18. Subdivision of Rights. This Warrant (as well as any new warrants issued pursuant to the provisions of this Section 18) is exchangeable, upon the surrender hereof by the Holder, at the principal office of the Company for any number of new warrants of like tenor and date representing in the aggregate the right to subscribe for and purchase the number of Preferred Shares which may be subscribed for and purchased hereunder.

19. “Market Stand-Off” Agreement. The Holder hereby agrees that, during the period of time specified by the Company and an underwriter of Preferred Shares or other securities of the Company, following the effective date of (i) a registration statement of the Company filed under the Act, or (ii) a comparable offering document filed under the applicable laws and regulations of any foreign governmental authority, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period, except Preferred Shares (or Common Shares issued upon conversion thereof) included in such registration or offering; provided, however, that:

(a) all officers and directors of the Company, and each person who holds one percent (1%) or more of the Company’s outstanding capital stock, enter into similar agreements;

(b) such market stand-off time period shall not exceed 180 days; and

(c) the foregoing agreement shall not prohibit privately negotiated transfers of Preferred Shares among the Holder and its Affiliates.

The Holder agrees to provide to the underwriters of any public offering such further agreements as such underwriters may reasonably request in connection with this market stand-off agreement, provided that the terms of such agreements are substantially consistent with the provisions of this Section 19. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the securities of the Company held by the Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period.

Notwithstanding the foregoing, the obligations described in this Section 19 shall not apply to (i) a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the future, (ii) a registration relating solely to a transaction under Rule 145 of the Act, or (iii) any offering which would the equivalent of clause (i) or (ii) under the applicable laws and regulations of any foreign governmental authority.

20. Change, Waiver, Etc. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally except by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought.

 

13

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21. Remedies. The Company stipulates that the remedies at law of the Holder in the event of any default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that the same may be specifically enforced.

22. Governing Law. This Warrant and all actions arising out of or in connection with this Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflicts of law provisions of the State of New York or of any other state.

23. Rights and Obligations Survive Exercise of Warrant. Unless otherwise provided herein, the rights and obligations of the Company, of the holder of this Warrant and of the holder of the Preferred Shares issued upon exercise of this Warrant, shall survive the exercise of this Warrant.

[Signature page follows]

 

14

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Issued this      day of August 28, 2007.

 

Acknowledged and Agreed:

 

BLUE RIDGE CHINA PARTNERS, L.P.,
By:		Blue Ridge China Holdings, L.P., its General Partner
By:		Blue Ridge Capital Offshore Holdings LLC, its General Partner
		By:
		Name:
		Title:

 

15

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EXHIBIT A

NOTICE OF EXERCISE

 

To:		Xinyuan Real Estate Co., Ltd.
		Attention: Chief Financial Officer

24. The undersigned hereby elects to purchase                      Series A Convertible Preferred Shares (“Preferred Shares”) pursuant to the terms of the attached Warrant.

25. The undersigned shall exercise the attached Warrant (i) by means of a cash payment, and tenders herewith, payment in full for the purchase price of the Preferred Shares being purchased, or (ii) by means of a Net Exercise in accordance with the terms of Section 3(b) of said Warrant, together with all applicable taxes, if any.

26. Please issue a certificate or certificates representing said Preferred Shares in the name of the undersigned or in such other name as is specified below:

 

(Name)
(Address)

27. The undersigned hereby represents and warrants that the aforesaid Preferred Shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale, in connection with the distribution thereof, and that the undersigned has no present intention of distributing or reselling such shares and all representations and warranties of the undersigned set forth in Section 12 of the attached Warrant (including Section 12(e) thereof) are true and correct as of the date hereof.

 

				(Signature)
				(Name)
(Date)
				(Title)

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EXHIBIT B

FORM OF TRANSFER

(To be signed only upon transfer of Warrant)

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto                                                               the right represented by the attached Warrant to purchase                      Series A Convertible Preferred Shares of XINYUAN REAL ESTATE CO., LTD. to which the attached Warrant relates, and appoints                                  Attorney to transfer such right on the books of                     , with full power of substitution in the premises.

Dated:

 

 

Signed in the presence of:

Exhibit 10.13

EXECUTION VERSION

BURNHAM WARRANT HOLDERS LETTER AGREEMENT

THIS AGREEMENT, dated as of April 9, 2007, is among Xinyuan Real Estate Co., Ltd. (the “Company”), Xinyuan Real Estate, Ltd. (“Xinyuan Subsidiary”), Burnham Securities Inc. (“Burnham”) and Joel B. Gardner (“Gardner” and along with Burnham, the “Burnham Holders”).

WHEREAS, Burnham is the registered and beneficial holder of a Warrant (Certificate No. C-l/A) to purchase 926,586 Common Shares of Xinyuan Subsidiary, as originally issued on August 25, 2006 and as amended on November 20, 2006 (the “Burnham Warrant”);

WHEREAS, Gardner is the registered and beneficial holder of a Warrant (Certificate No. C-2/A) to purchase 926,586 Common Shares of Xinyuan Subsidiary, as originally issued on August 25, 2006 and as amended on November 20, 2006 (the “Gardner Warrant”);

WHEREAS, the Company and the shareholders of all of the issued and outstanding capital stock of Xinyuan Subsidiary (the “Xinyuan Subsidiary Shareholders”) have entered in that certain share exchange and assumption agreement (the “Share Exchange and Assumption Agreement”) dated as of April 9, 2007, a copy of which is attached hereto as Exhibit A, pursuant to which the Xinyuan Subsidiary Shareholders have each agreed to sell, assign and transfer all of their capital stock in Xinyuan Subsidiary to the Company in consideration for capital stock, on a one-for-one basis, in the Company. As a result, the Company will (i) hold 100% of the issued and outstanding capital stock of Xinyuan Subsidiary and (ii) assume all the rights, benefits, restrictions and obligations in certain agreements to which Xinyuan Subsidiary was a party;

WHEREAS, the parties hereto agree to the above described restructuring and in connection therewith also agree to cancel the Burnham Warrants and the Gardner Warrants and replace them with equivalent warrants issued by the Company; and

WHEREAS, the Xinyuan Subsidiary, Blue Ridge China Partners L.P. (“Blue Ridge China”), El Fund II China, LLC (“El”), Mr. Zhang Yong, Ms. Yang Yuyan and, to the extent set forth therein, the Burnham Holders have entered into that certain shareholders agreement dated August 22, 2007, as amended (the “Shareholders Agreement”); and

WHEREAS, the Xinyuan Subsidiary, the Burnham Holders, Blue Ridge China, El, Zhang and Yang have agreed to terminate the Shareholders Agreement concurrently herewith; and

WHEREAS, the parties hereto agree to enter into with Blue Ridge China, El, Zhang and Yang a new shareholders agreement in respect of the capital stock of the Company (the “New Shareholders Agreement”);

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NOW, THEREFORE, for such good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. At or prior to the Closing of the Transactions contemplated in the Share Exchange and Assumption Agreement:

(i) the Burnham Holders shall deliver to the Xinyuan Subsidiary the Burnham Warrant and the Gardner Warrant for cancellation;

(ii) the Company shall issue, and Burnham and Gardner shall accept, warrants of the Company on equivalent terms and conditions as the Burnham Warrant and the Gardner Warrant, such warrants to be in the form attached hereto as Exhibit B; and

(iii) the Burnham Holders will execute and deliver the New Shareholders Agreement.

3. This Agreement and all actions arising out of or in connection with this Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflicts of law provisions of the State of New York or of any other state.

4. All capitalized terms used herein but otherwise not defined shall have their meaning in the Share Exchange and Assumption Agreement. The recitals, preamble and the Exhibit to this Agreement are incorporated by reference into this Agreement as if fully recited herein.

5. This Agreement may be executed in two or more counterparts, each of which when so executed shall be an original, but all of which together shall constitute one agreement. Facsimile signatures shall be deemed original signatures.

[Signature page follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

 

 

 

 

[SIGNATURE PAGE TO THE BURNHAM WARRANT HOLDERS LETTER AGREEMENT]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

 

 

 

 

[SIGNATURE PAGE TO THE BURNHAM WARRANT HOLDERS LETTER. AGREEMENT]

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EXHIBIT A

Share Exchange and Assumption Agreement

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EXHIBIT B

Form of Company Warrant

Exhibit 10.14

EXECUTION VERSION

 

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CREDIT AGREEMENT

among

BLUE RIDGE CHINA PARTNERS, L.P.,

EI FUND II CHINA, LLC,

and

XINYUAN REAL ESTATE, LTD.

As of December 7, 2006

 

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TABLE OF CONTENTS

 

						Page
1.		DEFINITIONS				1
2.		AMOUNT AND TERMS OF LOANS				7
		2.1		Loans		7
		2.2		Notice and Manner of Borrowing		7
		2.3		Repayment of Loan		7
		2.4		Mandatory Prepayment		7
		2.5		Payment of Interest		8
		2.6		Note		8
3.		PAYMENTS				8
		3.1		Manner of Payments		8
		3.2		Extension of Payments		9
		3.3		Computation of Interest		9
4.		CONVERSION RIGHTS				9
		4.1		Right to Convert Outstanding Obligations into Common Shares		9
		4.2		Determination of 2007 Net Income		11
		4.3		Escrow Account		12
5.		CONDITIONS PRECEDENT				13
		5.1		Accuracy of Representations		13
		5.2		Performance of Certain Covenants		13
		5.3		No Conflicts		14
		5.4		No Default		14
		5.5		Officer’s Certificate		14
		5.6		Secretary’s Certificates		14
		5.7		Proceedings and Documents		14
		5.8		Legal Opinion		14
		5.9		Notice of Borrowing; Loan Amount		15
6.		REPRESENTATIONS AND WARRANTIES				15
		6.1		Organization, Good Standing and Qualification		15
		6.2		Power and Authority		15
		6.3		Authorization, Execution and Enforceability		15
		6.4		Consents		15
		6.5		No Conflicts		16
		6.6		Subsidiaries; Operating Companies		16
		6.7		Capitalization, Issuance and Transfer of Shares		16
		6.8		Financial Statements		17
		6.9		Material Liabilities		17
		6.10		OFAC Compliance		17
		6.11		Solvency		18

 

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						Page
		6.12		U.S. Foreign Corrupt Practices Act		18
		6.13		Disclosure		19
		6.14		Performance of Covenants and Obligations		19
		6.15		Incorporation of Representations and Warranties		19
7.		REPRESENTATIONS AND WARRANTIES OF THE LENDERS				19
8.		COVENANTS				20
		8.1		Use of Proceeds		20
		8.2		Incorporation of Covenants		20
		8.3		Inspection		20
9.		DEFAULTS				21
		9.1		Events of Default		21
10.		INDEMNIFICATION				22
		10.1		Indemnification		22
		10.2		Procedures		23
		10.3		Survival; Right to Indemnification Not Affected by Knowledge		24
11.		GENERAL PROVISIONS				24
		11.1		Exculpation Among Lenders; Obligations Several		24
		11.2		Entire Agreement		25
		11.3		Further Assurances		25
		11.4		Amendment; Waiver		25
		11.5		Severability		25
		11.6		Assignment		25
		11.7		Third Parties		26
		11.8		Notices		26
		11.9		Expenses		26
		11.10		Governing Law		26
		11.11		Specific Performance		26
		11.12		Submission to Jurisdiction		26
		11.13		Interpretation		27
		11.14		Counterparts		27
		11.15		Confidentiality		27
Exhibits
Exhibit A — Form of Notice of Borrowing
Exhibit B — Form of Note
Exhibit C — Form of Opinion of Maples & Calder

 

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CREDIT AGREEMENT

CREDIT AGREEMENT, dated as of December 7, 2006, among Blue Ridge China Partners, L.P., a Cayman Islands exempted limited partnership (“Blue Ridge China”), EI Fund II China, LLC, a Delaware limited liability company (“EI” and, together with Blue Ridge China, the “Lenders”), and Xinyuan Real Estate, Ltd., a Cayman Islands company (the “Borrower”).

WHEREAS, the Borrower has requested that each Lender make Loans (as defined below) to the Borrower in an aggregate principal amount of $35,000,000 on the Effective Date (as defined below) on the terms and conditions set forth herein; and

WHEREAS, the Lenders are willing to make such Loans to the Borrower on the terms and conditions set forth herein.

NOW, THEREFORE, the parties hereby agree as follows:

1. DEFINITIONS

As used in this Agreement:

“2007 Net Income” means Consolidated Net Income for the 2007 fiscal year of the Borrower.

“Affiliate” means, with respect to a specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Person specified.

“Ancillary Businesses” means Xinyuan Property Management Co., Ltd., Zhengzhou Mingyuan Landscape Engineering Co., Ltd., Henan Xinyuan Real Estate Agency Co., Ltd., and Zhengzhou Xinyuan Computer Network Engineering Co., Ltd.

“Agreement” means this Credit Agreement, as amended or supplemented pursuant to its terms from time to time.

“Blue Ridge China” has the meaning set forth in the preamble.

“Blue Ridge China Commitment” means $21,000,000.

“Blue Ridge China Commitment Percentage” means 60%.

“Blue Ridge China Loan” has the meaning set forth in Section 2.1(a).

“Borrower” has the meaning set forth in the preamble.

“Borrower Group” means the Borrower, the WFOE and the Operating Companies; and any of the foregoing individually may sometimes be referred to as a “Member of the Borrower Group”.

 

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“Business Day” means any day except a Saturday, a Sunday or a legal holiday in the City of New York or the PRC.

“Common Shares” means the common shares, par value $0.0001 per share, of the Borrower.

“Company Contract” has the meaning set forth in Section 4.16 of the Securities Purchase Agreement.

“Confirmation Notice” has the meaning set forth in Section 4.1(d).

“control” (and the correlative terms “controlling,” “controlled by” and “under common control with”) of a Person shall mean the possession, direct or indirect, of the power to (i) vote more than 50% of the voting stock or other equity interests of such Person, or (ii) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

“Consolidated Net Income” means, for any period, the consolidated net income of the Company and its Subsidiaries for such period as set forth in the income statement included in the applicable financial statements deliverable to the Lenders pursuant to Section 4.2(a), provided, that Consolidated Net Income (i) shall be limited to net income from continuing operations, and shall exclude nonrecurring items of income and gain that are treated as “extraordinary” under GAAP, and (ii) shall exclude items of income and gain arising out of transactions with Affiliates that are not on arm’s-length terms commercially available from unaffiliated third parties.

“Conversion Notice” has the meaning set forth in Section 4.1(b).

“Debt Financing” means any issuance of notes, bonds or other debt instruments, or any other debt financing, made by Borrower prior to the payment in full of all of its obligations hereunder, including the repayment of the Loans.

“Default” means any Event of Default and any event which, with the passage of time or the giving of notice, or both, will become an Event of Default.

“Default Rate” means, for each Loan, a rate of interest per annum equal to 14.5%, but in no event to exceed the maximum rate permitted under applicable New York law.

“Determining Party” has the meaning set forth in Section 4.2(b).

“EI” has the meaning set forth in the preamble.

“EI Commitment” means $14,000,000.

“EI Commitment Percentage” means 40%.

“EI Loan” has the meaning set forth in Section 2.1(b).

 

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“Effective Date” means the date hereof.

“Equity Securities” means any equity securities of the Borrower, any security or obligation which is by its terms, directly or indirectly, convertible into or exchangeable or exercisable for equity securities of the Borrower, including any option, warrant or other subscription or purchase right with respect to any Equity Security.

“Escrow Account” and “Escrow Agreement” have the meanings set forth in Section 4.3(a).

“Escrow Deposit” has the meaning set forth in Section 4.3(b).

“Event of Default” means any of the events specified in Section 9.1.

“FCPA” has the meaning set forth in Section 6.13.

“GAAP” means generally accepted accounting principles in the United States in effect from time to time, and as such principles have been applied on a consistent basis during the relevant time period.

“Governing Documents” means, with respect to the Company, the Memorandum of Association, and with respect to the WFOE or any Operating Company, its Articles of Association or other organizational documents, in each case as amended from time to time.

“Governmental Authority” means any nation or government, any state or other political subdivision thereof, any governmental body, agency or official, and any entity or other Person exercising executive, legislative, regulatory or administrative functions of or pertaining to a governmental body.

“Governmental Authorization” means any consent, approval, license, registration or permit issued, granted, given or otherwise made available by or under the authority of any Governmental Authority or pursuant to any Law.

“Henan Xinyuan” means Henan Xinyuan Real Estate Co., Ltd., a company organized under the laws of the PRC.

“Indebtedness” as applied to any Person means, without duplication (i) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (ii) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (ii) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (iv) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts incurred in the ordinary course of business), (v) all items which in accordance with GAAP would be included in determining total liabilities as shown on the balance sheet of such Person as of the date on which Indebtedness is determined, including any capital lease, (vi) all indebtedness secured by any Lien to which any property or asset owned or held by such Person is subject, whether or not the

 

3

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indebtedness secured thereby shall have been assumed, provided, that in the case of any such Indebtedness that is recourse only to such property or asset, and not to such Person or any of its other property or assets, the amount of such Indebtedness shall be deemed not to exceed the fair market value of such property or asset as determined in good faith by the Board of Directors of the Borrower, and (vii) all indebtedness of others with respect to which such Person has provided a guaranty or otherwise has agreed to become directly or indirectly liable, or (without duplication) any such guaranty of such indebtedness.

“Indemnified Party” has the meaning set forth in Section 10.2.

“Indemnifying Party” has the meaning set forth in Section 10.2.

“Jiantou” means Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd.

“Laws” means, collectively, all international, foreign, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority.

“Lien” means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement or any right of a third party with respect to property of a Person, including the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property, but not including any inchoate right of set-off as such.

“Loan” has the meaning set forth in Section 2.1(b).

“Loan Documents” means this Agreement, each Note, the Notice of Borrowing and each other document executed and delivered by the Borrower hereunder and each certificate delivered in connection herewith or therewith.

“Management Shareholders” means Zhang Yong, a PRC national, and Yang Yuyan, a PRC national.

“Material Adverse Effect” means any change(s) or effect(s) that individually or in the aggregate is or may (so far as can reasonably be foreseen at the time) be materially adverse to (i) the assets, business, operations, income, prospects or condition (financial or other) of the Borrower, the WFOE, any of the Operating Companies, or the transactions contemplated hereby, (ii) the ability of the Borrower to perform its obligations under this Agreement, the other Loan Documents, the Shareholders Agreement or to consummate the transactions contemplated hereby, or (iii) a Lender’s rights under this Agreement or the other Loan Documents to which it is a party or the ability of a Lender to perform its obligations hereunder or thereunder or consummate the transactions contemplated hereby or thereby, but excluding changes in general economic conditions in the PRC.

 

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“Maturity Date” means December 6, 2007.

“Memorandum of Association” means the Second Amended and Restated Memorandum and Articles of Association of the Borrower, as amended from time to time.

“Note” has the meaning set forth in Section 2.6.

“Notice of Borrowing” means a Notice of Borrowing in the form attached hereto as Exhibit A.

“Objecting Party” has the meaning set forth in Section 4.2(a).

“Objection” has the meaning set forth in Section 4.2(b).

“OFAC”, “OFAC Sanctions”, and “OFAC Sanctioned Person” have the meaning set forth in Section 4.27 of the Securities Purchase Agreement.

“Operating Company” means each of the Ancillary Businesses, Henan Xinyuan, Henan Wanzhong Real Estate Co., Ltd., Shandong Xinyuan Real Estate Co., Ltd. and Qingdao Xinyuan Real Estate Co., Ltd.

“Permitted Liens” means (i) Liens for current taxes not yet due and payable, (ii) Liens imposed by Law and incurred in the ordinary course of business for obligations not past due, (iii) Liens in respect of pledges or deposits under workers’ compensation laws or similar legislation, and (iv) minor Liens which do not in any case materially detract from the value of the property subject thereto or materially interfere with the use thereof, and which have not arisen otherwise than in the ordinary course of business.

“Permitted Repayment Date” means the date that is 30 days after the date on which the calculation of 2007 Net Income, in accordance with Section 4.2 hereof, becomes final and binding on the parties hereto for purposes of this Agreement.

“Person” means any individual or entity, including any corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or Governmental Authority.

“PRC” means the People’s Republic of China.

“Register of Shareholders” means the register maintained in accordance with the Companies Law (2004 Revision) of the Cayman Islands and includes any duplicate Register of Shareholders.

“Requested Loan Amount” has the meaning set forth in Section 2.2(a).

“Requested Repayment Amount” has the meaning set forth in Section 4.3(a).

 

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“Securities Act” means the Securities Act of 1933 of the United States, as amended, and, as applicable, any relevant securities laws of any state or non-U.S. jurisdiction (including the Cayman Islands and the PRC).

“Securities Purchase Agreement” means the Securities Purchase Agreement, dated as of August 22, 2006, as amended, by and among the Lenders, the Management Shareholders and the Borrower.

“Share Purchase Agreement” means the Share Purchase Agreement, dated as of November 18, 2006, by and among the Lenders, the Management Shareholders and the Borrower.

“Shareholders Agreement” means the Shareholders Agreement, dated as of August 25, 2006, as amended, by and among the Lenders, the Shareholders Agreement, the Borrower and, to the extent set forth therein, Burnham Securities Inc. and Joel B. Gardner, as the same may be amended from time to time.

“Subsidiary” means, as to any Person, (i) a corporation or other entity whose shares of capital stock or other ownership interests having ordinary voting power to elect a majority of the directors of such corporation, or other Persons performing similar functions for such entity, are owned or controlled, directly or indirectly, by such Person, or (ii) a corporation or other entity of which a majority of the equity is owned, directly or indirectly, by such Person. The Subsidiaries of the Borrower include the WFOE and the Operating Companies.

“Taxes” means any income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental, windfall profit, customs, vehicle, airplane, boat, vessel or other title or registration, capital stock, franchise, employees’ income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, value added, alternative, add-on minimum and other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever and any interest, penalty, addition or additional amount thereon imposed, assessed or collected by or under the authority of any Governmental Authority or payable under any tax-sharing agreement or any other contract.

“United States” or “U.S.” means the United States of America.

“WFOE” means Xinyuan (China) Real Estate Co., Ltd. (f/k/a Xinyuan Real Estate (Henan) Development, Ltd.), a company organized under the laws of the PRC, which is a wholly foreign-owned enterprise 100% held by the Borrower under the laws of the PRC.

 

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2. AMOUNT AND TERMS OF LOANS

2.1 Loans

(a) Subject to the terms and conditions set forth herein, Blue Ridge China agrees to make a loan (the “Blue Ridge China Loans”) to the Borrower on the Effective Date, in a principal amount not to exceed the Blue Ridge China Commitment.

(b) Subject to the terms and conditions set forth herein, EI agrees to make a loan (the “EI Loans” and, together with the Blue Ridge China Loans, the “Loans”) to the Borrower on the Effective Date, in a principal amount not to exceed the EI Commitment.

2.2 Notice and Manner of Borrowing

(a) No later than three (3) Business Days prior to the Effective Date, the Borrower shall deliver to each Lender a Notice of Borrowing signed by the President or Chief Financial Officer of the Borrower, which shall include (i) the aggregate amount of Loans requested to be made by the Lenders (the “Requested Loan Amount”), and (ii) wire transfer instructions.

(b) Subject to the terms and conditions set forth in this Agreement, including the limitations set forth in Section 2.1, not later than 12:00 p.m. (New York City time) on the Effective Date, (i) Blue Ridge China will make a Loan in a principal amount equal to the product of (A) the Requested Loan Amount and (B) the Blue Ridge China Commitment Percentage and (ii) EI will make a Loan in a principal amount equal to the product of (A) the Requested Loan Amount and (B) the EI Commitment Percentage, in each case in immediately available funds in accordance with the instructions set forth in the Notice of Borrowing.

2.3 Repayment of Loan

The unpaid principal amount of the Loans, together with all accrued and unpaid interest thereon, shall be due and payable on the earlier of (i) the date of acceleration of the Loans hereunder pursuant to an Event of Default that shall have occurred and is continuing and (ii) the Maturity Date.

2.4 Mandatory Prepayment

The Borrower shall prepay the outstanding principal amount of the Loans together with any accrued and unpaid interest thereon with the proceeds of any Debt Financing, which prepayment shall be made within one (1) Business Day after the receipt of such proceeds; provided, that the aggregate amount of any such prepayments shall be made to each Lender ratably based on the respective outstanding principal amount of Loans held by each Lender as of the date of prepayment. Prior to the payment in full of all of its obligations hereunder, the Borrower shall cause its Subsidiaries not to issue any notes, bonds or other debt instruments to, or enter into any other debt financing with any party that is not an entity established under the laws of the PRC. In any event, the Borrower shall not enter into any such transaction unless the proceeds thereof are provided directly to the Borrower to its account outside the PRC.

 

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2.5 Payment of Interest

(a) Interest. Interest shall accrue on the unpaid principal amount of each Loan, from the date such Loan is made until such Loan is paid in full, at a rate per annum equal to 12.5%.

(b) Payment. The Borrower shall pay the accrued and unpaid interest on all of the Loans in arrears on the Maturity Date, except if the Lenders have elected to convert the Loans pursuant to Article 4 hereof.

(c) Default Interest. If the Borrower shall fail to make any payment when due (whether at maturity, on acceleration or otherwise), of any principal amount of any Loan or any interest thereon owing under this Agreement, then the interest rate with respect to such Loan shall thereupon be the Default Rate, and the Borrower shall pay interest on demand at a rate equal to the Default Rate from time to time in effect to the fullest extent permitted by law on the amount overdue from the date of Default until payment in full of such overdue amount; provided, that the amount of each Escrow Deposit made by the Borrower in accordance with Section 4.3 shall be deemed to reduce, on a dollar for dollar basis, such overdue amount solely for purposes of the interest calculation in this Section 2.5(c), from the date such deposit is made until all Escrow Deposits are released in accordance with Section 4.3(d). Notwithstanding the foregoing, it is agreed and understood that the making of the Escrow Deposits shall not constitute a repayment of the Loans, or the accrued interest thereon.

2.6 Note

Each Loan made by a Lender under this Agreement shall be evidenced by a promissory note of the Borrower in the form attached hereto as Exhibit B (each, a “Note”). The Borrower hereby irrevocably authorizes each Lender to endorse on the schedule attached to each Note the amount of the applicable Loan and of each payment of principal received by each Lender on account of such Loan, which endorsement shall, in the absence of manifest error, be conclusive as to the outstanding balance of such Loan made by such Lender; provided, however, that the failure to make such notation with respect to such Loan or payment shall not limit or otherwise affect the obligation of the Borrower under this Agreement or such Note.

3. PAYMENTS

3.1 Manner of Payments

Each payment of principal and interest on the Loans and all other amounts payable by the Borrower to a Lender under this Agreement and the other Loan Documents shall be made no later than 11:00 a.m. (Zhengzhou, Henan local time) on the day when due in immediately available U.S. currency to such Lender at such account as such Lender shall have notified the Borrower. Each such payment shall be made without setoff or counterclaim and free and clear of, and without deduction for, any Taxes.

 

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3.2 Extension of Payments

If any payment from the Borrower to a Lender under this Agreement shall become due on a day which is not a Business Day, the due date thereof shall be extended to the next following day which is a Business Day and such additional time shall be included in the computation of interest.

3.3 Computation of Interest

All interest accruing under this Agreement shall be computed on the basis of a year of 365 days and the actual number of days elapsed.

4. CONVERSION RIGHTS

4.1 Right to Convert Outstanding Obligations into Common Shares

(a) If the principal amount of the Loans, or any interest thereon, is not repaid on or prior to the Maturity Date, then (i) each Lender will have the right at any time thereafter to convert all or any portion of the outstanding principal amount of, and all accrued interest on, its respective Loans into Common Shares at a price per share equal to (x) five (5) times the 2007 Net Income, divided by (y) the sum of (A) the aggregate number of outstanding Common Shares on a fully diluted basis, taking into account the exercise of all outstanding options and warrants, as of the last day of fiscal year 2007, and (B) the number of additional Common Shares issuable pursuant to the conversion right hereunder, as calculated in accordance with the formula set forth on Schedule 1 hereto, and (ii) the Borrower shall be entitled to repay the outstanding principal amount of any such Loan, or any interest thereon, during the period from the Maturity Date through and including the Permitted Repayment Date only with the prior written consent of each Lender. For the avoidance of doubt, such outstanding amount shall continue to be due and payable and shall continue to accrue interest at the Default Rate in accordance with Section 2.5(c).

(b) In order to effect the conversion of all or any portion of the outstanding principal amount of, and all accrued interest on, its respective Loans, a Lender shall give written notice (the “Conversion Notice”) to the Company that such Lender elects to exercise its right to so convert. Such notice shall state the aggregate amount of principal of, and accrued interest on, the Loans such Lender wishes to so convert and the name or names in which such Lender wishes the certificate or certificates for Common Shares to be issued.

(c) Unless such requirement is expressly waived by the Lenders in the Conversion Notice, within 14 days of receipt of the Conversion Notice (or such other period agreed to by the Borrower and the Lenders), the Borrower and the Management Shareholders shall jointly and severally, in a form reasonably satisfactory to the Lenders, make the representations and warranties set forth in Article 6 hereof, as updated to reflect

 

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any development, circumstance, event, occurrence, fact or other matter that arises after the Effective Date and prior to the date of receipt by the Company of the Conversion Notice.

(d) The Lenders shall have a right to withdraw the Conversion Notice within seven (7) days of receipt of the representations and warranties described in Section 4.1(c) upon written notice to the Borrower. If the Lenders have not notified the Borrower that they withdraw the Conversion Notice within such seven-day period, or if the Lenders have notified the Borrower in writing before the expiration of such seven-day period that they do not withdraw the Conversion Notice (a “Confirmation Notice”), then as soon as practicable after the end of such seven-day period or receipt of Confirmation Notice by the Borrower, as applicable:

(i) The Borrower shall deliver to each of the Lenders a certificate of the President or Chief Financial Officer of the Borrower, in form and substance reasonably satisfactory to the Lenders, dated as of the date of issuance of the Common Shares pursuant to this Article 4, certifying that all representations and warranties of the Borrower and the Management Shareholders pursuant to Section 4.1(c) are accurate in all respects;

(ii) Each Lender shall deliver to the Borrower a certificate of an officer or director of such Lender, in form and substance reasonably satisfactory to the Borrower, dated as of the date of issuance of the Common Shares pursuant to this Article 4, containing representations and warranties substantially similar to those contained in Section 5.4 of the Share Purchase Agreement;

(iii) appropriate entries reflecting the conversion into Common Shares shall be made by the Borrower in the Register of Shareholders; and

(iv) the Borrower shall issue and deliver to such Lender’s nominee or nominees at such office, certificates for the number of whole Common Shares to which such Lender shall be entitled.

(e) Upon the issuance of the Common Shares pursuant to this Article 4, such Common Shares shall, immediately and automatically without the need for any further action, become subject to the Shareholders Agreement to the same extent and with the same rights as the Common Shares purchased by the Lenders pursuant to the Share Purchase Agreement, and shall be deemed “Investor Common Shares” as defined in the Shareholders Agreement and be subject to the legending requirements of Section 2.5 thereof.

(f) Subject to the satisfaction of the provisions of Section 4.1(d)(i) through (iv), upon the issuance of the Common Shares pursuant to this Article 4, the principal amount of the Loan and any interest accrued thereon shall be deemed to be paid in full.

 

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4.2 Determination of 2007 Net Income

(a) As soon as practicable, but in any event within 90 days after the end of the 2007 fiscal year, the Borrower shall deliver to the Lenders (i) an income statement for such fiscal year, a balance sheet and statement of shareholders’ equity as of the end of such year, and a statement of cash flows for such year, such financial reports to be on a consolidated basis for the Borrower and its subsidiaries, prepared in accordance with GAAP, consistently applied, and audited and certified by independent public accountants of nationally recognized standing selected by the Borrower, and (ii) a certificate of the Chief Financial Officer of the Borrower setting forth in reasonable detail the calculation of 2007 Net Income; provided, that if the Borrower fails to deliver such financial statements or such certificate within 120 days after the end of the 2007 fiscal year, the Lenders shall have the right to determine in good faith the 2007 Net Income and provide the Borrower a certificate setting forth in reasonable detail the basis and calculations of such determination. The Lenders shall have the right to object to the Borrower’s, and the Borrower shall have the right to object to the Lender’s determination of 2007 Net Income in accordance with Section 4.2(b) below (such objecting party, the “Objecting Party”).

(b) Unless the Objecting Party gives written notice to the party which determined 2007 Net Income (the “Determining Party”) of its objection (an “Objection”) to the Determining Party’s calculation of 2007 Net Income within 30 days following the Objecting Party’s receipt of such determination (and, in the event the Determining Party is the Borrower, the applicable financial statements and the accompanying Chief Financial Officer’s certificate), the Determining Party’s calculation shall be final and binding upon the parties for purposes of this Agreement. If the Objecting Party waives in writing its right to deliver an Objection with respect to any such determination, the applicable determination shall be final and binding upon the parties as of the date of delivery of such waiver. Any Objection shall specify in reasonable detail the nature of any disagreement so asserted. Upon request of any Determining Party or Objecting Party, the Borrower shall promptly provide representatives of such Determining Party or Objecting Party such access to the books and records of the Borrower and its Subsidiaries as are reasonably necessary to confirm the Determining Party’s calculation of 2007 Net Income, and such party receiving such access agrees to maintain any such information in strict confidence (except for such disclosure to advisors or otherwise as appropriate in connection with the proceedings referred to below in Section 4.2(c) below). During the 15-day period following the delivery of an Objection, the Determining Party and the Objecting Party shall attempt in good faith to resolve any differences which they may have with respect to any matter specified in the Objection.

(c) If at the end of such 15-day period, the Determining Party and the Objecting Party shall have failed to reach written agreement with respect to all matters specified in any Objection, any matter that remains in dispute shall promptly be submitted to an independent accounting firm of nationally recognized standing (the “Accountant”) designated by the Determining Party and the Objecting Party within 10 days after the expiration of such 15-day period, or, if they cannot agree on an accounting firm, such dispute shall be promptly referred to the American Arbitration Association (the “AAA”) and an independent accounting firm of nationally recognized standing shall

 

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be appointed thereby. The Accountant shall consider only the matters specified in the Objection. The Accountant shall act promptly to resolve all matters specified in the Objection, and shall give its decision within 30 days after the referral of the matter to it. Upon resolution by the Accountant of all matters specified in the Objection, the Accountant shall determine the 2007 Net Income on the basis of the matters it has resolved. The Accountant’s decisions and determinations with respect to all matters specified in the Objection shall be final and binding upon the Determining Party and the Objecting Party. The costs and expenses of the Accountant shall be borne equally by the Borrower, on the one hand, and any Lender(s) that is a Determining Party or an Objecting Party hereunder (pro rata in accordance with their Commitments hereunder), on the other hand.

(d) Notwithstanding Sections 4.2(a), (b) and (c), at any time the Borrower and each Lender may agree in good faith, in a document signed by the Borrower and such Lender, on the 2007 Net Income, which determination shall be final and binding upon the Borrower and such Lender for purposes of this Agreement, and the provisions of Sections 4.2(a), (b) and (c) shall not apply subsequent to such determination.

(e) Without limiting any other covenant of the Borrower to operate its business in the ordinary course of business consistent with past practice, under its Articles of Association, the Shareholders Agreement and the warrants issued by the Borrower to each of the Lenders as of August 25, 2006, until the end of the Borrower’s fiscal year 2007, the Borrower shall not:

(i) change any method of accounting or accounting practice or policy, other than those (A) required by GAAP, consistently applied during the relevant time period, (B) pursuant to guidance provided by the Securities and Exchange Commission, an applicable Governmental Authority in the PRC or other applicable regulatory authority, with the Lenders’ consent, which consent shall not be unreasonably withheld, or (C) as recommended by the Borrower’s independent auditors, with the Lenders’ consent, which consent shall not be unreasonably withheld; and

(ii) (A) give or offer discounts or provide other similar benefits, (B) reduce, defer or capitalize expenses, or (C) otherwise artificially affect the Consolidated Net Income for fiscal year 2007, except (in the case of (A) and (B)) in the ordinary course of business consistent with past practice.

4.3 Escrow Account

If, after the Maturity Date but prior to the Permitted Repayment Date, the Borrower has sought consent from the Lenders to repay all or any of the then outstanding principal amount of the Loans, or any interest thereon (collectively, the “Requested Repayment Amount”), and the Lenders do not give their written consent to such repayment, then:

(a) as promptly as practicable thereafter, the Lenders and the Borrower shall enter into an escrow agreement (the “Escrow Agreement”) with a financial institution of national standing on terms reasonably satisfactory to the Lenders and the Borrower, pursuant to which an interest bearing escrow account (the “Escrow Account”) shall be established;

 

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(b) the Borrower shall make a deposit in an amount equal to the Requested Repayment Amount, and may make other deposits from time to time into the Escrow Account (collectively, the “Escrow Deposits”), in an aggregate outstanding principal amount not to exceed the aggregate principal amount of Loans, and any unpaid interest thereon, outstanding as of the Maturity Date (which Escrow Deposits shall not constitute a repayment of the Loans, or the accrued interest thereon); and

(c) the Escrow Agreement shall provide that on the date that is one (1) Business Day after the earlier of (A) the date on which the Lenders, having exercised their conversion rights pursuant to Section 4.1, are satisfied that the Borrower has satisfied its obligations under Sections 4.1(b)(i) and 4.1(b)(ii), and (B) so long as the Lenders have not exercised their conversion rights pursuant to Section 4.1 by the Permitted Repayment Date, the Lenders and the Borrower shall deliver joint written instructions to the escrow agent under the Escrow Agreement, instructing such escrow agent to release the aggregate amount of Escrow Deposits, together with interest accrued thereon, in the Escrow Account to:

(i) in the case that the Lenders have exercised their conversion rights pursuant to Section 4.1, the Borrower; or

(ii) in all other cases, to the Lenders, ratably based on the respective outstanding principal amount of Loans held by each Lender as of such date, thereby reducing their respective outstanding principal amounts of the Loans hereunder, and interest accrued thereon, by such amounts received.

5. CONDITIONS PRECEDENT

The effectiveness of this Agreement is subject to the fulfillment or waiver on or before the Effective Date of each of the following conditions:

5.1 Accuracy of Representations

All representations and warranties of the Borrower and the Management Shareholders in this Agreement shall be accurate in all respects.

5.2 Performance of Certain Covenants

All of the covenants and obligations that any Member of the Borrower Group or any Management Shareholder is required to perform or to comply with pursuant to the Shareholders Agreement, the Securities Purchase Agreement, and the Share Purchase Agreement at or prior to the Effective Date (except for the Borrower causing the real property acquired by the WFOE in HeFei and Suzhou to be transferred to newly formed

 

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wholly owned Subsidiaries of the WFOE in compliance with applicable law pursuant to Section 6.7 of the Share Purchase Agreement) have been duly performed and complied with in all material respects.

5.3 No Conflicts

The execution of this Agreement and each other Loan Document will not, directly or indirectly (with or without notice or lapse of time), contravene or conflict with or result in a violation of or cause any Lender to suffer any adverse consequence under any applicable Law or any Company Contract.

5.4 No Default

At the time of and immediately upon giving effect to the making of the Loans on the Effective Date, no Default shall have occurred and be continuing.

5.5 Officer’s Certificate

The Borrower shall have delivered to each of the Lenders a certificate of the President or Chief Financial Officer of the Borrower, in form and substance satisfactory to the Lenders, dated the Effective Date, certifying as to the satisfaction of the conditions set forth in Sections 5.1 through 5.4.

5.6 Secretary’s Certificates

The Borrower shall have delivered to each of the Lenders a certificate of the Secretary of the Borrower, in form and substance satisfactory to the Lenders, dated the Effective Date, attaching (i) correct and complete copies of the Governing Documents of the Borrower then in effect, (ii) correct and complete copies of all resolutions of the Board of Directors of the Borrower relating to the transactions contemplated hereby, and (iii) a certificate of good standing of the Borrower issued by the applicable Governmental Authority on November 14, 2006.

5.7 Proceedings and Documents

As of the Effective Date, all corporate and other proceedings taken or to be taken in connection with this Agreement and each other Loan Document shall be in form and substance reasonably satisfactory to the Lenders and their counsel, and the Lenders and their counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.

5.8 Legal Opinion

The Lenders shall have received a favorable written opinion (addressed to the Lenders and dated the Effective Date), substantially in the form of Exhibit C, from Maples & Calder, Cayman counsel to the Borrower.

 

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5.9 Notice of Borrowing; Loan Amount

The Lenders shall have received a Notice of Borrowing as required by Section 2.2(a).

6. REPRESENTATIONS AND WARRANTIES OF THE BORROWER

In order to induce each of the Lenders to enter into this Agreement and the other Loan Documents to which it is a party, the Borrower and, only to the extent explicitly stated herein, the Management Shareholders hereby jointly and severally represent and warrant to the Lenders as follows:

6.1 Organization, Good Standing and Qualification

The Borrower is a company duly organized, validly existing and in good standing under the laws of the Cayman Islands and is duly qualified to do business as a foreign company in each additional jurisdiction where the failure to so qualify would have a Material Adverse Effect. The WFOE and each Operating Company is a company duly organized, validly existing and in good standing under the laws of the PRC.

6.2 Power and Authority

The Borrower has all requisite power and authority to own its properties and to carry on its business as now being conducted and as proposed to be conducted, and to execute, deliver and perform its obligations under this Agreement and each other Loan Document, including through the contribution of such proceeds to the registered capital of, or the making of a loan to, the WFOE.

6.3 Authorization, Execution and Enforceability

The execution, delivery and performance by the Borrower of this Agreement and the other Loan Documents have been duly authorized by all necessary corporate or other action on the part of the Borrower and its respective shareholders. This Agreement and the other Loan Documents are legal, valid and binding obligations of the parties thereto, enforceable in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, and (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

6.4 Consents

(a) No consent of, notice to, or filing with any Governmental Authority or any other Person, including any creditor or shareholder of the Borrower, is required to be made or obtained in connection with the execution, delivery and performance by any party (other than the Lenders) of this Agreement or any other Loan Document, or as a condition to the legality, validity or enforceability of this Agreement or each other Loan Document.

 

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(b) All consents, approvals, permits and filings required under applicable Laws for the due and proper establishment and operation of any Operating Companies and the WFOE, have been duly obtained from the appropriate authorities and are in full force and effect. For the avoidance of doubt, the abovementioned includes any and all requirements of any Governmental Authority, including with respect to the Operating Companies, the WFOE and the Management Shareholders, and including registrations with the PRC Ministry of Commerce, the PRC State Administration of Industry and Commerce, the PRC State Administration for Foreign Exchange, the PRC National Development and Reform Commission, the PRC Ministry of Construction, the PRC Ministry of Land and Resources, tax bureau, customs authorities, banks and the local counterpart of each of the aforementioned Governmental Authorities.

6.5 No Conflicts

The execution and delivery of this Agreement and other Loan Document will not, directly or indirectly (with or without notice or lapse of time): (a) breach any provision of any of the Governing Documents; (b) breach or give any Governmental Authority or other Person the right to challenge any of the transactions contemplated by the Agreement or the other Loan Documents, or to exercise any remedy or obtain any relief under any Law to which the Borrower and their respective assets may be subject; (c) contravene, conflict with or result in a violation or breach of any of the terms or requirements of, or give any Governmental Authority the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by any Member of the Borrower Group or that otherwise relates to any Member of the Borrower Group or their respective businesses; (d) breach any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or payment under, or to cancel, terminate or modify, any Company Contract; or (e) result in the imposition or creation of any Lien upon or with respect to the assets of any Member of the Borrower Group.

6.6 Subsidiaries; Operating Companies

The Company has no direct Subsidiaries other than the WFOE, the WFOE has no direct Subsidiaries other than Henan Xinyuan, Henan Xinyuan has no direct Subsidiaries other than the Operating Companies, and none of the Operating Companies (other than Henan Xinyuan) has any Subsidiaries. The Company owns all of the equity of the WFOE, the WFOE owns all of the equity of Henan Xinyuan, and Henan Xinyuan owns all of the equity of the Operating Companies. Except for the WFOE pursuant to the Related Documents (as defined in the Share Purchase Agreement), no Person has any right to receive or participate in the revenue or income of any Operating Company.

6.7 Capitalization, Issuance and Transfer of Shares

(a) Borrower Authorized Capital. The authorized share capital of the Borrower consists of 450,000,000 Common Shares, of which 75,704,379 are outstanding on the date hereof, and 50,000,000 Preferred Shares, of which 30,805,400 are outstanding on the date hereof. All of the outstanding Common Shares and Preferred Shares have

 

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been duly authorized and validly issued, and are fully paid. None of the outstanding Common Shares or Preferred Shares was issued in violation of the Securities Act or any other Law.

(b) The Common Shares, which shall be issued by the Borrower upon exercise by a Lender of its conversion rights pursuant to Section 4.1, have been duly authorized and, when delivered to the Lenders in accordance with Section 4.1(b), will be validly issued and fully paid, free and clear of all preemptive rights (other than as required by applicable Law) and Liens, and will be entitled to the voting and other rights of all other Common Shares, as set forth in the Shareholders Agreement

(c) Governing Documents. The Borrower has provided the Lenders with correct and complete copies of the Governing Documents of the Borrower and of each Operating Company, as in effect on the date hereof. The Governing Documents of each Operating Company have been duly and validly authorized and adopted, and are valid and enforceable in accordance with the Law of the PRC, and have been duly filed and are in full force and effect. The Governing Documents of the Borrower have been duly and validly authorized and adopted, and are valid and enforceable to the full extent under the Law of the Cayman Islands, and have been duly filed and are in full force and effect.

6.8 Financial Statements

The Borrower has provided to the Lenders true and complete copies of the audited consolidated financial statements of the Borrower and the Operating Companies as at December 31, 2005 and the unaudited consolidated financial statements of the Borrower and the Operating Companies as at October 31, 2006. Such financial statements are in accordance with the accounting records of the Operating Companies, and fairly present in all material respects the financial condition and the results of operations, changes in shareholders’ equity and cash flows of the Borrower and the Operating Companies as at the respective dates of and for the periods referred to in such financial statements, all in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, except for recurring year-end audit adjustments and accruals which are not material and any absence of notes required by GAAP.

6.9 Material Liabilities

The Borrower was incorporated as an exempted company under the Companies Law (2004 Revision) of the Cayman Islands on January 27, 2006 and conducted no business or operations prior to August 22, 2006. The Borrower has no material liabilities on the date hereof except as set forth in this Agreement, the Loan Documents, the Share Purchase Agreement, the Securities Purchase Agreement and the Related Documents referred to in the Share Purchase Agreement and the Securities Purchase Agreement, and its only assets are cash and the shares of the WFOE.

6.10 OFAC Compliance

No Member of the Borrower Group, or to the knowledge of the Borrower, Jiantou is an OFAC Sanctioned Person. Each Member of the Borrower Group, and to the

 

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knowledge of the Borrower, Jiantou, and each of their respective Affiliates are in compliance with, and have not previously violated, the USA Patriot Act of 2001, as amended, and all other applicable U.S., Cayman Islands, and PRC anti-money laundering laws and regulations. None of (i) the making of the Loans, (ii) the use of the proceeds of the Loans, or (iii) the execution, delivery and performance of this Agreement or the other Loan Documents, or the fulfillment of the terms hereof or thereof, will result in a violation by anyone, including the Lenders, of any of the OFAC Sanctions or of any anti-money laundering laws of the United States, Cayman Islands, or the PRC.

6.11 Solvency

Immediately prior to, and immediately subsequent to, the making of the Loans hereunder, each of the Borrower Group will be solvent. For purposes of this Agreement, “solvent” shall mean, with respect to any Person, (i) the fair value of the property of such Person is greater than the total amount of liabilities (including contingent liabilities) of such Person, (ii) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such person on its debts as they become absolute and matured, (iii) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person’s property would constitute an unreasonably small capital, and (iv) such Person has the ability to pay its debts as they become due, and does not intend to, or believe or reasonably should have believed that it will, incur debts beyond its ability to repay as they become due.

6.12 U.S. Foreign Corrupt Practices Act

None of the Members of the Borrower Group, or to the knowledge of the Borrower, Jiantou, nor any their respective Affiliates, directors, officers, agents or employees is currently making, directly or indirectly, any payment or promise to pay, or gift or promise to give or authorized such a promise or gift, of any money or anything of value, directly or indirectly, nor will the proceeds of any of the Loans be given, directly or indirectly, to (a) any foreign official (as such term is defined in the U.S. Foreign Corrupt Practices Act (the “FCPA”)) for the purpose of influencing any official act or decision of such official or inducing him or her to use his or her influence to affect any act or decision of a governmental authority or (b) any foreign political party or official thereof, candidate for foreign political office, or official of a state-controlled entity or public international organization, for the purpose of influencing any official act or decision of such party, official or candidate or inducing such party, official or candidate to use his, her or its influence to affect any act or decision of a foreign governmental authority, in the case of both (a) and (b) above in order to assist the Borrower Group, or to the knowledge of the Borrower, Jiantou, or any of their respective Affiliates to obtain or retain business for, or direct business to the Borrower any of its Subsidiaries, or to the knowledge of the Borrower, Jiantou, or any their respective Affiliates, as applicable. None of the Borrower Group, or to the knowledge of the Borrower, Jiantou, nor any their respective Affiliates is currently making any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of funds or received or retained any funds in violation of any law, rule or regulation.

 

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6.13 Disclosure

(a) No statement made by or on behalf of any Member of the Borrower Group in (i) this Agreement, (ii) any certificates delivered pursuant to this Agreement, or (iii) any financial or other information delivered or made available to the Lenders since August 25, 2006 contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.

(b) None of the Members of the Borrower Group is aware of any facts pertaining to any Member of the Borrower Group or its Affiliates, or the Business or their respective assets, which could adversely affect any Member of the Borrower Group or its Affiliates, or the Business or their respective assets, and which have not been disclosed in this Agreement, or otherwise disclosed to the Lenders by the Borrower in writing.

6.14 Performance of Covenants and Obligations

To the extent required as of the date hereof, each Member of the Borrower Group and each Management Shareholder has performed and complied with each of its covenants and obligations under the Shareholders Agreement.

6.15 Incorporation of Representations and Warranties

The representations and warranties set forth in Sections 4.11 through 4.25 (inclusive), 4.28, 4.30, 4.31, 4.33 and 4.36 of the Securities Purchase Agreement (and the related definitions) are hereby incorporated by reference into this Agreement for all purposes hereof with the same force and effect as though set forth in full in this Article 6, provided, that references in such representations and warranties to the Disclosure Schedule attached to the Securities Purchase Agreement shall, for purposes of this Agreement, be deemed to refer to the applicable schedules attached to this Agreement.

7. REPRESENTATIONS AND WARRANTIES OF THE LENDERS

Each Lender, severally and not jointly, hereby represents and warrants, as to itself but not as to any other Lender, to the Borrower as follows:

(a) Any Note issued to a Lender hereunder and any Common Shares issuable upon the conversion of such Note pursuant to Section 4.1 are being acquired for such Lender’s own account, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act. Upon any such conversion, the Lender shall, if so requested by the Borrower, confirm in writing, in a form reasonably satisfactory to the Borrower, that the Common Shares issuable upon such conversion are being acquired for investment and not with a view toward distribution or resale.

(b) The Lender understands that any Note issued to a Lender hereunder and any Common Shares issuable upon the conversion of such Note pursuant to Section 4.1 have not been registered under the Securities Act by reason of their issuance in a

 

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transaction exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) thereof, and that they must be held by the Lender indefinitely, and that the Lender must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempted from such registration.

(c) The Lender has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of acquiring any Note issued to such Lender hereunder and any Common Shares issuable upon the conversion of such Note pursuant to Section 4.1 and of protecting its interests in connection therewith.

(d) The Lender is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act.

8. COVENANTS

So long as the Lender has any commitment to make Loans hereunder or any Loan or any part thereof is outstanding under this Agreement, the Borrower will, unless each Lender shall otherwise consent in writing:

8.1 Use of Proceeds.

Unless expressly waived in writing by the Lenders in their sole discretion, the proceeds of the Loans shall be loaned by the Borrower to the WFOE pursuant to a shareholder loan agreement in a form and substance reasonably satisfactory to the Lenders, and the Borrower shall comply with the procedures for foreign debt registration with the Henan Office of the State Administration of Foreign Exchange and shall comply with all other applicable Law with respect to the foregoing.

8.2 Incorporation of Covenants

(a) Comply with the covenants set forth in Sections 4.1 (except for the first sentence of Section 4.1(a) and Sections 4.1(d), (e) and (f)(i)) of the Shareholders Agreement as though such covenants were set forth in full in this Article 8. Capitalized terms used in such sections but not defined herein shall have the meaning ascribed to such terms in the Shareholders Agreement.

(b) Not (and not permit any Member of the Borrower Group to), directly or indirectly, without first obtaining the approval of the Lenders, take any action set forth in Sections 4.5(a) through (z) of the Shareholders Agreement.

8.3 Inspection

The Borrower shall permit any Lender to visit and inspect the properties of each Member of the Borrower Group, to examine their respective books of account and records, and to discuss its affairs, finances and accounts with their respective directors, officers, employees, attorneys, accountants, representatives, consultants and other agents, all at such reasonable times and reasonable frequency as may be requested by such Lender.

 

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9. DEFAULTS

9.1 Events of Default

If any of the following events shall occur and be continuing (each such event, an “Event of Default”):

(a) the Borrower shall fail to pay when due any principal of any Loan, whether at stated maturity, by acceleration, by prepayment or otherwise, or shall fail to pay within five (5) Business Days after the same becomes due and payable, any other amount (whether of principal, interest, fees or otherwise), whether at maturity, by acceleration or otherwise, payable to the Lender under this Agreement or the other Loan Documents;

(b) the Borrower or any Management Shareholder shall fail to perform or observe any obligation or covenant or term contained in Section 4.5 of the Shareholders Agreement or Article 8 of this Agreement;

(c) the Borrower or any Management Shareholder shall fail to perform or observe any other obligation or covenant or term contained in the Securities Purchase Agreement, the Share Purchase Agreement, this Agreement or the other Loan Documents (in each case not specified in subsection (a) or (b) above), unless, if capable of cure without material prejudice to any Lender due to such failure to so perform or observe, such breach is cured within 15 Business Days after the Borrower’s knowledge of the occurrence thereof;

(d) any representation or warranty made herein or in the other Loan Documents, or in any certificate or notice delivered or made pursuant hereto or in connection herewith or therewith, shall prove to be false or misleading in any material respect when made;

(e) the Borrower shall default beyond applicable notice and grace periods, if any, in the payment of any principal or interest on any of their respective Indebtedness in excess of $500,000 or with respect to the performance or observance of any terms of any instrument pursuant to which any such Indebtedness was created or of any mortgage, indenture or other agreement relating thereto, and the principal amount thereof is accelerated in accordance with the terms thereof;

(f) (i) any final judgment or settlement in excess of $1,000,000 shall be entered against the Borrower or any of its Subsidiaries and shall not be paid, vacated or stayed for a period of 60 days or (ii) any one or more non-monetary final judgments shall have been entered that could reasonably be expected to have, a Material Adverse Effect;

(g) this Agreement or any of the other Loan Documents shall, at any time after its execution and delivery and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by any party thereto;

 

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(h) there occurs any event or circumstance that has a Material Adverse Effect;

(i) (i) the Borrower becomes unable or admits in writing its inability or fails generally to pay its debts as they become due, or (ii) any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of the Borrower and is not released, vacated or fully bonded within 30 days after its issue or levy; or

(j) (i) an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced against the Borrower or any of its Subsidiaries, or a court shall enter a decree or order appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Borrower or any of its Subsidiaries, or for any substantial part of any of its properties, or ordering the winding-up or liquidation of any of its affairs, and such case shall not be dismissed in 60 days, or such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; or (ii) the Borrower or any of its Subsidiaries shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Borrower, any of its Subsidiaries, or for all or any substantial part of any of their respective properties, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay their debts as they become due, or shall take any corporate action in furtherance of any of the foregoing;

then each Lender may by notice to the Borrower declare its portion of the Loans and all other amounts payable by the Borrower to such Lender under this Agreement to be immediately due and payable, whereupon the same shall become forthwith due and payable; provided that upon the occurrence and continuance of an Event of Default specified in Section 9.1(i) or Section 9.1(j), all principal, interest and other amounts due hereunder and under the Notes shall thereupon and concurrently therewith become due and payable and the principal amount of the Loans outstanding hereunder shall bear interest at the Default Rate, all without any action by the Lenders or any of them and without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or in the other Loan Documents to the contrary notwithstanding.

10. INDEMNIFICATION

10.1 Indemnification

(a) The Borrower agrees to indemnify, defend and hold harmless the Lenders and their respective Affiliates, and the partners, members, shareholders, managers, directors, employees and agents of each of the foregoing, from and against and in respect

 

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of any and all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, interest and penalties, diminution in value of securities, costs and expenses (including reasonable legal fees and disbursements incurred in connection therewith and in seeking indemnification therefor, and any amounts or expenses required to be paid or incurred in connection with any action, suit, proceeding, claim, appeal, demand, assessment or judgment) (collectively, “Losses”), resulting from, arising out of, or imposed upon or incurred by any Person to be indemnified hereunder by reason of any breach of any representation, warranty, covenant or agreement of the Borrower or the Management Shareholders contained in this Agreement or any agreement, certificate or document executed and delivered by the Borrower or any other Member of the Borrower Group pursuant hereto or in connection with any of the transactions contemplated hereby.

(b) Notwithstanding anything herein to the contrary, the Borrower shall not be obligated to indemnify the Lenders under this Section 10.1 in excess of an aggregate amount of $35,000,000 (the “Borrower’s Indemnification Cap”); provided, however, that the Borrower’s Indemnification Cap shall not apply to any Borrower indemnification obligations arising out of, relating to or resulting from fraud or intentional misrepresentation by the Borrower or the Management Shareholders.

10.2 Procedures

Whenever a claim shall arise for indemnification under this Section 10.2, with the exception of claims for litigation expenses to be funded on an ongoing basis, the Person entitled to indemnification (the “Indemnified Party”) shall promptly notify the party from whom indemnification is sought (the “Indemnifying Party”) of such claim and, when known, the facts constituting the basis for such claim. Failure of an Indemnified Party to give reasonably prompt notice of any claim shall not release, waive or otherwise affect an Indemnifying Party’s obligations with respect thereto except to the extent that the Indemnifying Party can demonstrate actual loss and prejudice as a result of such failure. In the event of any such claim for indemnification resulting from or in connection with a claim or legal proceeding by a third party, the Indemnifying Party may, at its sole cost and expense, elect by notice to the Indemnified Party to assume the defense; provided, however, that the Indemnifying Party makes such election within 15 days after delivery of notice of claim from the Indemnified Party and agrees in writing to pay the full amount of such indemnification to the Indemnified Party. If an Indemnifying Party assumes the defense of any such claim or legal proceeding, the Indemnifying Party shall be entitled to select counsel satisfactory to the Indemnified Party and take all steps necessary in the settlement or defense thereof; provided, that no settlement shall be made without the prior written consent of the Indemnified Party unless the settlement involves only payment of money damages by the Indemnifying Party and a release of the Indemnified Party from all liability. The Indemnified Party may, at its own expense, participate in any such proceeding with the counsel of its choice. So long as the Indemnifying Party is in good faith defending such claim or proceeding, the Indemnified Party shall not compromise or settle such claim without the prior written consent of the Indemnifying Party. If the Indemnifying Party does not assume the defense of any such claim or litigation in accordance with the terms hereof, the Indemnified Party may defend against such claim or litigation in such manner as it may deem appropriate, including, but not limited to,

 

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settling such claim or litigation (after giving notice of the same to the Indemnifying Party) on such terms as the Indemnified Party may deem appropriate, and the Indemnifying Party will promptly indemnify the Indemnified Party in accordance with the provisions of Section 10.1.

10.3 Survival; Right to Indemnification Not Affected by Knowledge

All representations, warranties, covenants, and obligations in this Agreement or any other Loan Document will survive until (i) in the case where the Lenders have exercised their conversion rights pursuant to Article 4, the date that is three (3) years after the issuance of the Common Shares pursuant to Article 4, or (ii) otherwise, through the date when the Borrower has fully and indefeasibly repaid to the Lenders the principal amount of the Loans and any interest thereon (such date pursuant to clause (ii) of this Section 10.3, the “Survival Date”); provided, however, that all representations and warranties made as of the date hereof by incorporation into this Agreement by reference pursuant to Section 6.15 of this Agreement that relate to Section 4.17 (Employment Matters) and Section 4.23 (Taxes) of the Securities Purchase Agreement shall survive until the earlier of the date which is (i) 30 days after the expiration of the respective statute of limitations applicable thereto and (ii) the Survival Date; provided, further, that notwithstanding Section 4.1(f), exercise by the Lenders of the conversion rights pursuant to Article 4 shall not be deemed payment in full of the Loan for purpose of this Section 10.3(ii). The right to indemnification, payment of Losses or other remedy based on such representations, warranties, covenants and agreements will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Effective Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or agreement. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of Losses, or other remedy based on such representations, warranties, covenants and agreements.

11. GENERAL PROVISIONS

11.1 Exculpation Among Lenders; Obligations Several

Each Lender acknowledges that it is not relying upon any Person, other than the Borrower and its officers and directors and the Management Shareholders, in making its decisions with respect to making Loans to the Borrower and with respect to its conversion rights pursuant to Article 4. Each Lender agrees that no Lender nor any of its Affiliates or any controlling persons, members, officers, directors, partners, agents or employees of any Lender or its Affiliates shall be liable to the other Lender for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the transactions contemplated hereby. The parties agree that the obligations of the Lenders hereunder shall be several and not joint.

 

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11.2 Entire Agreement

This Agreement, together with the other Loan Documents, merges all previous negotiations and agreements among the parties hereto with respect to the subject matter hereof and thereof, either oral or written, and constitutes the entire agreement and understanding among the parties with respect to the subject matter hereof and thereof.

11.3 Further Assurances

The Borrower agrees that at any time and from time to time upon the written request of any Lender, the Borrower will execute and deliver such further documents and instruments and do such further acts and things as any Lender may reasonably request consistent with the provisions hereof in order to effect the intent and purposes of this Agreement.

11.4 Amendment; Waiver

No amendment, modification, or waiver of any provision of this Agreement shall be valid except by an agreement in writing executed by the Borrower and the Lenders. Except as otherwise expressly set forth herein, no failure or delay by any party hereto in exercising any right, power or privilege hereunder (and no course of dealing between or among any of the parties) shall operate as a waiver of any such right, power or privilege. No waiver of any default on any one occasion shall constitute a waiver of any subsequent or other default. No single or partial exercise of any such right, power or privilege shall preclude the further or full exercise thereof.

11.5 Severability

If any provision of this Agreement or the application thereof to any Person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by Law, but only as long as the continued validity, legality and enforceability of such provision or application does not materially (a) alter the terms of this Agreement, (b) diminish the benefits of this Agreement or (c) increase the burdens of this Agreement, for any Person.

11.6 Assignment

The rights and obligations of the parties hereunder shall be binding upon and inure to the benefit of the parties hereto, their successors and permitted assigns. This Agreement may not be assigned (by operation of Law or otherwise) without the prior written consent of the parties; provided, that any Lender may assign its rights and delegate its duties hereunder to any of its Affiliates upon written notice to the Borrower and the other Lender, which notice shall identify the assignee, so long as such Lender remains liable for the performance of such Affiliate.

 

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11.7 Third Parties

Nothing herein, expressed or implied, is intended to or shall confer on any Person other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement except as expressly provided in Article 10 with respect to any Indemnified Party.

11.8 Notices

All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered in accordance with the provisions of Section 12.6 of the Share Purchase Agreement.

11.9 Expenses

At the Effective Date, the Borrower shall reimburse the Lenders for all of their reasonable costs and expenses, including the fees and expenses of any attorney or tax advisor retained by them, that they shall have incurred in connection with the legal, accounting and commercial due diligence process, the negotiation, execution, delivery and performance of this Agreement and the other Loan Documents and the consummation of the transactions contemplated hereby and thereby; provided, that the aggregate amount of all such reimbursement shall be limited to a maximum of $75,000. The Borrower shall also reimburse the Lenders on demand for their reasonable costs (including attorneys’ fees and expenses) of enforcing any provision of this Agreement or the other Loan Documents in the event of a breach by any Member of the Borrower Group; provided, that such reimbursement shall be limited to a maximum of $250,000 per claim.

11.10 Governing Law

This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York without application of principles of conflicts of law.

11.11 Specific Performance

The parties agree that irreparable damage will occur in the event that either party fails to consummate the transactions contemplated hereby in accordance with the terms of this Agreement, and that the parties shall therefore be entitled to specific performance in such event, in addition to any other remedy at law or in equity.

11.12 Submission to Jurisdiction

Any dispute arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be resolved by arbitration in accordance with the provisions of Section 12.10 of the Securities Purchase Agreement. The parties hereby consent to the exclusive jurisdiction of (i) the Supreme Court of the State of New York and the United States District Court for the Southern District of New York, and (ii) courts

 

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with appropriate jurisdiction to hear such matters in Hong Kong, Special Administrative Region, for temporary injunctive or other relief in aid of arbitration or to prevent irreparable harm and to the non-exclusive jurisdiction of such courts for enforcement of any award by the arbitrators.

11.13 Interpretation

As both parties have participated in the drafting of this Agreement, any ambiguity shall not be construed against either party as the drafter. Unless the context of this Agreement clearly requires otherwise, (a) “or” has the inclusive meaning frequently identified with the phrase “and/or”, (b) “including” and “include” has the inclusive meaning frequently identified with the phrase “including, but not limited to,” (c) references to “hereof,” “hereunder” or “herein” or words of similar import relate to this Agreement, (d) when a reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or a Section of this Agreement unless otherwise indicated, and (e) the terms defined hereunder shall have the meanings therein specified for all purposes of this Agreement, applicable to both the singular and plural forms of any of the terms defined herein. The section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. All terms and words used in this Agreement, regardless of the number and gender in which they are used, shall be deemed and construed to include any other number and any other gender as the context of this Agreement requires.

11.14 Counterparts

This Agreement may be executed in two or more counterparts, each of which when so executed shall be an original, but all of which together shall constitute one agreement. Facsimile signatures shall be deemed original signatures.

11.15 Confidentiality

No Member of the Borrower Group shall, and each Member of the Borrower Group shall cause their respective affiliates and advisors, and their respective directors, officers and representatives not to, disclose to anyone the fact that the Lenders have executed this Agreement, or disclose to or discuss with anyone the terms of this Agreement, without the prior written consent of the Lenders, except (a) to their officers and advisors, as necessary, provided that they agree to maintain the confidentiality thereof, (b) as may be required under applicable Law, and (c) as may be necessary to consummate the transactions contemplated hereby.

[remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, each Lender and the Borrower have executed this Agreement as of the date first above written.

 

 

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Schedule 1

Calculation of New Shares Issuable on Conversion

Definitions:

NS = New Shares issuable upon conversion

P = Exercise price per share

ES = Number of outstanding Common Shares on a fully diluted basis, taking into account the exercise of all outstanding options and warrants, as of the last day of fiscal year 2007

L = The outstanding principal amount of the Loans, and any interest thereon

NI = The 2007 Net Income.

Formula for Calculation:

NS = L / (5*NI / (ES + NS))

[1. NS = L / P

2. P = 5*NI / (ES + NS)]

Example, for illustration purposes only

Assumptions:

L = $39.375M (based on $35.0M at 12.5% per annum)

ES = 115,170,000

NI = $32M

Applying the formula above:

NS = $39.375M / (5*$32.0M / (115.17M + NS))

Step 1: Multiply the right side of the equation by (115.17M + NS) / (115.17M + NS):

NS = $39.375M * (115.17M + NS) / (5*$32.0M)

    ® $39.375M * (115.17M + NS) / $160.0M

Step 2: Divide the numerator by the denominator:

NS = 0.246 * (115.17M + NS)

Step 3: Multiply through on the right side:

NS = 28.34M + .246NS

Step 4: Subtract .246NS from each side:

.754NS = 28.34M

Step 5: Divide each side by .754

NS = 37.59M

 

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Exhibit 10.15

EXECUTION VERSION

 

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SHARE PURCHASE AGREEMENT

AMONG

BLUE RIDGE CHINA PARTNERS, L.P.,

EI FUND II CHINA, LLC,

ZHANG YONG, YANG YUYAN

AND

XINYUAN REAL ESTATE, LTD.

DATED AS OF NOVEMBER 18, 2006

 

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SHARE PURCHASE AGREEMENT

SHARE PURCHASE AGREEMENT, dated as of November 18, 2006, among Blue Ridge China Partners, L.P., a Cayman Islands exempted limited partnership (“Blue Ridge China”), EI Fund II China, LLC, a Delaware limited liability company (“EI” and together with Blue Ridge China, the “Purchasers”), Zhang Yong, a PRC national, Yang Yuyan, a PRC national (together with Zhang Yong, the “Management Shareholders” and individually, a “Management Shareholder”), and Xinyuan Real Estate, Ltd., a Cayman Islands company (the “Company”).

WHEREAS, the Company wishes to obtain equity financing, and the Purchasers are willing to invest in the Company on the terms and conditions herein set forth.

NOW, THEREFORE, it is hereby agreed as follows:

ARTICLE 1

DEFINITIONS

As used herein, unless the context requires a different meaning, the following terms shall have the following meanings:

“2006 Budget” means the Company’s budget for the period from and after the date of this Agreement through the end of fiscal year 2006, a copy of which has been provided to the Purchasers prior to the date hereof.

“Affiliate” means, with respect to a specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Person specified.

“Ancillary Businesses” means Xinyuan Property Management Co., Ltd., Zhengzhou Mingyuan Landscape Engineering Co., Ltd., Henan Xinyuan Real Estate Agency Co., Ltd., and Zhengzhou Xinyuan Computer Network Engineering Co., Ltd.

“Blue Ridge Shares” has the meaning set forth in Section 2.2(a).

“Business” means the business that the WFOE and the Operating Companies engage in, including the business of investing in real estate in the PRC.

“Business Day” means any day except a Saturday, a Sunday or a legal holiday in the City of New York or the PRC.

“Call” has the meaning set forth in Section 2.5(b).

“Closing” has the meaning set forth in Section 2.3.

“Closing Date” has the meaning set forth in Section 2.3.

“Closing Purchaser” has the meaning set forth in Section 9.9.

“Code” means the U.S. Internal Revenue Code of 1986, as amended.

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“Common Shares” means the common shares, par value $0.0001 per share, of the Company.

“Company” has the meaning set forth in the preamble.

“Company Group” means the Company, the WFOE and the Operating Companies, and any of the foregoing individually may sometimes be referred to as a “Member of the Company Group”.

“Company’s Indemnification Cap” has the meaning set forth in Section 10.1(b).

“Contract” means any agreement, arrangement or understanding, written or oral.

“Disclosure Schedule” means the disclosure schedule with respect to the representations and warranties of the Company Group contained in Article 4.

“FCPA” has the meaning set forth in Section 4.15.

“GAAP” means generally accepted accounting principles in the United States in effect from time to time, and as such principles have been applied on a consistent basis during the relevant time period.

“Governing Documents” means, with respect to the Company, the Memorandum of Association, and with respect to the WFOE or any Operating Company, its Articles of Association or other organizational documents, in each case as amended from time to time.

“Governmental Authorization” means any consent, approval, license, registration or permit issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Law.

“Governmental Body” means any legislative or executive branch of any federal, state or local government (including municipalities), anywhere in the world (including the United States, the Cayman Islands and the PRC), and any agency, bureau, commission, court, department or other instrumentality thereof.

“Henan Acquisition” has the meaning set forth in Section 4.14.

“Henan Xinyuan” means Henan Xinyuan Real Estate Co., Ltd., a company organized under the laws of the PRC.

“Indemnified Party” has the meaning set forth in Section 10.2.

“Indemnifying Party” has the meaning set forth in Section 10.2.

“Jiantou” means Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd.

“Law” means applicable common law and any statute, ordinance, code or other law, rule, permit, permit condition, regulation, order, decree, technical or other standard, requirement or procedure enacted, adopted, promulgated, applied or followed by any Governmental Body.

 

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“Lien” means any mortgage, pledge, hypothecation, security assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and any lien related to any filing of any financing statement under the Uniform Commercial Code or comparable Law of any jurisdiction), any right of first refusal, right to call, preemptive right or other right of another Person with respect to any property or asset, or any option, warrant or commitment of any kind or nature.

“Losses” has the meaning set forth in Section 10.1.

“Management Shareholders” has the meaning set forth in the preamble.

“Memorandum of Association” has the meaning set forth in Section 2.1.

“Non-Closing Purchaser” has the meaning set forth in Section 9.9.

“OFAC”, “OFAC Sanctions”, and “OFAC Sanctioned Person” have the meaning set forth in Section 4.27 of the Securities Purchase Agreement.

“Operating Company” means each of the Ancillary Businesses, Henan Xinyuan, Henan Wanzhong Real Estate Co., Ltd., Shandong Xinyuan Real Estate Co., Ltd. and Qingdao Xinyuan Real Estate Co., Ltd.

“Order” means any order, writ, injunction, decree, judgment, award, determination or written direction of any arbitrator or Governmental Body.

“Person” means any individual or entity, including any corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or Governmental Body.

“PFIC” has the meaning set forth in Section 6.5(c).

“Plan” and “Plans” means the employment regulations, employee benefit regulations, and other employee-related regulations of the Company.

“PRC” means the People’s Republic of China.

“Preferred Shares” means the Series A Convertible Preferred Shares, par value $0.0001 per share, of the Company.

“Purchase Price” has the meaning set forth in Section 2.2(b).

“Purchased Securities” has the meaning set forth in Section 2.2(b).

“Purchasers” has the meaning set forth in the preamble.

“Qualified Public Offering” has the meaning ascribed to such term in the Memorandum of Association.

 

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“Related Documents” means the Contracts and other documents listed on Schedule I hereto, as each may from time to time be amended, modified or supplemented in accordance with the terms hereof and thereof.

“Required Consents” has the meaning set forth in Section 4.4.

“Securities Act” means the Securities Act of 1933 of the United States, as amended, and, as applicable, any relevant securities laws of any state or non-U.S. jurisdiction (including the Cayman Islands and the PRC).

“Securities Purchase Agreement” means the Securities Purchase Agreement, dated as of August 22, 2006, as amended, among the parties hereto.

“Shareholders Agreement” means that certain Shareholders Agreement, dated as of August 25, 2006, among the Company, the Purchasers and the shareholders of the Company party thereto, as the same may from time to time be amended, modified or supplemented in accordance with the terms hereof and thereof.

“Subsidiary” means, as to any Person, (i) a corporation or other entity whose shares of capital stock or other ownership interests having ordinary voting power to elect a majority of the directors of such corporation, or other Persons performing similar functions for such entity, are owned or controlled, directly or indirectly, by such Person, or (ii) a corporation or other entity of which a majority of the equity is owned, directly or indirectly, by such Person.

“Tax” means any income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental, windfall profit, customs, vehicle, airplane, boat, vessel or other title or registration, capital stock, franchise, employees’ income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, value added, alternative, add-on minimum and other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever and any interest, penalty, addition or additional amount thereon imposed, assessed or collected by or under the authority of any Governmental Body or payable under any tax-sharing agreement or any other Contract.

“Transactions” means the transactions contemplated by this Agreement and the Related Documents.

“U.S. Person” has the meaning set forth in Section 4.27 of the Securities Purchase Agreement.

“United States” or “U.S.” means the United States of America.

“WFOE” means Xinyuan Real Estate (Henan) Development, Ltd., a company organized under the laws of the PRC, which is a wholly foreign-owned enterprise 100% held by the Company under the laws of the PRC.

 

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ARTICLE 2

PURCHASE AND SALE

Section 2.1 Authorization of Shares

On or prior to the Closing, the Company shall have authorized the issuance and sale to (i) Blue Ridge China of 9,422,627 Common Shares, and (ii) EI of 6,281,752 Common Shares, in each case having the rights, restrictions, privileges and preferences as set forth in the form of the Second Amended and Restated Memorandum and Articles of Association of the Company attached hereto as Exhibit B (the “Memorandum of Association”).

Section 2.2 Purchase and Sale

Subject to the terms and conditions of this Agreement, at the Closing:

(a) the Company agrees to issue and sell to Blue Ridge China, and Blue Ridge China agrees to purchase from the Company, 9,422,627 Common Shares for $9,000,000 (the “Blue Ridge Shares”); and

(b) the Company agrees to issue and sell to EI, and EI agrees to purchase from the Company, 6,281,752 Common Shares (such securities, together with the Blue Ridge Shares, are collectively referred to herein as the “Purchased Securities”) for $6,000,000 (such amount, together with the amount referred to in the immediately preceding paragraph (a), is collectively referred to herein as the “Purchase Price”).

Section 2.3 Closing

Subject to the terms and conditions of this Agreement, the Closing of the purchase and sale of the Purchased Securities (the “Closing”) shall take place at the offices of TransAsia Lawyers, at 10:00 a.m. local time on the third Business Day following the satisfaction or waiver of the conditions in Article 8 and Article 9, or at such other place and date prior to December 31, 2006 as the parties may agree (the “Closing Date”).

Section 2.4 Delivery of Share Certificates

Subject to the terms of this Agreement, as soon as practicable, and in no event more than ten (10) days after the Closing, the Company shall deliver to each Purchaser one or more certificates registered in such Purchaser’s name representing the Purchased Securities purchased by such Purchaser against payment of such Purchaser’s portion of the Purchase Price therefor by wire transfer of immediately available funds pursuant to the Company’s instructions. Within ten (10) days after the Closing, the Company shall deliver to each Purchaser a certified copy of its Register of Shareholders (as defined in the Articles of Association of the Company) reflecting their ownership of the Purchased Securities.

Section 2.5 Call on Blue Ridge Shares

Notwithstanding anything to the contrary herein:

(a) the Blue Ridge Shares issued to Blue Ridge China at Closing shall be nil paid, and shall be subject to call and forfeiture in accordance with the provisions of this Section 2.5;

 

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(b) at Closing, the Company shall make a call on the Blue Ridge Shares in the aggregate amount of $9,000,000, payable on or prior to December 4, 2006 (the “Call”); and

(c) if the Call remains unpaid after December 4, 2006, promptly thereafter (i) the Blue Ridge Shares shall be automatically forfeited and cancelled with no further action by the Company, (ii) the right of Blue Ridge China to appoint a second member of the Board of Directors of the Company pursuant to the Shareholders Agreement and the Memorandum of Association shall automatically terminate, (iii) Blue Ridge China shall cause the person elected to serve as a director of the Company pursuant to Section 8.14(a) to resign as a director, (iv) the Purchasers and the Management Shareholders shall elect a person designated by the Management Shareholders as a director of the Company and (v) the parties shall take all other steps reasonably required to effect the provisions of this paragraph (c).

ARTICLE 3

USE OF PROCEEDS

Section 3.1 Use of Proceeds

The Company shall retain $1,000,000 of the proceeds from the sale of the Purchased Securities to pay expenses, and shall contribute the balance of the Purchase Price to the registered capital of the WFOE to use for general working capital purposes, including the expansion of the Business.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF THE COMPANY GROUP

In order to induce each of the Purchasers to enter into this Agreement and the Related Documents to which it is a party, the Members of the Company Group and, only to the extent explicitly stated herein, the Management Shareholders, hereby jointly and severally represent and warrant to the Purchasers as follows:

Section 4.1 Organization, Good Standing and Qualification

The Company is a company duly organized, validly existing and in good standing under the laws of the Cayman Islands and is duly qualified to do business as a foreign company in each additional jurisdiction where the failure to so qualify would have a material adverse effect on the Company. The WFOE and each Operating Company is a company duly organized, validly existing and in good standing under the laws of the PRC.

Section 4.2 Power and Authority

Each Member of the Company Group has all requisite power and authority to own its properties and to carry on its business as now being conducted and as proposed to be conducted, and to execute, deliver and perform its obligations under this Agreement and the Related Documents to which it is a party, and, in the case of the Company, to issue, sell and deliver the Purchased Securities.

 

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Section 4.3 Authorization, Execution and Enforceability

(a) The execution, delivery and performance by each Management Shareholder and each Member of the Company Group of this Agreement and the Related Documents to which each is a party have been duly authorized by all necessary corporate or other action on the part of such Management Shareholder or such Member of the Company Group and its respective shareholders. This Agreement and the Related Documents are legal, valid and binding obligations of the parties thereto, enforceable in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies and (c) to the extent the indemnification provisions contained in the Shareholders Agreement may be limited by any applicable securities laws.

(b) The issuance, sale and delivery of the Purchased Securities have been duly authorized by all necessary corporate action on the part of the Company and its shareholders.

Section 4.4 Consents

(a) Except as set forth on Section 4.4(a) of the Disclosure Schedule (the “Required Consents”), no consent of, notice to, or filing with any Governmental Body or any other Person, including any creditor or shareholder of any Member of the Company Group, is required to be made or obtained in connection with the execution, delivery and performance by any party (other than the Purchasers) of this Agreement or the Related Documents, or the Transactions, or as a condition to the legality, validity or enforceability of this Agreement or the Related Documents, or the offer, issuance, sale or delivery of the Purchased Securities except qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Purchased Securities under applicable U.S. federal and state securities laws or the securities laws of the Cayman Islands or any other jurisdiction.

(b) All consents, approvals, permits and filings required under applicable Laws for the due and proper establishment and operation of any Operating Companies and the WFOE, have been duly obtained from the appropriate authorities and are in full force and effect. For the avoidance of doubt, the abovementioned includes any and all requirements of any Governmental Body, including, with respect to the Operating Companies, the WFOE and the Management Shareholders, registrations with: the PRC Ministry of Commerce, the PRC State Administration of Industry and Commerce, the PRC State Administration for Foreign Exchange, the PRC National Development and Reform Commission; the PRC Ministry of Construction; the PRC Ministry of Land and Resources, tax bureau, customs authorities, banks and the local counterpart of each of the aforementioned Governmental Bodies.

Section 4.5 No Conflicts

The execution and delivery of this Agreement and the Related Documents, and the consummation of the Transactions, will not, directly or indirectly (with or without notice or lapse

 

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of time): (a) breach any provision of any of the Governing Documents; (b) breach, or give any Governmental Body or other Person the right to challenge any of the Transactions or to exercise any remedy or obtain any relief under, any Law or Order to which any Member of the Company Group and their respective assets may be subject; (c) contravene, conflict with or result in a violation or breach of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by any Member of the Company Group or that otherwise relates to any Member of the Company Group or their respective businesses; (d) breach any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or payment under, or to cancel, terminate or modify, any Company Contract (as defined in Section 4.16 of the Securities Purchase Agreement); or (e) result in the imposition or creation of any Lien upon or with respect to the assets of any Member of the Company Group.

Section 4.6 Subsidiaries; Operating Companies

The Company has no direct Subsidiaries other than the WFOE, the WFOE has no direct Subsidiaries other than Henan Xinyuan, Henan Xinyuan has no direct Subsidiaries other than the Operating Companies, and none of the Operating Companies (other than Henan Xinyuan) has any Subsidiaries. The Company owns all of the equity of the WFOE, the WFOE owns all of the equity of Henan Xinyuan, and Henan Xinyuan owns all of the equity of the Operating Companies. Except for the WFOE pursuant to the Related Documents, no Person has any right to receive or participate in the revenue or income of any Operating Company.

Section 4.7 Capitalization, Issuance and Transfer of Shares

(a) Company Authorized Capital. The authorized share capital of the Company consists, or will consist immediately prior to the Closing, of 450,000,000 Common Shares, of which 60,000,000 are outstanding on the date hereof, and 50,000,000 Preferred Shares, of which 30,805,400 are outstanding on the date hereof. All of the outstanding Common Shares and Preferred Shares have been duly authorized and validly issued, and are fully paid. None of the outstanding Common Shares or Preferred Shares was issued in violation of the Securities Act or any other Law.

(b) Issuance of Purchased Securities. The Purchased Securities have been duly authorized and, when delivered to and paid for in full by the Purchasers as provided herein or in the Governing Documents, as the case may be, will be validly issued and fully paid, will be free and clear of all preemptive rights (other than as required by applicable Law) and Liens (other than the Call on the Blue Ridge Shares) except in each case as otherwise provided in the Related Documents, and will be entitled to the voting and other rights set forth in the Governing Documents. All preemptive rights of the Company’s shareholders in respect of the Transactions have been waived in writing.

(c) Sale of Purchased Securities. At the Closing, the Purchasers will receive the Purchased Securities sold under this Agreement free and clear of all preemptive rights and other Liens (other than the Call on the Blue Ridge Shares) except as otherwise provided in the Related Documents.

 

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(d) Governing Documents. The Company has provided the Purchasers with correct and complete copies of the Governing Documents of the Company and of each Operating Company, as in effect on the date hereof. The Governing Documents of each Operating Company have been duly and validly authorized and adopted, and are valid and enforceable in accordance with the Law of the PRC, and have been duly filed and are in full force and effect. The Governing Documents of the Company (other than the Memorandum of Association, but including the Amended and Restated Memorandum and Articles of Association of the Company as adopted by the Company effective August 25, 2006) have been duly and validly authorized and adopted, and are valid and enforceable to the full extent under the Law of the Cayman Islands, and have been duly filed and are in full force and effect.

(e) Registration Rights. Except as set forth in the letter agreement, dated as of November 7, 2005, between Henan Xinyuan and Burnham Securities Inc., and the Shareholders Agreement, neither the Company, the WFOE nor any Operating Company has granted or agreed to grant any rights relating to registration of its securities under the Securities Act or any other Law other than pursuant to the Shareholders Agreement.

Section 4.8 Compliance with Securities Laws

The Company has not, either directly or through any agent, offered any securities to or solicited any offers to acquire any securities from, or otherwise approached, negotiated, or communicated in respect of any securities with, any Person in such a manner as to require that the offer or sale of such securities (including the Purchased Securities) be registered pursuant to the provisions of the Securities Act and the rules and regulations thereunder or any other Law, and neither the Company nor anyone acting on its behalf will take any action prior to the Closing that would cause any such registration to be required, including any offer, issuance or sale of any security of the Company under circumstances which might require the integration of such security with the Purchased Securities under the Securities Act or the rules and regulations thereunder. The issuance of the Purchased Securities are exempt from registration under the Securities Act. The Company has complied with all applicable laws in all issuances and purchases of its shares prior to the date hereof and has not violated any applicable Law in connection with any such issuances and purchases of its securities. Any notices required to be filed under federal, state or any non-U.S. securities and blue sky laws prior to or subsequent to the Closing shall be filed on a timely basis prior to or as so required. Except as set forth on Section 4.8 of the Disclosure Schedule, neither the Company nor any Person authorized or employed by the Company as agent, broker, dealer or otherwise in connection with the offering or sale of the Purchased Securities has offered the same or any such securities for sale to, or solicited any offers to buy the same from, or otherwise approached or negotiated with respect thereto with, any Person other than the Purchasers and their respective Affiliates. Except as set forth on Section 4.8 of the Disclosure Schedule for securities which may be issuable under the Equity Incentive Plan (as defined in the Securities Purchase Agreement), at no time has the Company offered or sold any securities in the United States or to any Person resident or domiciled in the United States.

 

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Section 4.9 Financial Statements

Attached as Section 4.9 of the Disclosure Schedule are true and complete copies of the consolidated and unconsolidated financial statements of the Operating Companies as at December 31, 2005 and as at October 31, 2006. Such financial statements are in accordance with the accounting records of the Operating Companies, and fairly present in all material respects the financial condition and the results of operations, changes in shareholders’ equity and cash flows of the Operating Companies as at the respective dates of and for the periods referred to in such financial statements, all in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, except for recurring year-end audit adjustments and accruals which are not material and any absence of notes required by GAAP.

Section 4.10 Material Liabilities

The Company was incorporated as an exempted company under the Companies Law (2004 Revision) of the Cayman Islands on January 27, 2006 and conducted no business or operations prior to August 22, 2006. The Company has no material liabilities on the date hereof except as set forth in this Agreement and the Securities Purchase Agreement, and in the Related Documents referred to herein and therein, and its only assets are the shares of the WFOE.

Section 4.11 Brokers

No Member of the Company Group has incurred any liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or similar payments in connection with the Transactions.

Section 4.12 OFAC Compliance

No Member of the Company Group, or to the knowledge of the Company, Jiantou is an OFAC Sanctioned Person. Each Member of the Company Group, and to the knowledge of the Company, Jiantou, and each of their respective Affiliates are in compliance with, and have not previously violated, the USA Patriot Act of 2001, as amended, and all other applicable U.S., Cayman Islands, and PRC anti-money laundering laws and regulations. None of (i) the purchase and sale of the Purchased Securities, (ii) the use of the Purchase Price, (iii) the execution, delivery and performance of this Agreement, or any of the Related Documents, or (iv) the consummation of the Transactions, or the fulfillment of the terms hereof or thereof, will result in a violation by anyone, including without limitation the Purchasers, of any of the OFAC Sanctions or of any anti-money laundering laws of the United States, Cayman Islands, or the PRC.

Section 4.13 Solvency

Immediately prior to, and immediately subsequent to, the consummation of the sale of the Purchased Securities pursuant to this Agreement, each of the Company Group will be solvent. For purposes of this Agreement, “solvent” shall mean, with respect to any Person, (i) the fair value of the property of such Person is greater than the total amount of liabilities (including contingent liabilities) of such Person, (ii) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such

 

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person on its debts as they become absolute and matured, (iii) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person’s property would constitute an unreasonably small capital, and (iv) such Person has the ability to pay its debts as they become due, and does not intend to, or believe or reasonably should have believed that it will, incur debts beyond its ability to repay as they become due.

Section 4.14 Other Acquisitions

(a) The acquisition by the WFOE of one hundred percent (100%) of the issued and outstanding capital stock of Henan Xinyuan from the Management Shareholders (the “Henan Acquisition”) has been duly completed pursuant to the terms of the Henan Acquisition Agreement (as defined in the Securities Purchase Agreement), without any waiver or modification of any of the terms thereof, and all of the necessary permits and licenses in respect of the Henan Acquisition have been obtained under applicable Law. The Henan Acquisition Agreement is valid and enforceable under applicable Law.

(b) The Purchasers have been provided with true and complete copies of the definitive acquisition agreements relating to the purchase and sale of the Ancillary Businesses as contemplated by Section 6.12(c) of the Securities Purchase Agreement. Such acquisition agreements have been duly executed and delivered by the Management Shareholders, are in full force and effect, and are valid and enforceable under applicable Law. All of the necessary consents, approvals, filings, permits and licenses in respect of such acquisitions have been obtained under applicable Law.

Section 4.15 U.S. Foreign Corrupt Practices Act

None of the Company Group, or to the knowledge of the Company, Jiantou, nor any their respective Affiliates, directors, officers, agents or employees is currently making, directly or indirectly, any payment or promise to pay, or gift or promise to give or authorized such a promise or gift, of any money or anything of value, directly or indirectly, nor will the Purchase Price be given, directly or indirectly, to (a) any foreign official (as such term is defined in the U.S. Foreign Corrupt Practices Act (the “FCPA”)) for the purpose of influencing any official act or decision of such official or inducing him or her to use his or her influence to affect any act or decision of a governmental authority or (b) any foreign political party or official thereof, candidate for foreign political office, or official of a state-controlled entity or public international organization, for the purpose of influencing any official act or decision of such party, official or candidate or inducing such party, official or candidate to use his, her or its influence to affect any act or decision of a foreign governmental authority, in the case of both (a) and (b) above in order to assist the Company Group, or to the knowledge of the Company, Jiantou, or any of their respective Affiliates to obtain or retain business for, or direct business to the Company any of its Subsidiaries, or to the knowledge of the Company, Jiantou, or any their respective Affiliates, as applicable. None of the Company Group, or to the knowledge of the Company, Jiantou, nor any their respective Affiliates is currently making any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of funds or received or retained any funds in violation of any law, rule or regulation.

 

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Section 4.16 Disclosure

(a) No statement made by or on behalf of any Member of the Company Group in (i) this Agreement, (ii) any certificates delivered pursuant to this Agreement, or (iii) any financial or other information delivered or made available to the Purchasers since August 25, 2006 (including but not limited to information regarding the Ancillary Businesses) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.

(b) None of the Members of the Company Group is aware of any facts pertaining to any Member of the Company Group or its Affiliates, or the Business or their respective assets, which could adversely affect any Member of the Company Group or its Affiliates, or the Business or their respective assets, and which have not been disclosed in this Agreement (including the Disclosure Schedule), or otherwise disclosed to the Purchasers by the Company in writing.

Section 4.17 Performance of Covenants and Obligations

Except as set forth in Section 4.17 of the Disclosure Schedule or as contemplated by Section 9.10 of this Agreement, and only to the extent required to do so as of the date hereof, each Member of the Company Group has performed and complied with each of its covenants and obligations under the Securities Purchase Agreement and the Related Documents (which for purpose of this Section 4.17 shall have the meaning ascribed to such term in the Securities Purchase Agreement) to be performed or complied with after the Closing thereunder.

Section 4.18 Incorporation of Representations and Warranties

The representations and warranties set forth in Sections 4.7(b), (c), (e) and (h), 4.10(b), 4.11 through 4.25 (inclusive), 4.28, 4.30, 4.31, 4.33 and 4.36 of the Securities Purchase Agreement (and the related definitions) are hereby incorporated by reference into this Agreement for all purposes hereof with the same force and effect as though set forth in full in this Article 4, provided, that references in such representations and warranties to the Disclosure Schedule attached to the Securities Purchase Agreement shall, for purposes of this Agreement, be deemed to refer to the Disclosure Schedule attached to this Agreement.

ARTICLE 5

REPRESENTATIONS AND WARRANTIES OF PURCHASER

Each Purchaser, severally and not jointly, hereby represents and warrants, as to itself but not as to any other Purchaser, to the Company as follows

Section 5.1 Organization and Good Standing

Such Purchaser is a company, corporation or an exempted limited partnership, as applicable, duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization.

 

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Section 5.2 Power and Authority

Such Purchaser has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and the Related Documents to which it is a party.

Section 5.3 Authorization, Execution and Enforceability

(a) The execution, delivery and performance by such Purchaser of this Agreement and the Related Documents to which it is a party have been duly authorized by all necessary corporate or limited partnership action, as applicable, on the part of such Purchaser. This Agreement and the Related Documents to which such Purchaser is a party are legal, valid and binding obligations of such Purchaser, enforceable against such Purchaser in accordance with their respective terms.

(b) Except as set forth on Section 5.3 of the Disclosure Schedule, no consent of, notice to, or filing with any Governmental Body or any other Person, including any creditor or shareholder of the Company, is required to be made or obtained in connection with the execution, delivery and performance by such Purchaser of this Agreement or the Related Documents to which it is a party, or the Transactions, or as a condition to the legality, validity or enforceability of this Agreement or the Related Documents to which it is a party, or the offer, issuance, sale or delivery of the Purchased Securities.

Section 5.4 Investment Representations

(a) Such Purchaser is acquiring the Purchased Securities for its own account not as a nominee or agent, and not with a view to the distribution of any part thereof, and such Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. Such Purchaser does not have any contract, undertaking, agreement or arrangement with any Person to sell, transfer or grant participations to such Person or to other Person, with respect to any of the Purchased Securities. Such Purchaser understands that such Purchased Securities must be held indefinitely unless they are registered under the Securities Act or an exemption from such registration is available, and that such Purchased Securities may be transferred only in accordance with the Shareholders Agreement.

(b) Such Purchaser understands that the purchase of the Purchased Securities involves substantial risk and that its financial condition and investments are such that it is in a financial position to hold the Purchased Securities for an indefinite period of time and to bear the economic risk of, and withstand a complete loss of its investment in, the Purchased Securities. In addition, by virtue of its expertise, the advice available to it and previous investment experience, such Purchaser has extensive knowledge and experience in financial and business matters, investments, securities and private placements and the capability to evaluate the merits and risks of the transactions contemplated by this Agreement. Such Purchaser represents that it is an “accredited investor” as that term is defined in Regulation D promulgated under the Securities Act.

(c) If such Purchaser is not a “United States Person” (as defined in Section 7701(a)(30) of the Code and is not acquiring the securities for the account or benefit of any United States Person, within the meaning of Regulation S under the Securities Act, such

 

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Purchaser (i) agrees not to resell the Purchased Securities except in accordance with the provisions of Regulation S under the Securities Act, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration, and agrees not to engage in hedging transactions with regard to such securities unless in compliance with the Securities Act, (ii) agrees that any certificates representing the Purchased Securities issued to the Purchaser shall contain a legend to the effect that transfer is prohibited except in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act or pursuant to an available exemption from registration and that hedging transactions with regard to such securities may not be conducted unless in compliance with the Securities Act, (iii) agrees that the Company is hereby required to refuse to register any transfer of any securities issued to the Purchaser not made in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration, (iv) represents that it has satisfied itself as to the full observance of the laws of the jurisdiction of its organization in connection with any invitation to subscribe for the Purchased Securities, including (w) the legal requirements of the jurisdiction of its organization for the purchase of Purchased Securities, (x) any foreign exchange restrictions applicable to such purchase, (y) any governmental or other consents that may need to be obtained, and (z) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Purchased Securities, and (iii) represents that its subscription and payment for and continued beneficial ownership of the Purchased Securities will not violate any applicable securities or other laws of the jurisdiction of its organization.

(d) In addition to any legend described above, such Purchaser understands that the certificates evidencing the Purchased Securities may bear a legend as set forth in the Shareholders Agreement.

(e) Such Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Purchased Securities and the business, management, properties, prospects and financial condition of the Company.

(f) Such Purchaser understands that the Purchased Securities it is purchasing are characterized as “restricted securities” under the Securities Act laws because they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold absent registration under the Securities Act only in certain limited circumstances. Such Purchaser further understands that no public market now exists for any of the securities issued by the Company and the Company has given no assurances that a public market will ever exist for the Company’s securities.

Section 5.5 No Conflicts

To the knowledge of such Purchaser, the execution and delivery of this Agreement and the Related Documents, and the consummation of the Transactions, will not, directly or indirectly (with or without notice or lapse of time): (a) breach any provision of any of its memorandum and articles of association or other organizational documents, as amended; (b) breach in any material respect any Law or Order to which such Purchaser and its respective assets may be subject; or (c) result in a violation or breach of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any material Governmental Authorization that is held by such Purchaser.

 

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Section 5.6 Exculpation Among Purchasers

Such Purchaser acknowledges that it is not relying upon any Person, other than the Company and its officers and directors and the Management Shareholders, in making its investment or decision to invest in the Company. Such Purchaser agrees that no Purchaser nor any of its Affiliates or any controlling persons, members, officers, directors, partners, agents or employees of any Purchaser or its Affiliates shall be liable to any other Purchaser for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Purchased Securities.

ARTICLE 6

COVENANTS OF THE COMPANY AND THE MANAGEMENT SHAREHOLDERS

Section 6.1 Operation of Business

Between the date of this Agreement and the Closing Date, the Company shall, and shall cause the WFOE to, and the Management Shareholders shall cause each Operating Company to, conduct its business only in the ordinary course of business as currently conducted and as proposed to be conducted, and otherwise in compliance with the Governing Documents and the Shareholders Agreement.

Section 6.2 Required Consents

As promptly as practicable after the date of this Agreement, each Member of the Company Group shall make all filings required by Law to be made by it in order to consummate the Transactions, and shall cooperate with the Purchasers with respect to all filings that any Purchaser elects to make or shall be required by Law to make in connection with the Transactions and in obtaining all Required Consents.

Section 6.3 Notification

Between the date of this Agreement and the Closing Date, the Company shall promptly notify the Purchasers in writing if the Company becomes aware of (a) any fact or condition that makes any Member of the Company Group’s representations and warranties untrue as of the date of this Agreement, (b) the occurrence after the date of this Agreement of any fact or condition that would make any Member of the Company Group’s representations and warranties untrue had such representation or warranty been made as of the date of the occurrence of such fact or condition, (c) any breach of any Member of the Company Group’s covenants in this Agreement, or (d) any fact or condition that could reasonably be expected to make the satisfaction of the conditions in Article 8 unlikely or impossible. Should any such fact or condition require any change to the Disclosure Schedule, the Company shall promptly deliver to the Purchasers a supplement to the Disclosure Schedule specifying such change; provided, that such delivery shall not affect any rights of the Purchasers hereunder.

 

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Section 6.4 Reasonable Best Efforts

Each Member of the Company Group shall use its reasonable best efforts to cause the conditions in Article 8 to be satisfied.

Section 6.5 Tax Matters

Without limiting the rights of the Purchasers under Section 6.9 of the Securities Purchase Agreement, for so long as Blue Ridge China or EI holds at least 25% of the number of Common Shares purchased by it under this Agreement:

(a) the Company shall, and shall cause the WFOE and the Operating Companies and any other Subsidiaries to, promptly and timely make any tax elections pursuant to the Code or any other applicable Law as may be required by the Purchasers in their sole discretion;

(b) prior to a Qualified Public Offering, the Company shall not, without the written consent of the Purchaser, issue or transfer shares (or rights to acquire shares) in the Company, and shall use its reasonable best efforts (and the Management Shareholders shall use their reasonable best efforts) to not permit issuances or transfers of shares or ownership interests (or rights to acquire ownership interests) in any Person who directly or indirectly owns shares in the Company, to any Person if following such issuance or transfer the Company, in the determination of counsel or accountants for the Purchaser, would be a “Controlled Foreign Corporation” (a “CFC”) as defined in the Code with respect to the shares held by any Purchaser. No later than two (2) months following the end of each Company taxable year, the Company shall provide the following information to the Purchasers: (i) the Company’s capitalization table as of the end of the last day of such taxable year and (ii) a report regarding the Company’s status as a CFC. In addition, the Company shall provide the Purchasers with access to such other Company information as may be reasonably required by such Purchasers to determine the Company’s status as a CFC, to determine whether each such Purchaser is required to report its pro rata portion of the Company’s “Subpart F income” (as defined in the Code) on its United States federal income tax return, or to allow such Purchasers to otherwise comply with applicable United States federal income tax laws. In the event that the Company is determined by counsel or accountants for the Purchasers to be a CFC as defined in the Code (or any successor thereto) with respect to the shares held by any Purchaser, the Company agrees to use commercially reasonable efforts to avoid generating for any taxable year in which the Company is a CFC, “subpart F income,” as such term is defined in Section 952 of the Code;

(c) the Company shall use its reasonable best efforts to avoid being a “passive foreign investment company” (“PFIC”) within the meaning of Section 1297 of the Code (or any successor thereto). In furtherance of the foregoing, the Company shall (no less frequently than as of the end of each calendar year and at such other times as it determines in good faith to be appropriate), in consultation with its professional advisors, take such reasonable steps as necessary to determine whether the Company could reasonably be expected to be classified as a PFIC or whether there is a material risk that it could be classified as a PFIC. The Company will promptly inform the Purchasers at any time that it determines that it could reasonably be expected to be so classified or there is a material risk thereof, and it will cooperate with the Purchasers in taking such actions as required by the first sentence of this paragraph (c) to avoid

 

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being a PFIC. In connection with a “Qualified Electing Fund” election made by any Purchaser pursuant to Section 1295 of the Code (or any successor thereto), the Company shall provide annual financial information to the Purchasers in a PFIC Annual Information Statement in such reasonable form as provided by the Purchasers and shall provide the Purchasers with access to such other Company information as may be required for purposes of filing United States federal income tax returns in connection with such Qualified Electing Fund election;

(d) The representations, warranties and covenants in the forgoing paragraphs (b) and (c) shall be applicable with respect to each Subsidiary of the Company that would be classified as a corporation for U.S. Federal income tax purposes, and the Company shall cause such Subsidiary to comply with the foregoing as if such Subsidiary (and not just the Company) were named in such paragraphs. The Company shall also obtain representations, warranties and covenants from each entity in which it invests or has invested substantially to the effect of the representations, warranties and covenants contained in the foregoing paragraphs and such additional representations, warranties and covenants as shall be necessary to allow the Company to comply with the provisions of the foregoing provisions of this Section 6.5; and

(e) except to the extent that the Purchasers elect otherwise, and only if requested by the Purchasers, the Company shall take such reasonable actions, including making an election to be treated as a corporation or refraining from making an election to be treated as a partnership, as may be required to ensure that at all times the Company is treated as a corporation for United States federal income tax purposes;

provided that, all third-party reasonable fees and expenses in excess of $20,000 per year associated with the Company complying with this Section 6.5 and with Section 6.9 of the Securities Purchase Agreement shall be borne by the Purchasers.

Section 6.6 Foreign Exchange Settlement and Repatriation

Following the Closing Date and during the WFOE’s operational term, with such term to be approved by the Purchasers, the Company and Management Shareholder shall cause the WFOE’s capital to be freely and timely converted from foreign exchange into RMB according to the business needs approved by the Purchasers and all of the WFOE’s profits to be freely and timely repatriated to the Company.

Section 6.7 Transfers of Property in HeFei and Suzhou

As soon as reasonably practicable following the Closing Date, the Company will cause the real property acquired by the WFOE in HeFei and Suzhou to be transferred to newly formed wholly owned Subsidiaries of the WFOE in compliance with applicable Law.

Section 6.8 Revised 2007 Budget

On or prior to December 31, 2006, the Company shall deliver to the Purchasers the revised 2007 Budget, which shall be in form and substance reasonably satisfactory to the Purchasers.

 

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ARTICLE 7

COVENANTS OF THE PURCHASERS

Section 7.1 Required Consents

As promptly as practicable after the date of this Agreement, each Purchaser shall make all filings required by Law to be made by it to consummate the Transactions. Each Purchaser shall cooperate with the Company with respect to all filings the Company shall be required by Law to make and in obtaining all Required Consents; provided, that no Purchaser shall be required to dispose of any of its assets or properties, or make any change to its business, or expend any material funds in order to comply with this Section 7.1.

Section 7.2 Notification

Between the date of this Agreement and the Closing Date, each Purchaser shall promptly notify the Company in writing if such Purchaser becomes aware of (a) any fact or condition that makes any of its representations and warranties untrue as of the date of this Agreement, (b) the occurrence after the date of this Agreement of any fact or condition that would make any of its representations and warranties untrue had such representation or warranty been made as of the date of the occurrence of such fact or condition, (c) any breach of any of its covenants in this Agreement, or (d) any fact or condition that could reasonably be expected to make the satisfaction of the conditions in Article 9 unlikely or impossible.

ARTICLE 8

CONDITIONS TO PURCHASERS’ CLOSING OBLIGATIONS

The obligations of the Purchasers to consummate the Transactions to be effected at the Closing are subject to the fulfillment or waiver on or before the Closing Date of each of the conditions set forth in this Article 8.

Section 8.1 Accuracy of Representations

All representations and warranties of each Member of the Company Group in this Agreement shall have been accurate in all material respects as of the date of this Agreement, and shall be accurate in all material respects as of the time of the Closing Date as if made on and as of such date, without giving effect to any supplement to the Disclosure Schedule; provided, that each of the representations and warranties in this Agreement that contains an express materiality qualification shall have been accurate in all respects as of the date of this Agreement, and shall be accurate in all respects as of the time of the Closing Date as if made on and as of such date, without giving effect to any supplement to the Disclosure Schedule.

Section 8.2 Performance of Covenants

All of the covenants and obligations that any Member of the Company Group is required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been duly performed and complied with in all material respects.

 

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Section 8.3 Required Consents

Each of the Required Consents, including with respect to the Operating Companies, shall have been obtained in a form and substance reasonably acceptable to the Purchasers and shall be in full force and effect, and the Company shall have delivered copies thereof to the Purchasers. None of such Required Consents shall be subject to conditions that are unacceptable to the Purchasers in their reasonable judgment.

Section 8.4 No Adverse Proceedings

There shall not be existing or threatened against any Purchaser or any Member of the Company Group by any Governmental Body any action, claim, suit or other proceeding involving any challenge to, or seeking damages or other relief in connection with, any of the Transactions, or that may have the effect of preventing, delaying, making illegal, imposing limitations or conditions on or otherwise interfering with the Transactions.

Section 8.5 Changes in Law

After the date hereof, no Law or interpretation thereof shall have been enacted or made, nor shall any Order have been issued, by or on behalf of any Governmental Body, which, in the Purchasers’ reasonable judgment, would materially and adversely affect foreign investments in the PRC (including any Law, interpretation or Order limiting the ownership or control of domestic business ventures by foreign Persons, or the ability of foreign Persons to repatriate funds held by domestic business ventures) or would otherwise materially and adversely affect the Purchased Securities or the benefits expected to be derived by the Purchasers from the purchase of the Purchased Securities or by the Company from the sale of the Purchased Securities.

Section 8.6 Certain Documents

As of the Closing Date, each of the following documents shall have been duly executed and delivered by the parties thereto (other than the Purchasers), each in substance and form satisfactory to the Purchasers, and each such document shall be in full force and effect and filed, as required or appropriate, with applicable Governmental Authorities, and no term or condition thereof shall have been supplemented, amended, modified or waived without the Purchasers’ prior written consent, and any transactions contemplated thereby shall have been consummated (or will be consummated concurrently with the Closing) in accordance with the terms and conditions thereof:

(a) the Related Documents, and

(b) any other Contract or document reasonably requested by the Purchasers.

Section 8.7 Officer’s Certificate

The Company shall have delivered to each of the Purchasers a certificate of the President (or comparable officer) of the Company, dated the Closing Date, certifying as to the satisfaction of the conditions set forth in Section 8.1 through Section 8.6 and Section 8.12.

 

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Section 8.8 No Conflict

Neither the consummation nor the performance of any of the Transactions will, directly or indirectly (with or without notice or lapse of time), contravene or conflict with or result in a violation of or cause any Purchaser to suffer any adverse consequence under any applicable Law or Order.

Section 8.9 Secretary’s Certificates

The Company shall have delivered to each of the Purchasers a certificate of the Secretary of the Company, dated the Closing Date, attaching (i) correct and complete copies of the Governing Documents then in effect, (ii) correct and complete copies of all resolutions of the Board of Directors of the Company relating to the Transactions, and (iii) a certificate of good standing of the Company issued by the applicable Governmental Body no earlier than five Business Days before the Closing Date.

Section 8.10 Opinions of Counsel

(a) On the Closing Date, each Purchaser shall have received from King & Wood, counsel to the Company and the Management Shareholders, an opinion addressed to the Purchasers, dated as of the Closing Date, in form and substance reasonably acceptable to the Purchasers and similar to the legal opinion delivered to the Purchasers by King & Wood pursuant to the Securities Purchase Agreement.

(b) On the Closing Date, each Purchaser shall have received from Maples and Calder, counsel to the Company, an opinion addressed to the Purchasers, dated as of the Closing Date, reasonably acceptable to the Purchasers and similar to the legal opinion delivered to the Purchasers by Maples and Calder pursuant to the Securities Purchase Agreement.

Section 8.11 Proceedings and Documents

As of the Closing Date, all corporate and other proceedings taken or to be taken in connection with the Transactions and all documents incidental thereto shall be reasonably satisfactory in form and substance to the Purchasers and their counsel, and the Purchasers and their counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. The Memorandum of Association shall have been duly and validly adopted conditional upon, and with effect immediately before, the Closing.

Section 8.12 Budgets

The Company shall have operated in compliance with the 2006 Budget prior to the Closing Date.

Section 8.13 Acquisition of Ancillary Businesses

The acquisition by Henan Xinyuan of one hundred percent (100%) of the issued and outstanding capital stock of each of the Ancillary Businesses from the Management Shareholders shall have been duly completed pursuant to the terms of the acquisition agreements referred to in Section 4.14(b), without any waiver or modification of any of the terms thereof.

 

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Section 8.14 Board of Directors

(a) Mr. Angus Lo (or such other person designated by Blue Ridge China) shall have been elected to serve on the Company’s Board of Directors in accordance with the Shareholders Agreement, and each Purchaser shall have received a certificate by the Secretary of the Company, reasonably satisfactory to the Purchasers, certifying as to the foregoing and attaching copies of required resolutions, and other evidence of effecting the foregoing shall have been delivered to the Purchasers.

(b) Mr. Xuan Hao shall have resigned as a director of the Company.

ARTICLE 9

CONDITIONS TO THE COMPANY’S AND THE

MANAGEMENT SHAREHOLDERS’ CLOSING OBLIGATIONS

The obligations of the Company and the Management Shareholders to consummate the Transactions to be effected at the Closing are subject to the fulfillment or waiver on or before the Closing Date of each of the conditions set forth in this Article 9.

Section 9.1 Accuracy of Representations

All of the Purchasers’ representations and warranties in this Agreement shall have been accurate in all material respects as of the date of this Agreement, and shall be accurate in all material respects as of the time of the Closing as if made on and as of such date; provided, that each of the representations and warranties in this Agreement that contains an express materiality qualification shall have been accurate in all respects as of the date of this Agreement, and shall be accurate in all respects as of the Closing Date as if made on and as of such date.

Section 9.2 Performance of Covenants

All of the covenants and obligations that the Purchasers are required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been duly performed and complied with in all material respects.

Section 9.3 Officer’s Certificate

Each of the Purchasers shall have delivered to the Company and the Management Shareholders a certificate of an appropriate officer or director thereof, dated the Closing Date, certifying as to the satisfaction of the conditions set forth in Section 9.1 and Section 9.2.

Section 9.4 Payment of Purchase Price

Each of the Purchasers shall have delivered such Purchaser’s portion of the Purchase Price to the Company due at Closing.

 

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Section 9.5 No Adverse Proceedings

Since the date of this Agreement, there shall not have been commenced or threatened against any Member of the Company Group by any Governmental Body any action, claim, suit or other proceeding involving any challenge to, or seeking damages or other relief in connection with, any of the Transactions, or that may have the effect of preventing, delaying, making illegal, imposing limitations or conditions on or otherwise interfering with the Transactions.

Section 9.6 No Conflict

Neither the consummation nor the performance of any of the Transactions will, directly or indirectly (with or without notice or lapse of time), contravene or conflict with or result in a violation of or cause the Company to suffer any adverse consequence under any applicable Law or Order.

Section 9.7 Proceedings and Documents

As of the Closing Date, all corporate and other proceedings taken or to be taken in connection with the Transactions and all documents incidental thereto shall be reasonably satisfactory in form and substance to the Company and its counsel, and the Company and its counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.

Section 9.8 Related Documents

As of the Closing Date, each of the Related Documents to which a Purchaser is a party shall have been duly executed and delivered by such Purchaser and shall be in full force and effect.

Section 9.9 Closing by One Purchaser Only

If (a) any of the conditions set forth in this Article 9 with respect to a Purchaser are not satisfied or waived (such Purchaser, the “Non-Closing Purchaser”), (b) all of the conditions set forth in this Article 9 with respect to the other Purchaser are satisfied or waived (such Purchaser, the “Closing Purchaser”), and (c) all of the conditions set forth in Article 8 are satisfied or waived, then upon written notice by the Closing Purchaser to the Non-Closing Purchaser (with a copy to the Company), all of the Non-Closing Purchaser’s rights hereunder shall be deemed to have been assigned and all of the Non-Closing Purchaser’s obligations hereunder shall be deemed to have been delegated to the Closing Purchaser (including with respect to the purchase of the Purchased Securities and payment of the Purchase Price), and the Non-Closing Purchaser shall no longer be a Purchaser for purpose of this Agreement or a party to any Related Document.

Section 9.10 Waiver of Joint Venture Covenant

In connection with the transactions contemplated by Section 8.13 of this Agreement, each of the Purchasers shall have delivered to the Company and Zhang Yong a letter in form satisfactory to the Company and Zhang Yong waiving the requirements of Section 6.12(b) of the

 

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Securities Purchase Agreement and providing written consent pursuant to Section 6.12(a) of the Securities Purchase Agreement for the release of $1,250,000, or such equivalent in RMB, from escrow to Zhang Yong as partial consideration for the sale of the Ancillary Businesses by the Management Shareholders to Henan Xinyuan pursuant to the terms of the acquisition agreements referred to in Section 4.14(b).

ARTICLE 10

INDEMNIFICATION

Section 10.1 Indemnification

(a) The Company agrees to indemnify, defend and hold harmless the Purchasers and their respective Affiliates, and the partners, members, shareholders, managers, directors, employees and agents of each of the foregoing, from and against and in respect of any and all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, interest and penalties, diminution in value of securities, costs and expenses (including, without limitation, reasonable legal fees and disbursements incurred in connection therewith and in seeking indemnification therefor, and any amounts or expenses required to be paid or incurred in connection with any action, suit, proceeding, claim, appeal, demand, assessment or judgment) (collectively, “Losses”), resulting from, arising out of, or imposed upon or incurred by any Person to be indemnified hereunder by reason of (i) any breach of any representation, warranty, covenant or agreement of the Company or the Management Shareholders contained in this Agreement or any agreement, certificate or document executed and delivered by the Company or any other Member of the Company Group pursuant hereto or in connection with any of the Transactions or (ii) any matter set forth on Schedule II.

(b) Notwithstanding anything herein to the contrary, the Company shall not be obligated to indemnify the Purchasers under this Section 10.1 in excess of an aggregate amount of $15,000,000 (the “Company’s Indemnification Cap”); provided, however, that the Company’s Indemnification Cap shall not apply to any Company indemnification obligations arising out of, relating to or resulting from fraud or intentional misrepresentation by the Company or the Management Shareholders.

Section 10.2 Procedures

Whenever a claim shall arise for indemnification under this Article 10, with the exception of claims for litigation expenses to be funded on an ongoing basis, the Person entitled to indemnification (the “Indemnified Party”) shall promptly notify the party from whom indemnification is sought (the “Indemnifying Party”) of such claim and, when known, the facts constituting the basis for such claim. Failure of an Indemnified Party to give reasonably prompt notice of any claim shall not release, waive or otherwise affect an Indemnifying Party’s obligations with respect thereto except to the extent that the Indemnifying Party can demonstrate actual loss and prejudice as a result of such failure. In the event of any such claim for indemnification resulting from or in connection with a claim or legal proceeding by a third party, the Indemnifying Party may, at its sole cost and expense, elect by notice to the Indemnified Party to assume the defense; provided, however, that the Indemnifying Party makes such election within 15 days after delivery of notice of claim from the Indemnified Party and agrees in writing

 

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to pay the full amount of such indemnification to the Indemnified Party. If an Indemnifying Party assumes the defense of any such claim or legal proceeding, the Indemnifying Party shall be entitled to select counsel satisfactory to the Indemnified Party and take all steps necessary in the settlement or defense thereof; provided, that no settlement shall be made without the prior written consent of the Indemnified Party unless the settlement involves only payment of money damages by the Indemnifying Party and a release of the Indemnified Party from all liability. The Indemnified Party may, at its own expense, participate in any such proceeding with the counsel of its choice. So long as the Indemnifying Party is in good faith defending such claim or proceeding, the Indemnified Party shall not compromise or settle such claim without the prior written consent of the Indemnifying Party. If the Indemnifying Party does not assume the defense of any such claim or litigation in accordance with the terms hereof, the Indemnified Party may defend against such claim or litigation in such manner as it may deem appropriate, including, but not limited to, settling such claim or litigation (after giving notice of the same to the Indemnifying Party) on such terms as the Indemnified Party may deem appropriate, and the Indemnifying Party will promptly indemnify the Indemnified Party in accordance with the provisions of Section 10.1.

Section 10.3 Survival; Right to Indemnification Not Affected by Knowledge

All representations, warranties, covenants, and obligations in this Agreement, the Disclosure Schedule, the certificate delivered pursuant to Section 8.7, and any other certificate or document delivered pursuant to this Agreement or any of the Related Documents will survive for a period of three years following the Closing; provided, however, that all representations and warranties made as of the date hereof by incorporation into this Agreement by reference pursuant to Section 4.17 of this Agreement that relate to Section 4.17 (Employment Matters) and Section 4.23 (Taxes) of the Securities Purchase Agreement shall survive until 30 days after the expiration of the respective statute of limitations applicable thereto. The right to indemnification, payment of Losses or other remedy based on such representations, warranties, covenants and agreements will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or agreement. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of Losses, or other remedy based on such representations, warranties, covenants and agreements.

ARTICLE 11

TERMINATION

Section 11.1 Termination Events

By notice given prior to the Closing, this Agreement may be terminated as follows:

(a) by agreement of the Purchasers and the Company;

(b) by Blue Ridge China as to itself and by EI as to itself, if a material breach of any provision of this Agreement has been committed by any Member of the Company Group, which breach shall not be cured within a period of five (5) Business Days of receipt of written notice thereof from such Purchaser;

 

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(c) by the Company or the Management Shareholders, if a material breach of any provision of this Agreement has been committed by a Purchaser, which breach shall not be cured within a period of five (5) Business Days of receipt of written notice thereof from the Company or the Management Shareholders, which notice shall be sent to each of the Purchasers; provided that a breach by the Non-Closing Purchaser shall not entitle the Company or the Management Shareholders to terminate this Agreement if the Closing Purchaser notifies the Company within such five (5) Business-Day period that it intends to send the notice referred to in Section 9.9, or if the Closing Purchaser sends such notice within such five (5) Business-Day period; and

(d) by the Purchasers, the Management Shareholders or the Company if the Closing has not occurred on or before December 31, 2006, provided that such right of termination shall not be exercisable by any party which is then in material breach of this Agreement.

Section 11.2 Effect of Termination

Each party’s right of termination under Section 11.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of such right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 11.1, all obligations of the parties under this Agreement will terminate, except that the obligations of the parties in this Section 11.2 and Article 12 shall survive the termination of this Agreement; provided, that no such termination shall relieve any party of liability for any breach of this Agreement.

ARTICLE 12

MISCELLANEOUS

Section 12.1 Entire Agreement

This Agreement, together with the Related Documents, merges all previous negotiations and agreements among the parties hereto, either oral or written, and constitutes the entire agreement and understanding among the parties with respect to the subject matter hereof and thereof. For the avoidance of doubt, the Securities Purchase Agreement and the Related Documents referred to therein shall remain in full force and effect except to the extent expressly modified by this Agreement or the Related Documents referred to herein.

Section 12.2 Amendments; Waivers

No amendment, modification, or waiver of any provision of this Agreement shall be valid except by an agreement in writing executed by the parties hereto. Except as otherwise expressly set forth herein, no failure or delay by any party hereto in exercising any right, power or privilege hereunder (and no course of dealing between or among any of the parties) shall operate as a waiver of any such right, power or privilege. No waiver of any default on any one occasion shall constitute a waiver of any subsequent or other default. No single or partial exercise of any such right, power or privilege shall preclude the further or full exercise thereof.

 

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Section 12.3 Severability

If any provision of this Agreement or the application thereof to any Person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by Law, but only as long as the continued validity, legality and enforceability of such provision or application does not materially (a) alter the terms of this Agreement, (b) diminish the benefits of this Agreement or (c) increase the burdens of this Agreement, for any Person.

Section 12.4 Assignment

The rights and obligations of the parties hereunder shall be binding upon and inure to the benefit of the parties hereto, their successors and permitted assigns. This Agreement may not be assigned (by operation of Law or otherwise) without the prior written consent of the parties; provided, that any Purchaser may assign its rights and delegate its duties hereunder to any of its Affiliates upon written notice to the Company and the other Purchasers, which notice shall identify the assignee, so long as such Purchaser remains liable for the performance of such Affiliate.

Section 12.5 Third Parties

Nothing herein, expressed or implied, is intended to or shall confer on any Person other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement.

Section 12.6 Notices

All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered in accordance with the provisions of Section 12.6 of the Securities Purchase Agreement, except that the address of the Company (including copy recipients) shall be deleted and replaced with the following address (it being agreed that the following address shall be deemed to replace the address of the Company (including copy recipients) in Section 12.6 of the Securities Purchase Agreement for all purposes of the Securities Purchase Agreement):

Xinyuan Real Estate, Ltd.

No. 18 Xinyuan Road

Zhengzhou, Henan 450011

Attention: Zhang Yong

Fax: +86-0371-65651686

E-mail: zyong63@163.com

with a required copy (which shall not by itself constitute notice) to:

Baker & McKenzie LLP

BCE Place, 181 Bay Street, Suite 2100

Toronto, Canada M5J 2T3

Attention: Omer Ozden, Esq.

Fax: (416) 863-6275

Email: omer.ozden@bakernet.com

 

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with required copies (which shall not by itself constitute notice) to the Purchasers and to the Management Shareholders at the addresses provided in Section 12.6 of the Securities Purchase Agreement (including copy recipients).

Section 12.7 Expenses

At the Closing, the Company shall reimburse the Purchasers for all of their reasonable costs and expenses, including the fees and expenses of any attorney or tax advisor retained by them, that they shall have incurred in connection with the legal, accounting and commercial due diligence process, the negotiation, execution, delivery and performance of this Agreement and the Related Documents and the consummation of the Transactions provided, that such reimbursement shall be limited to a maximum of $75,000. The Company or the Management Shareholders, as the case may be, shall also reimburse the Purchasers on demand for their reasonable costs (including attorneys’ fees and expenses) of enforcing any provision of this Agreement or the Related Documents in the event of a breach by any Member of the Company Group; provided, that such reimbursement shall be limited to a maximum of $250,000 per claim.

Section 12.8 Governing Law

This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York without application of principles of conflicts of law.

Section 12.9 Specific Performance

The parties agree that irreparable damage will occur in the event that either party fails to consummate the Transactions in accordance with the terms of this Agreement, and that the parties shall therefore be entitled to specific performance in such event, in addition to any other remedy at law or in equity.

Section 12.10 Submission to Jurisdiction

Any dispute arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be resolved by arbitration in accordance with the provisions of Section 12.10 of the Securities Purchase Agreement. The parties hereby consent to the exclusive jurisdiction of (i) the Supreme Court of the State of New York and the United States District Court for the Southern District of New York, and (ii) courts with appropriate jurisdiction to hear such matters in Hong Kong, Special Administrative Region, for temporary injunctive or other relief in aid of arbitration or to prevent irreparable harm and to the non-exclusive jurisdiction of such courts for enforcement of any award by the arbitrators.

Section 12.11 Interpretation

As both parties have participated in the drafting of this Agreement, any ambiguity shall not be construed against either party as the drafter. Unless the context of this Agreement clearly

 

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requires otherwise, (a) “or” has the inclusive meaning frequently identified with the phrase “and/or”, (b) “including” has the inclusive meaning frequently identified with the phrase “including, but not limited to,” (c) references to “hereof,” “hereunder” or “herein” or words of similar import relate to this Agreement, (d) when a reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or a Section of this Agreement unless otherwise indicated, and (e) the terms defined hereunder shall have the meanings therein specified for all purposes of this Agreement, applicable to both the singular and plural forms of any of the terms defined herein. The section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. All terms and words used in this Agreement, regardless of the number and gender in which they are used, shall be deemed and construed to include any other number and any other gender as the context of this Agreement requires.

Section 12.12 Counterparts

This Agreement may be executed in two or more counterparts, each of which when so executed shall be an original, but all of which together shall constitute one agreement. Facsimile signatures shall be deemed original signatures.

Section 12.13 Confidentiality

No Member of the Company Group shall, and each Member of the Company Group shall cause their respective affiliates and advisors, and their respective directors, officers and representatives not to, disclose to anyone the fact that the Purchasers have executed this Agreement, or disclose to or discuss with anyone the terms of this Agreement, without the prior written consent of the Purchasers, except to their officers and advisors, as necessary, provided that they agree to maintain the confidentiality thereof, and except as may be necessary to consummate the Transactions.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

 

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SCHEDULE I

RELATED DOCUMENTS

 

1.	Amendment No. 1 to Shareholders Agreement attached hereto as Exhibit A.

 

2.	Indemnification Agreement between the Company and Angus Lo.

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SCHEDULE II

CERTAIN INDEMNIFICATION OBLIGATIONS

 

1.	Any underpayment by any Member of the Company Group of EIT on or prior to the Closing Date, except as already accrued in the audited financial statements of the Company, as of December 31, 2005.

 

2.	Any failure to pay or underpayment by any Member of the Company Group or any agent thereof of social insurance contributions and/or any other employee benefits (and any interest payable thereon or in connection therewith) on or prior to November 18, 2006.

 

3.	Beijing Cornwill Investment & Consultancy Co., Ltd. or the dissolution or transfer thereof.

 

4.	Any amount by which projects completed on and as of the Closing Date have exceeded the amount budgeted therefor in the 2006 Budget by more than 5%.

 

5.	Any illegal or improper pre-completion sales of the premises prior to June 1, 2006.

 

6.	Henan Wanzhong Real Estate Co., Ltd. exceeding its development capacity as approved by the Governmental Bodies in developing project Central Garden.

 

7.	Henan Xinyuan exceeding its development capacity as approved by the Governmental Bodies in developing project Xinyuan Splendid.

 

8.	Xinyuan Property Management Co., Ltd. exceeding its property management capacity as approved by the Governmental Bodies for the provision of property management services.

 

9.	Mingyuan Landscape Engineering Co., Ltd.’s class 3 (temporary) qualification approved by the Governmental Bodies for the provision of landscaping services expiring as of November 11, 2006.

 

10.	The ongoing litigations in which any Member of the Company Group was involved as of August 22, 2006, and excluding any reasonable legal fees related thereto.

 

11.	Any activities of any Member of the Company Group and Jiantou prior to August 22, 2006 in violation of the representations and warranties in Section 4.15.

 

12.	Any and all Losses incurred prior to August 22, 2006 by the Company, any Member of the Company Group, or the Purchaser, associated with, arising from, or in connection with, Jiantou.

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TABLE OF CONTENTS

 

				Page
Article 1 DEFINITIONS				1
Article 2 PURCHASE AND SALE				5
Section 2.1		Authorization of Shares		5
Section 2.2		Purchase and Sale		5
Section 2.3		Closing		5
Section 2.4		Delivery of Share Certificates		5
Section 2.5		Call on Blue Ridge Shares		5
Article 3 USE OF PROCEEDS				6
Section 3.1		Use of Proceeds		6
Article 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY GROUP				6
Section 4.1		Organization, Good Standing and Qualification		6
Section 4.2		Power and Authority		6
Section 4.3		Authorization, Execution and Enforceability		7
Section 4.4		Consents		7
Section 4.5		No Conflicts		7
Section 4.6		Subsidiaries; Operating Companies		8
Section 4.7		Capitalization, Issuance and Transfer of Shares		8
Section 4.8		Compliance with Securities Laws		9
Section 4.9		Financial Statements		10
Section 4.10		Material Liabilities		10
Section 4.11		Brokers		10
Section 4.12		OFAC Compliance		10
Section 4.13		Solvency		10
Section 4.14		Other Acquisitions		11
Section 4.15		U.S. Foreign Corrupt Practices Act		11
Section 4.16		Disclosure		12
Section 4.17		Performance of Covenants and Obligations		12
Section 4.18		Incorporation of Representations and Warranties		12
Article 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER				12
Section 5.1		Organization and Good Standing		12
Section 5.2		Power and Authority		13
Section 5.3		Authorization, Execution and Enforceability		13
Section 5.4		Investment Representations		13
Section 5.5		No Conflicts		14
Section 5.6		Exculpation Among Purchasers		15
Article 6 COVENANTS OF THE COMPANY AND THE MANAGEMENT SHAREHOLDERS				15
Section 6.1		Operation of Business		15

 

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Section 6.2		Required Consents		15
Section 6.3		Notification		15
Section 6.4		Reasonable Best Efforts		16
Section 6.5		Tax Matters		16
Section 6.6		Foreign Exchange Settlement and Repatriation		17
Section 6.7		Transfers of Property in HeFei and Suzhou		17
Section 6.8		Revised 2007 Budget		17
Article 7 COVENANTS OF THE PURCHASERS				18
Section 7.1		Required Consents		18
Section 7.2		Notification		18
Article 8 CONDITIONS TO PURCHASERS’ CLOSING OBLIGATIONS				18
Section 8.1		Accuracy of Representations		18
Section 8.2		Performance of Covenants		18
Section 8.3		Required Consents		19
Section 8.4		No Adverse Proceedings		19
Section 8.5		Changes in Law		19
Section 8.6		Certain Documents		19
Section 8.7		Officer’s Certificate		19
Section 8.8		No Conflict		20
Section 8.9		Secretary’s Certificates		20
Section 8.10		Opinions of Counsel		20
Section 8.11		Proceedings and Documents		20
Section 8.12		Budgets		20
Section 8.13		Acquisition of Ancillary Businesses		20
Section 8.14		Board of Directors		21
Article 9 CONDITIONS TO THE COMPANY’S AND THE MANAGEMENT SHAREHOLDERS’ CLOSING OBLIGATIONS				21
Section 9.1		Accuracy of Representations		21
Section 9.2		Performance of Covenants		21
Section 9.3		Officer’s Certificate		21
Section 9.4		Payment of Purchase Price		21
Section 9.5		No Adverse Proceedings		22
Section 9.6		No Conflict		22
Section 9.7		Proceedings and Documents		22
Section 9.8		Related Documents		22
Section 9.9		Closing by One Purchaser Only		22
Section 9.10		Waiver of Joint Venture Covenant		22
Article 10 INDEMNIFICATION				23
Section 10.1		Indemnification		23
Section 10.2		Procedures		23
Section 10.3		Survival; Right to Indemnification Not Affected by Knowledge		24
Article 11 TERMINATION				24

 

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Section 11.1		Termination Events		24
Section 11.2		Effect of Termination		25
Article 12 MISCELLANEOUS				25
Section 12.1		Entire Agreement		25
Section 12.2		Amendments; Waivers		25
Section 12.3		Severability		26
Section 12.4		Assignment		26
Section 12.5		Third Parties		26
Section 12.6		Notices		26
Section 12.7		Expenses		27
Section 12.8		Governing Law		27
Section 12.9		Specific Performance		27
Section 12.10		Submission to Jurisdiction		27
Section 12.11		Interpretation		27
Section 12.12		Counterparts		28
Section 12.13		Confidentiality		28

 

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Schedules
Disclosure Schedule
Schedule I		Related Documents
Schedule II		Certain Indemnification Obligations
Exhibits
Exhibit A		Amendment No. 1 to Shareholders Agreement
Exhibit B		Form of Memorandum of Association

 

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Exhibit 10.16

EXECUTION VERSION

 

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SECURITIES PURCHASE AGREEMENT

AMONG

BLUE RIDGE CHINA PARTNERS, L.P.,

EI FUND II CHINA, LLC,

ZHANG YONG, YANG YUYAN

AND

XINYUAN REAL ESTATE, LTD.

 

DATED AS OF AUGUST 22, 2006

 

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SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT, dated as of August 22, 2006, among Blue Ridge China Partners, L.P., a Cayman Islands exempted limited partnership (“Blue Ridge China”), EI Fund II China, LLC, a Delaware limited liability company (“EI” and together with Blue Ridge China, the “Purchasers”), Zhang Yong, a PRC national, Yang Yuyan, a PRC national (together with Zhang Yong, the “Management Shareholders” and individually, a “Management Shareholder”), and Xinyuan Real Estate, Ltd., a Cayman Islands company (the “Company”).

WHEREAS, the Company wishes to obtain equity financing, and the Purchasers are willing to invest in the Company on the terms and conditions herein set forth.

NOW, THEREFORE, it is hereby agreed as follows:

ARTICLE 1

DEFINITIONS

As used herein, unless the context requires a different meaning, the following terms shall have the following meanings:

“2006 Budget” means the Company’s budget for the period from and after the date of this Agreement through the end of fiscal year 2006, a copy of which has been provided to the Purchasers prior to the date hereof.

“2007 Budget” has the meaning set forth in Section 6.8.

“Affiliate” means, with respect to a specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Person specified.

“Burnham Warrants” means the warrants to purchase a total of 1,853,172 Common Shares, in the form of Exhibit D hereto, to be issued by the Company to Burnham Securities, Inc. and Joel B. Gardner at Closing.

“Business” means the business that the WFOE and the Operating Companies engage in, including the business of investing in real estate in the PRC.

“Business Day” means any day except a Saturday, a Sunday or a legal holiday in the City of New York or the PRC.

“Closing” has the meaning set forth in Section 2.3.

“Closing Date” has the meaning set forth in Section 2.3.

“Closing Purchaser” has the meaning set forth in Section 9.9.

“Code” has the meaning set forth in Section 4.23.

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“Common Shares” means the common shares, par value $0.0001 per share, of the Company.

“Company” has the meaning set forth in the preamble.

“Company Contract” has the meaning set forth in Section 4.16.

“Company Group” means the Company, the WFOE and the Operating Companies, and any of the foregoing individually may sometimes be referred to as a “Member of the Company Group”.

“Company’s Indemnification Cap” has the meaning set forth in Section 10.1(d).

“Confidentiality Agreement” means the provisions relating to confidentiality substantially in the form approved by the Purchasers.

“Contract” means any agreement, arrangement or understanding, written or oral.

“Conversion Shares” has the meaning set forth in Section 2.1.

“Copyrights” has the meaning set forth in the definition of “Intellectual Property” in this Article 1.

“Disclosure Schedule” means the disclosure schedule with respect to the representations and warranties of the Company Group contained in Article 4.

“Employee Terms and Conditions” has the meaning set forth in Section 4.17.

“Environment” means the air, water, groundwater, surface water, wetlands, land, soil, subsurface strata, sediment, wildlife, woodlands, ecosystem, flora or fauna, including, the interior and exterior of buildings or structures, and shall also include, any location or media included in the definition of “Environment” under any and all Environmental Laws.

“Environmental Law” means any and all statutes, regulations, ordinances, rules, orders, directives, requirements, common law, claims or adjudications of any Governmental Body, without limitation in time or scope, which regulate or govern or are related in any way to the protection of the Environment, or worker, public, consumer or human health or safety, or are related in any way to Hazardous Materials.

“Environmental Liability” means any cost, damages, expense, liability, obligation or other responsibility arising from or under any Environmental Law, including (i) any environmental matter or condition (including on-site or off-site contamination, and regulation of any chemical substance or product); (ii) any fine, penalty, judgment, award, settlement, legal or administrative proceeding, damages, loss, claim, demand or response, remedial or inspection cost or expense arising under any Environmental Law; (iii) financial responsibility under any Environmental Law for cleanup costs or corrective action, including any cleanup, removal, containment or other remediation or response actions required by any Environmental Law (whether or not required or requested by any Governmental Body or other Person); or (iv) any other compliance, corrective or remedial measure required under any Environmental Law.

 

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“Equity Incentive Plan” has the meaning set forth in Section 6.14.

“FCPA” has the meaning set forth in Section 4.34.

“GAAP” means generally accepted accounting principles in the United States in effect from time to time, and as such principles have been applied on a consistent basis during the relevant time period.

“Governing Documents” means, with respect to the Company, the Memorandum of Association, and with respect to the WFOE or any Operating Company, its Articles of Association or other organizational documents, in each case as amended from time to time.

“Governmental Authorization” means any consent, approval, license, registration or permit issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Law.

“Governmental Body” means any legislative or executive branch of any federal, state or local government (including municipalities), anywhere in the world (including the United States, the Cayman Islands and the PRC), and any agency, bureau, commission, court, department or other instrumentality thereof.

“Hazardous Materials” means any chemicals, pollutants, contaminants, wastes, hazardous or toxic substances, radioactive materials, asbestos, genetically modified organisms, petroleum or hydrocarbon and petroleum or hydrocarbon products.

“Henan Acquisition” has the meaning set forth in Section 4.32.

“Henan Acquisition Agreement” has the meaning set forth in Section 4.32.

“Henan Xinyuan” means Henan Xinyuan Real Estate Co., Ltd., a company organized under the laws of the PRC.

“ICC” has the meaning set forth in Section 12.10.

“Indebtedness” as applied to any Person means (i) all items which in accordance with GAAP would be included in determining total liabilities as shown on the balance sheet of such Person as of the date on which Indebtedness is determined, including any capital lease, (ii) all indebtedness secured by any Lien to which any property or asset owned or held by such Person is subject, whether or not the indebtedness secured thereby shall have been assumed, provided, that in the case of any such Indebtedness that is recourse only to such property or asset, and not to such Person or any of its other property or assets, the amount of such Indebtedness shall be deemed not to exceed the fair market value of such property or asset as determined in good faith by the Board of Directors of the Company, and (iii) all indebtedness of others with respect to which such Person has provided a guaranty or otherwise has agreed to become directly or indirectly liable, or (without duplication) any such guaranty of such indebtedness.

 

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“Indemnified Party” has the meaning set forth in Section 10.2.

“Indemnifying Party” has the meaning set forth in Section 10.2.

“Intellectual Property” means all intellectual property necessary to conduct the Company’s and the Operating Companies’ respective businesses as now conducted and as proposed to be conducted, including (i) the Company’s or any of the Operating Companies’ name, all assumed fictional business names, franchises, trade names, trade dress and logos, registered and unregistered trademarks, service marks and applications, and all rights in internet websites, URL’s and internet domain names and e-mail addresses presently used by the Company or the Operating Companies (“Marks”); (ii) all patents, patent applications and inventions and discoveries that may be patentable (“Patents”); (iii) all registered and unregistered copyrights in both published works and unpublished works, and including in software (“Copyrights”); and (iv) all plans, drawings and blueprints, studies and reports, and other trade secrets (“Trade Secrets”).

“Jiantou” means Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd.

“Joint Venture” has the meaning set forth in Section 6.12(b).

“Key Employees” means any (i) general manager, chief executive officer and chief financial officer of the Company Group (the “Senior Management Personnel”), (ii) management personnel, such as employees who are less senior than Senior Management Personnel but who supervise the general staff, such as assistant managers, department heads and supervisors of the Company Group, (iii) technical personnel, such as key employees who possess confidential information regarding business operations of the Company Group, and (iv) other employees with access to the Company Group’s confidential information.

“Law” means applicable common law and any statute, ordinance, code or other law, rule, permit, permit condition, regulation, order, decree, technical or other standard, requirement or procedure enacted, adopted, promulgated, applied or followed by any Governmental Body.

“Leased Property” has the meaning set forth in Section 4.13(b).

“Lien” means any mortgage, pledge, hypothecation, security assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and any lien related to any filing of any financing statement under the Uniform Commercial Code or comparable Law of any jurisdiction), any right of first refusal, right to call, preemptive right or other right of another Person with respect to any property or asset, or any option, warrant or commitment of any kind or nature.

“Losses” has the meaning set forth in Section 10.1.

“Management Shareholders” has the meaning set forth in the preamble.

 

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“Management Shareholders’ Indemnification Cap” has the meaning set forth in Section 10.1(c).

“Marks” has the meaning set forth in the definition of “Intellectual Property” in this Article 1.

“Material Adverse Effect” means any change(s) or effect(s) that individually or in the aggregate is or may (so far as can reasonably be foreseen at the time) be materially adverse to (i) the assets, business, operations, income, prospects or condition (financial or other) of the Company, the WFOE, any of the Operating Companies or the Transactions, (ii) the ability of the Company, the WFOE or any of the Operating Companies to perform its obligations under this Agreement or the Related Documents to which it is a party or to consummate the Transactions, or (iii) a Purchaser’s rights under this Agreement or the Related Documents to which it is a party or the ability of a Purchaser to perform its obligations hereunder and thereunder or consummate the Transactions, but excluding changes in general economic conditions in the PRC.

“Memorandum of Association” has the meaning set forth in Section 2.1.

“Non-Closing Purchaser” has the meaning set forth in Section 9.9.

“OFAC”, “OFAC Sanctions”, and “OFAC Sanctioned Person” have the meaning set forth in Section 4.27.

“Operating Company” means each of Henan Xinyuan, Henan Wanzhong Real Estate Co., Ltd., Shandong Xinyuan Real Estate Co., Ltd. and Qingdao Xinyuan Real Estate Co., Ltd.

“Order” means any order, writ, injunction, decree, judgment, award, determination or written direction of any arbitrator or Governmental Body.

“Owned Real Property” has the meaning set forth in Section 4.13(a).

“Patents” has the meaning set forth in the definition of “Intellectual Property” in this Article 1.

“PCBs” has the meaning set forth in Section 4.22(b).

“Permitted Liens” means (i) Liens for current taxes not yet due and payable, (ii) Liens imposed by Law and incurred in the ordinary course of business for obligations not past due, (iii) Liens in respect of pledges or deposits under workers’ compensation laws or similar legislation, and (iv) possible minor Liens, which do not in any case materially detract from the value of the property subject thereto or materially interfere with the use thereof, and which have not arisen otherwise than in the ordinary course of business.

“Person” means any individual or entity, including any corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or Governmental Body.

“PFIC” has the meaning set forth in Section 6.9(c).

 

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“Plan” and “Plans” means the employment regulations, employee benefit regulations, and other employee-related regulations of the Company.

“PRC” means the People’s Republic of China.

“Preferred Shares” means the Series A Convertible Preferred Shares, par value $0.0001 per share, of the Company.

“Projects” means all real estate projects which were developed or are being developed by any Operating Company, including, without limitation, City Family, Central Garden, Longhai Star-level Garden, Xinyuan Splendid, City Manor and City Homestead (as such named projects are identified in the Disclosure Schedule).

“Purchase Price” has the meaning set forth in Section 2.2(b).

“Purchased Securities” has the meaning set forth in Section 2.2(b).

“Purchasers” has the meaning set forth in the preamble.

“Real Property Leases” has the meaning set forth in Section 4.13(b).

“Qualified Public Offering” has the meaning ascribed to such term in the Memorandum of Association.

“Related Documents” means the Contracts and other documents listed on Schedule I hereto, as each may from time to time be amended, modified or supplemented in accordance with the terms hereof and thereof.

“Related Person” means any shareholder, partner, member, director, manager, officer, employee or agent of any Member of the Company Group or any of their respective Affiliates, and any member or former member of the family of any individual shareholder, partner, member, director, manager, officer, employee or agent of any Member of the Company Group or any of their respective Affiliates.

“Required Consents” has the meaning set forth in Section 4.4.

“Returns” has the meaning set forth in Section 4.23(a)

“Securities Act” means the Securities Act of 1933 of the United States, as amended, and, as applicable, any relevant securities laws of any state or non-U.S. jurisdiction (including the Cayman Islands and the PRC).

“Shareholders Agreement” means that certain Shareholders Agreement, dated as of the date hereof, among the Company, the Purchasers and the shareholders of the Company party thereto, substantially in the form of Exhibit A, as the same may from time to time be amended, modified or supplemented in accordance with the terms hereof and thereof.

 

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“Subsidiary” means, as to any Person, (i) a corporation or other entity whose shares of capital stock or other ownership interests having ordinary voting power to elect a majority of the directors of such corporation, or other Persons performing similar functions for such entity, are owned or controlled, directly or indirectly, by such Person, or (ii) a corporation or other entity of which a majority of the equity is owned, directly or indirectly, by such Person.

“Tax” means any income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental, windfall profit, customs, vehicle, airplane, boat, vessel or other title or registration, capital stock, franchise, employees’ income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, value added, alternative, add-on minimum and other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever and any interest, penalty, addition or additional amount thereon imposed, assessed or collected by or under the authority of any Governmental Body or payable under any tax-sharing agreement or any other Contract.

“Trade Secrets” has the meaning set forth in the definition of “Intellectual Property” in this Article I.

“Transactions” means the transactions contemplated by this Agreement and the Related Documents.

“U.S. Person” has the meaning set forth in Section 4.27(b)(iii).

“U.S. Shareholder” has the meaning set forth in Section 4.28.

“United States” or “U.S.” means the United States of America.

“Voting Stock” means shares or other equity interests of any class or classes of a corporation or other entity the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or Persons performing similar functions).

“Warrant Shares” has the meaning set forth in Section 2.1.

“Warrant(s)” has the meaning set forth in Section 2.1.

“WFOE” means Xinyuan Real Estate (Henan) Development, Ltd., a company organized under the laws of the PRC, which is a wholly foreign-owned enterprise 100% held by the Company under the laws of the PRC.

“Zhang Yong Warrant” has the meaning given to it in the Shareholders Agreement.

 

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ARTICLE 2

PURCHASE AND SALE

Section 2.1 Authorization of Securities

On or prior to the Closing, the Company shall have authorized (a) the issuance and sale to (i) Blue Ridge China of 18,483,240 Preferred Shares, and (ii) EI of 12,322,160 Preferred Shares, in each case having the rights, restrictions, privileges and preferences as set forth in the form of the Amended and Restated Memorandum and Articles of Association of the Company (the “Memorandum of Association”) attached hereto as Exhibit B, (b) the issuance and sale to each of the Purchasers of a warrant, each in the form attached hereto as Exhibit C (each a “Warrant” and collectively, the “Warrants”) to purchase additional Preferred Shares (the “Warrant Shares”), (c) the issuance of the Warrant Shares upon exercise of the Warrants, and (d) the issuance of Common Shares upon conversion of the Preferred Shares and the Warrant Shares (the “Conversion Shares”). The Company shall adopt and file the Memorandum of Association with the Cayman Islands Registrar of Companies on or before the Closing.

Section 2.2 Purchase and Sale

Subject to the terms and conditions of this Agreement, at the Closing:

(a) the Company agrees to issue and sell to Blue Ridge China, and Blue Ridge China agrees to purchase from the Company, 18,483,240 Preferred Shares and a Warrant for $15,000,000.00; and

(b) the Company agrees to issue and sell to EI, and EI agrees to purchase from the Company, 12,322,160 Preferred Shares and a Warrant (such securities, together with the securities referred to in the immediately preceding paragraph (a), are collectively referred to herein as the “Purchased Securities”) for $10,000,000 (such amount, together with the amount referred to in the immediately preceding paragraph (a), is collectively referred to herein as the “Purchase Price”).

Section 2.3 Closing

Subject to the terms and conditions of this Agreement, the Closing of the purchase and sale of the Purchased Securities (the “Closing”) shall take place at the offices of TransAsia Lawyers, at 10:00 a.m. local time on the third Business Day following the satisfaction or waiver of the conditions in Article 8 and Article 9, or at such other place and date prior to September 30, 2006 as the parties may agree (the “Closing Date”).

Section 2.4 Delivery of Share Certificates

Subject to the terms of this Agreement, as soon as practicable, and in no event more than ten (10) days after the Closing, the Company shall deliver to each Purchaser one or more certificates registered in such Purchaser’s name representing the Purchased Securities purchased by such Purchaser against payment of such Purchaser’s portion of the Purchase Price therefor by wire transfer of immediately available funds pursuant to the Company’s instructions.

 

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ARTICLE 3

USE OF PROCEEDS

Section 3.1 Use of Proceeds

The Company shall use the proceeds from the sale of the Purchased Securities as follows: (a) $23,000,000 shall be contributed to the WFOE as its registered capital, of which $2,500,000 shall be paid by the WFOE to the Management Shareholders pursuant to the Henan Acquisition Agreement, and (b) the balance shall be used for general working capital purposes, including the expansion of the Business.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF THE COMPANY GROUP

In order to induce each of the Purchasers to enter into this Agreement and the Related Documents to which it is a party, the Members of the Company Group and, only to the extent explicitly stated herein, the Management Shareholders, hereby jointly and severally represent and warrant to the Purchasers as follows:

Section 4.1 Organization, Good Standing and Qualification

The Company is a company duly organized, validly existing and in good standing under the laws of the Cayman Islands and is duly qualified to do business as a foreign company in each additional jurisdiction where the failure to so qualify would have a Material Adverse Effect. The WFOE and each Operating Company is a company duly organized, validly existing and in good standing under the laws of the PRC.

Section 4.2 Power and Authority

Each Member of the Company Group has all requisite power and authority to own its properties and to carry on its business as now being conducted and as proposed to be conducted, and to execute, deliver and perform its obligations under this Agreement and the Related Documents to which it is a party, and, in the case of the Company, to issue, sell and deliver the Purchased Securities, the Conversion Shares and the Warrant Shares.

Section 4.3 Authorization, Execution and Enforceability

(a) The execution, delivery and performance by each Management Shareholder and each Member of the Company Group of this Agreement and the Related Documents to which each is a party have been duly authorized by all necessary corporate or other action on the part of such Management Shareholder or such Member of the Company Group and its respective shareholders. This Agreement and the Related Documents are legal, valid and binding obligations of the parties thereto, enforceable in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies and (c) to the extent the indemnification provisions contained in the Shareholders Agreement may be limited by any applicable securities laws.

 

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(b) The issuance, sale and delivery of the Purchased Securities, the Conversion Shares and the Warrant Shares have been duly authorized by all necessary corporate action on the part of the Company and its shareholders.

Section 4.4 Consents

(a) Except as set forth on Section 4.4(a) of the Disclosure Schedule (the “Required Consents”), no consent of, notice to, or filing with any Governmental Body or any other Person, including any creditor or shareholder of any Member of the Company Group, is required to be made or obtained in connection with the execution, delivery and performance by any party (other than the Purchasers) of this Agreement or the Related Documents, or the Transactions, or as a condition to the legality, validity or enforceability of this Agreement or the Related Documents, or the offer, issuance, sale or delivery of the Purchased Securities, the Conversion Shares or the Warrant Shares except (i) filing of the Memorandum of Association with the Cayman Islands Registrar of Companies, and (ii) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Purchased Securities, the Conversion Shares and the Warrant Shares under applicable U.S. federal and state securities laws or the securities laws of the Cayman Islands or any other jurisdiction.

(b) All consents, approvals, permits and filings required under applicable Laws for the due and proper establishment and operation of any Operating Companies and the WFOE, have been duly obtained from the appropriate authorities and are in full force and effect. For the avoidance of doubt, the abovementioned includes any and all requirements of any Governmental Body, including, with respect to the Operating Companies, the WFOE and the Management Shareholders, registrations with: the PRC Ministry of Commerce, the PRC State Administration of Industry and Commerce, the PRC State Administration for Foreign Exchange, the PRC National Development and Reform Commission; the PRC Ministry of Construction; the PRC Ministry of Land and Resources, tax bureau, customs authorities, banks and the local counterpart of each of the aforementioned Governmental Bodies.

Section 4.5 No Conflicts

The execution and delivery of this Agreement and the Related Documents, and the consummation of the Transactions, will not, directly or indirectly (with or without notice or lapse of time): (a) breach any provision of any of the Governing Documents; (b) breach, or give any Governmental Body or other Person the right to challenge any of the Transactions or to exercise any remedy or obtain any relief under, any Law or Order to which any Member of the Company Group and their respective assets may be subject; (c) contravene, conflict with or result in a violation or breach of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by any Member of the Company Group or that otherwise relates to any Member of the Company Group or their respective businesses; (d) breach any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or payment under, or to cancel, terminate or modify, any Company Contract; or (e) result in the imposition or creation of any Lien upon or with respect to the assets of any Member of the Company Group.

 

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Section 4.6 Subsidiaries; Operating Companies

The Company has no direct Subsidiaries other than the WFOE, the WFOE has no direct Subsidiaries other than Henan Xinyuan, Henan Xinyuan has no direct Subsidiaries other than the Operating Companies, and none of the Operating Companies (other than Henan Xinyuan) has any Subsidiaries. The Company owns all of the equity of the WFOE, the WFOE owns all of the equity of Henan Xinyuan, and Henan Xinyuan owns all of the equity of the Operating Companies. Except for the WFOE pursuant to the Related Documents, no Person has any right to receive or participate in the revenue or income of any Operating Company.

Section 4.7 Capitalization, Issuance and Transfer of Shares

(a) Company Authorized Capital. The authorized share capital of the Company consists, or will consist immediately prior to the Closing, of 450,000,000 Common Shares, of which 60,000,000 are outstanding on the date hereof, and 50,000,000 Preferred Shares, none of which shall be issued and outstanding prior to the Closing. All of the outstanding Common Shares have been duly authorized and validly issued, and are fully paid. None of the outstanding Common Shares was issued in violation of the Securities Act or any other Law.

(b) Derivative Securities. Except for (i) the Purchased Securities and the Warrant Shares, (ii) a maximum of 6,802,495 Common Shares reserved for issuance pursuant to the Equity Incentive Plan and as provided in the Related Documents, (iii) 1,853,172 Common Shares issuable upon the exercise of the Burnham Warrants, and (iv) the 1,853,172 Common Shares issuable upon the exercise of the Zhang Yong Warrant, there are no outstanding securities convertible into or exchangeable for any of the shares of the Company or the membership interests or other equity of the WFOE or any Operating Company, or any options, warrants or other rights to subscribe for or to purchase, or any agreements (contingent or otherwise) providing for the issuance of, or any calls, commitments or claims of any character relating to, any of the shares of the Company or membership interests or other equity of the WFOE or the Operating Companies or any securities convertible into or exchangeable for, any of the shares of the Company or membership interests or other equity of the WFOE or any Operating Company, nor is the Company, the WFOE or any Operating Company subject to any obligation (contingent or otherwise) to redeem, repurchase or otherwise acquire or retire any of the shares of the Company or membership interests or other equity of the WFOE or any Operating Company. None of the Company, the WFOE or any Operating Company has granted any stock appreciation, phantom stock or similar rights.

(c) Shareholders. Neither of the Management Shareholders is a citizen of the United States or an entity domiciled in the United States.

(d) Registration Rights. Except as set forth in the letter agreement, dated as of November 7, 2005, between Henan Xinyuan and Burnham Securities Inc., neither the Company, the WFOE nor any Operating Company has granted or agreed to grant any rights relating to registration of its securities under the Securities Act or any other Law other than pursuant to the Shareholders Agreement.

 

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(e) Voting Agreements. Except as provided in the Shareholders Agreement, no Management Shareholder or Member of the Company Group nor, to its knowledge, any other Person is a party or subject to any Contract which affects or relates to the voting or giving of written consents with respect to any securities of the Company, the WFOE or any Operating Company.

(f) Issuance of Purchased Securities. The Purchased Securities have been duly authorized and, when delivered to and paid for by the Purchasers as provided herein or in the Governing Documents, as the case may be, will be validly issued and fully paid, will be free and clear of all preemptive rights (other than as required by applicable Law) and Liens except in each case as otherwise provided in the Related Documents, and will be entitled to the voting and other rights set forth in the Governing Documents. All preemptive rights of the Company’s shareholders in respect of the Transactions have been waived in writing.

(g) Sale of Purchased Securities. At the Closing, the Purchasers will receive the Purchased Securities sold under this Agreement free and clear of all preemptive rights and other Liens except as otherwise provided in the Related Documents.

(h) Henan Xinyuan Securities. The entire outstanding registered capital of Henan Xinyuan is held by the WFOE and (except as otherwise set forth on Schedule 4.7(h)) the entire registered capital of each other Operating Company is held by Henan Xinyuan, and in each case has been duly authorized and issued and, when paid for will be free and clear of all preemptive rights (other than as required by applicable Law) and Liens except in each case as otherwise provided in the Related Documents, and will be entitled to the voting and other rights set forth in the Governing Documents. To the extent applicable, all preemptive rights of each Operating Company’s shareholders in respect of the Transactions have been waived in writing.

(i) Governing Documents. The Company has provided the Purchasers with correct and complete copies of the Governing Documents of the Company and of each Operating Company, as in effect on the date hereof. The Governing Documents of each Operating Company have been duly and validly authorized and adopted, and are valid and enforceable in accordance with the Law of the PRC, and have been duly filed and are in full force and effect. The Governing Documents of the Company have been duly and validly authorized and adopted, and are valid and enforceable to the full extent under the Law of the Cayman Islands, and have been duly filed and are in full force and effect.

Section 4.8 Compliance with Securities Laws

The Company has not, either directly or through any agent, offered any securities to or solicited any offers to acquire any securities from, or otherwise approached, negotiated, or communicated in respect of any securities with, any Person in such a manner as to require that the offer or sale of such securities (including the Purchased Securities) be registered pursuant to the provisions of the Securities Act and the rules and regulations thereunder or any other Law, and neither the Company nor anyone acting on its behalf will take any action prior to the Closing that would cause any such registration to be required, including any offer, issuance or sale of any security of the Company under circumstances which might require the integration of such security with the Purchased Securities under the Securities Act or the rules and regulations

 

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thereunder. The issuance of the Purchased Securities, including the issuance of Conversion Shares and Warrant Shares, are exempt from registration under the Securities Act. The Company has complied with all applicable laws in all issuances and purchases of its shares prior to the date hereof and has not violated any applicable Law in connection with any such issuances and purchases of its securities. Any notices required to be filed under federal, state or any non-U.S. securities and blue sky laws prior to or subsequent to the Closing shall be filed on a timely basis prior to or as so required. Except as set forth on Section 4.8 of the Disclosure Schedule, neither the Company nor any Person authorized or employed by the Company as agent, broker, dealer or otherwise in connection with the offering or sale of the Purchased Securities has offered the same or any such securities for sale to, or solicited any offers to buy the same from, or otherwise approached or negotiated with respect thereto with, any Person other than the Purchasers and their respective Affiliates. Except as set forth on Section 4.8 of the Disclosure Schedule for securities which may be issuable under the Equity Incentive Plan, at no time has the Company offered or sold any securities in the United States or to any Person resident or domiciled in the United States.

Section 4.9 Financial Statements

Attached as Section 4.9 of the Disclosure Schedule are true and complete copies of the consolidated and unconsolidated financial statements of the Operating Companies as at December 31, 2005 and as at June 30, 2006. Such financial statements, as the same may be revised on or prior to the Closing Date as provided in Section 8.16, are in accordance with the accounting records of the Operating Companies, and fairly present in all material respects the financial condition and the results of operations, changes in shareholders’ equity and cash flows of the Operating Companies as at the respective dates of and for the periods referred to in such financial statements, all in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, except for recurring year-end audit adjustments and accruals which are not material and any absence of notes required by GAAP.

Section 4.10 Material Liabilities

(a) The Company was incorporated as an exempted company under the Companies Law (2004 Revision) of the Cayman Islands on January 27, 2006 and has conducted no business or operations prior to the date hereof. The Company has no assets or liabilities on the date hereof except as set forth herein and in the Related Documents and at Closing its only assets shall be the shares of the WFOE.

(b) No Operating Company has any liability or obligation, absolute or contingent, liquidated or unliquidated (individually or in the aggregate), except (i) obligations and liabilities incurred after its incorporation date in the ordinary course of business that are not material, individually or in the aggregate, all of which are fully reflected in the financial statements attached as Section 4.9 of the Disclosure Schedule to the extent required by GAAP, (ii) obligations under Contracts made in the ordinary course of business that would not be required to be reflected in financial statements prepared in accordance with GAAP, all of which Contracts are set forth on Schedule 4.10(b) of the Disclosure Schedule (except for such Contracts that, in the aggregate, would not require the payment by the Company Group of more than RMB 8,000,000) and (iii) obligations under this Agreement and the Related Agreements.

 

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Section 4.11 No Material Adverse Effect; Changes

(a) Since January 1, 2006, there has not been any Material Adverse Effect with respect to any Operating Company.

(b) Since January 1, 2006, each Operating Company has conducted its business only in the ordinary course of business in accordance with past practice and there has not been any:

(i) change in its authorized or issued share capital or equity interests, grant of any stock option or right to purchase shares or equity interests, or issuance of any security convertible into or exercisable for such shares or equity interests, except as provided for under the Equity Incentive Plan, or as set forth in Section 4.11(b) of the Disclosure Schedule;

(ii) declaration, setting aside or payment of any dividend or other distribution in respect of its shares or equity interests, or any direct or indirect redemption, purchase or other acquisition of any of its shares or equity interests;

(iii) amendment to any of its Governing Documents, except as set forth in Section 4.11(b) of the Disclosure Schedule;

(iv) incurrence of any material liabilities or obligations of any nature whatsoever, contingent or otherwise (including any liabilities or obligations which, individually or in the aggregate, exceed RMB 8,000,000, other than current liabilities or obligations incurred in the ordinary course of business);

(v) Contract or transaction with a Related Person (except in the ordinary course of business) or increase of any bonuses, salaries or other compensation to any Related Person or entry into any employment, severance or similar Contract with any such Related Person, except as provided for under the Equity Incentive Plan and as set forth on Section 4.11(b) of the Disclosure Schedule;

(vi) any material change in any compensation arrangement or agreement with any employee, officer, or shareholder;

(vii) any resignation or termination of employment of any officer or any Key Employee;

(viii) adoption of, amendment to or increase in the payments to or benefits under, any Plan;

(ix) damage to or destruction or loss of any material asset, whether or not covered by insurance;

(x) entry into, termination of or receipt of notice of termination of any license (including the Licenses), distributorship, dealer, sales representative, joint venture, credit or similar Contract to which it is a party, or any Contract or transaction involving a total remaining commitment by it of at least RMB 4,000,000;

 

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(xi) sale, lease or other disposition of any material asset or property (other than sales of inventory in the ordinary course of business) or the creation of any Lien (other than Permitted Liens) on any material asset or property, except as set forth in Section 4.11(b) of the Disclosure Schedule;

(xii) transfer or grant of any material rights under any Intellectual Property;

(xiii) cancellation, compromise or waiver of any debt, claims or rights with a value in excess of RMB 2,000,000;

(xiv) indication by any significant customer or supplier of an intention to discontinue or change the terms of its relationship with it;

(xv) material change in the accounting methods used or tax elections made; or

(xvi) Contract to do any of the foregoing.

Section 4.12 Legal Proceedings

Except as set forth on Section 4.12 of the Disclosure Schedule, there are no actions, claims, suits or other proceedings pending or, to the knowledge of any Member of the Company Group or the Management Shareholders, threatened, nor is there, to such knowledge, any investigation pending or threatened (or any basis in fact therefor known to the Company), against or affecting any Member of the Company Group or the Management Shareholders, or which seeks to enjoin or otherwise prevent the consummation of the Transactions, or to recover any damages or obtain any other relief against any Member of the Company Group or the Management Shareholders as a result of any of the Transactions, in any court or other Governmental Body or before any arbitrator.

Section 4.13 Real Property

(a) Section 4.13 of the Disclosure Schedule lists all real property owned, used, and occupied by the Operating Companies and contains a true and complete description of all such property (the “Owned Real Property”). The Operating Companies have good and marketable fee simple title to the Owned Real Property and improvements thereon, free and clear of all Liens, except Permitted Liens. None of the Owned Real Property is subject to any right or option of any other person, firm, corporation or other entity to purchase or otherwise obtain title to such property.

(b) Section 4.13 of the Disclosure Schedule contains a true and complete description of all leases, licenses, permits, subleases, and occupancy agreements, together with any amendments thereto (the “Real Property Leases”), with respect to (i) all real property leased by each of the Operating Companies (whether as a lessor or lessee and including those in the names of nominees or other entities) and used or occupied in connection with the Business (the “Leased Property”), and (ii) all real property leased or subleased by each of the Operating Companies, as lessor or sublessor, to third parties. Except as set forth on Section 4.13 of the Disclosure Schedule, true, complete and accurate copies of the Real Property Leases have been delivered to the Purchasers, and each of such Real Property Leases is in full force and effect without

 

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modification or amendment from the form delivered and are valid, binding and enforceable in accordance with their respective terms. Neither the Operating Companies nor, to the knowledge of the Members of the Company Group, any of the other parties to the Real Property Leases, is in breach thereunder, no material amount due under the Real Property Leases remains unpaid, no material controversy, claim, dispute or disagreement exists between the parties to the Real Property Leases, and no event has occurred which with the passage of time or giving of notice, or both, would constitute a material default thereunder. The lessor under each Real Property Lease has completed all tenant improvement work and other alterations required to be performed by the lessor pursuant to such Real Property Lease. Except as set forth on Section 4.13 of the Disclosure Schedule, no Real Property Lease or sublease will cease to be legal, valid, binding, enforceable and in full force and effect on terms identical to those currently in effect as a result of the consummation of the Transactions, nor will the consummation of the Transactions constitute a breach or default under such Real Property Lease or sublease or otherwise give the landlord a right to terminate such lease or sublease.

(c) Each Operating Company’s use of its Owned Real Property and Leased Property for the purposes for which it is presently being used is permitted as of right under all applicable zoning Laws and is not subject to “permitted nonconforming” use or structure classifications.

(d) There is no violation of a condition or agreement contained in any covenant, easement or any similar agreement affecting the Owned Real Property or the Leased Property. The covenants, easements or rights-of-way affecting the Owned Real Property or the Leased Property do not, with respect to each Owned Real Property or Leased Property, impair the Operating Companies’ ability to use or transfer any such Owned Real Property or Leased Property in the operation of the Business as presently conducted. The Operating Companies have access to public roads, streets or the like or valid easements over private streets, roads or other private property for such ingress to and egress from the Owned Real Property or Leased Property, except as would not impair the Operating Companies’ ability to use or transfer any such Owned Real Property or Leased Property in the operation of the Business as presently conducted.

(e) Except as set forth on Section 4.13 of the Disclosure Schedule, none of the Operating Companies has received any notice and, to the knowledge of the Members of the Company Group, there is no pending or contemplated rezoning proceeding affecting the Owned Real Property or Leased Property that would reasonably be expected to have a Material Adverse Effect on any Operating Company.

(f) All improvements on the Owned Real Property and Leased Property and the operations therein conducted conform to all requirements under applicable Law, including without limitation, health, fire, environmental, safety, zoning and building laws, ordinances and administrative regulations, except for possible nonconforming uses or violations which do not and will not expose any person or property to injury or damage, materially and adversely affect any insurance coverage, give rise to strict liability, penalties or fines, or materially interfere with the present use, operation or maintenance thereof by the Operating Companies as now used, operated or maintained, and which do not and will not materially and adversely affect the value thereof. To the knowledge of the Members of the Company Group, all buildings, structures, improvements and fixtures owned, leased or used at the Owned Real Property and Leased

 

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Property conform in all material respects to all applicable codes and rules adopted by national and local associations and boards of insurance underwriters; and all such buildings, structures, improvements and fixtures are in good operating condition and repair.

(g) All improvements on the Owned Real Property are in reasonable condition and repair, with normal wear and tear, and have not suffered any casualty or other material damage that has not been repaired in all material respects. No such improvement encroaches on any real property not included in the Owned Real Property there are no buildings, structures, fixtures or other improvements primarily situated on adjoining property that encroach on the Owned Real Property.

(h) None of the Operating Companies has received notice from any insurance carrier regarding defects or inadequacies in the Owned Real Property or Leased Property, which, if not corrected, would result in termination of the insurance coverage therefor or an increase in the cost thereof.

(i) There is no pending or, to the knowledge of the Members of the Company Group, threatened: (i) condemnation of any part of the Owned Real Property (or to the knowledge of the Members of the Company Group, the Leased Property) by any Governmental Body; (ii) special assessment against any part of the Owned Real Property (and to the knowledge of the Members of the Company Group, the Leased Property); or (iii) litigation against the Operating Companies for breach of any restrictive covenant affecting any part of the Owned Real Property or Leased Property.

Section 4.14 Sufficiency; Personal Property

(a) Except for the Leased Property, each Operating Company owns all of the assets and properties sufficient to carry on its business as now being conducted.

(b) Section 4.14 of the Disclosure Schedule sets forth all the material tangible assets owned by each Operating Company (other than Owned Real Property). Each Operating Company has good and marketable title to all of its tangible personal property and assets (other than properties and assets leased or licensed from others), free and clear of all Liens, except Permitted Liens. Each item of tangible personal property is in good repair and good operating condition, ordinary wear and tear excepted, and is suitable for use in the ordinary course of business. Each Operating Company has the right to peaceful and undisturbed possession under all leases of personal property necessary in any material respect for the operation of its business and assets, none of which contains any unusual or burdensome provisions which might have a Material Adverse Effect, and all such leases are valid and subsisting and in full force and effect.

Section 4.15 Intellectual Property

(a) Patents. (i) Section 4.15(a) of the Disclosure Schedule contains a complete and accurate list and summary description of all Patents; (ii) all of the issued Patents are currently in compliance with applicable Law (including payment of filing, examination and maintenance fees and proofs of working or use), are valid and enforceable; (iii) no Patent has been or is now involved in any interference, reissue, reexamination, or opposition proceeding and, to the knowledge of any Member of the Company Group, there is no potentially interfering patent or

 

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patent application of any third party; (iv) (A) to the knowledge of any Member of the Company Group, no Patent is infringed or has been challenged or threatened in any way and (B) none of the products manufactured or sold, nor any process or know-how used, by any Member of the Company Group infringes or is alleged to infringe any patent or other proprietary right of any other Person, and no Member of the Company Group is aware of any reasonable basis for such an allegation or of any reason to believe that such an allegation may be forthcoming; (v) all products made, used or sold under the Patents have been marked with the proper patent notice.

(b) Marks. (i) Section 4.15(b) of the Disclosure Schedule contains a complete and accurate list and summary description of all Marks; (ii) registrations of all Marks have been submitted to the Trademark Office of the State Administration for Industry and Commerce of the PRC (or, with respect to domain names, with the China Internet Network Information Center and the Internet Corporation for Assigned Names and Numbers) and are still pending examination and approval; (iii) no Mark has been or is now involved in any opposition, invalidation or cancellation proceeding and, to the knowledge of any Member of the Company Group, no such action is threatened with respect to any of the Marks; (iv) to the knowledge of any Member of the Company Group, there is no potentially interfering trademark or trademark application of any other Person; (v) (A) to the knowledge of any Member of the Company Group, no Mark is infringed or has been challenged or threatened in any way and (B) none of the Marks used by any Member of the Company Group infringes or is alleged to infringe any trade name, trademark or service mark of any other Person, and no Member of the Company Group is aware of any reasonable basis for such an allegation or of any reason to believe that such an allegation may be forthcoming; (vi) all products and materials containing a Mark bear the proper registration notice where permitted by Law.

(c) Copyrights. (i) Section 4.15(c) of the Disclosure Schedule contains a complete and accurate list and summary description of all Copyrights; (ii) all of the registered Copyrights are currently in compliance with applicable Law, and are valid and enforceable; (iii) to the knowledge of any Member of the Company Group, (A) no Copyright is infringed or has been challenged or threatened in any way and (B) none of the subject matter of any of the Copyrights infringes or is alleged to infringe any copyright of any third party or is a derivative work based upon the work of any other Person, and no Member of the Company Group is aware of any reasonable basis for such an allegation or of any reason to believe that such an allegation may be forthcoming; (iv) all works encompassed by the Copyrights have been marked with the proper copyright notice. All content provided to customers of, or otherwise made available by, the current Business of each Operating Company (i) is in compliance with applicable Law, (ii) is used within its licensed scope if such license is provided by a third party; (iii) in relation to subsisting copyrights has been properly attributed to the relevant Operating Company by its employee(s), and (iv) is, to the knowledge of each Operating Company, not infringing or alleged to infringe upon any third party rights, and no Operating Company is aware of any reasonable basis for any such allegation to exist or have any reason to believe that such allegation may be forthcoming.

(d) Trade Secrets. All Trade Secrets that are material to any Operating Company are not part of the public knowledge or literature and, to the knowledge of any Member of the Company Group, have not been used, divulged or appropriated either for the benefit of any Person (other than the Operating Companies) or to the detriment of any Member of the Company

 

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Group; and to the knowledge of any Member of the Company Group, no such Trade Secret is subject to any adverse claim or has been challenged or threatened in any way or infringes or is alleged to infringe any intellectual property right of any other Person, and no Member of the Company Group is aware of any reasonable basis for such an allegation or of any reason to believe that such an allegation may be forthcoming.

(e) Good Title; Valid License. Each Member of the Company Group has good title, free and clear of Liens (other than Permitted Liens), to all Intellectual Property that it owns. No Member of the Company Group owes any payments to any owner or licensor of any intellectual property right, except as set forth on Section 4.15(e) of the Disclosure Schedule. Each Member of the Company Group owns or has licensed all of the Intellectual Property sufficient to carry on its respective business as now being conducted and as proposed to be conducted, and no other intellectual property right not owned or licensed by a Member of the Company Group are required for such purpose.

(f) Confidentiality. No third party has claimed in writing or, to the knowledge of any Member of the Company Group, has reason to claim that any individual employed by or affiliated with the Company Group has (i) violated any of the terms or conditions of such Person’s employment (including non-solicitation and non-hire), non-competition or nondisclosure agreement with such third party, (ii) disclosed or utilized any proprietary information or documentation of such third party, or (iii) interfered in the employment relationship between such third party and any of its present or former employees. No Person employed by or affiliated with any Member of the Company Group has used or disclosed or, to the knowledge of any Member of the Company Group, proposes to use or disclose, any trade secret or any information or documentation in violation of the proprietary rights of any former employer, and, to the knowledge of any Member of the Company Group, no Person employed by or affiliated with any Member of the Company Group has violated any confidential relationship which such Person may have had with any third party, in connection with the development, manufacture or sale of any product or proposed product or the development or sale of any service or proposed service of the Company Group and there is no reason to believe there will be any such use or disclosure.

Section 4.16 Material Contracts

Section 4.16 of the Disclosure Schedule contains a complete and correct list of all Contracts to which any Member of the Company Group is a party or which otherwise pertain to a Member of the Company Group, which require the expenditure or receipt of more than RMB 4,000,000 per year or are otherwise material to the Company’s or any Operating Company’s business, including (a) all Contracts with Affiliates (except exclusively among the Company and one or more Operating Companies) or any Related Person; (b) all construction Contracts relating to Owned Real Property, Leased Property or the Projects; (c) all Contracts for the incurrence of indebtedness for borrowed money; (d) all shareholder agreements with respect to any Member of the Company Group and other Contracts between shareholders of any Member of the Company Group; and (e) all Contracts related to the grant and/or transfer of land use rights for the Projects (collectively, the “Company Contracts”). Each of the Company Contracts is valid, binding and, to the knowledge of any Member of the Company Group, enforceable against the parties thereto in accordance with its terms. Except as set forth on Section 4.16 of the

 

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Disclosure Schedule, each party to the Company Contracts has performed all obligations required to be performed by it to date, and no event has occurred that, with notice or lapse of time or both, would constitute a material default under such Company Contract.

Section 4.17 Employment Matters

(a) Employment Agreements. Except for the Related Documents, the Equity Incentive Plan, the Plans, as set forth on Section 4.17 of the Disclosure Schedule and the labor agreements with employees which do not materially differ from the form of labor agreement attached hereto as Exhibit H, no Member of the Company Group (i) is a party to any employment or deferred compensation agreement, (ii) has any bonus, incentive or profit-sharing plans, or (iii) has any pension, retirement or similar plans or obligations, whether funded or unfunded, of a legally binding nature or in the nature of informal understandings. To the knowledge of any Member of the Company Group, no Key Employee has any plans to terminate his or her employment with the Company Group. To the knowledge of any Member of the Company Group, no existing or prospective employee of any Member of the Company Group is bound by any Contract that purports to limit the ability of such Person to engage in or continue or perform any conduct, activity, duties or practice relating to the business of the Company Group, or to assign to any Person any rights to any invention, improvement, or discovery. No former or current employee of any Member of the Company Group is a party to, or is otherwise bound by, any Contract that in any way adversely affected, affects, or will affect the ability of the Company Group to conduct its business as heretofore carried on or proposed to be carried on. No Person is providing consulting services to any Member of the Company Group on a regular basis.

(b) Disclosure of Plans. The Company has provided the Purchasers with complete, accurate and up-to-date copies and all details of the Plans, including material written and oral employment rules, policies and terms and conditions of employment applicable to the directors, officers and employees of the Company, the WFOE and the Operating Companies (collectively, “Employee Terms and Conditions”). Except for the Related Documents or as disclosed in the Disclosure Schedule, no Member of the Company Group has any obligation to compensate or make any payment of any kind to any director, officer or employee, other than (i) current obligations for payment of wages and salary, accrued but unused vacation pay and other benefits, all as expressly provided for in the Employee Terms and Conditions provided to the Purchasers, and (ii) such severance pay obligations and social aid benefit obligations as are imposed by applicable Law.

(c) Legal Compliance. Except as set forth in Section 4.17 of the Disclosure Schedule, each of the Operating Companies has at all times complied with all Laws concerning national pensions, national medical insurance, worker’s compensation insurance, unemployment insurance and any other social security matters. Without limiting the foregoing, all Plans are funded to the full extent required by applicable Laws, and all amounts properly accrued as Indebtedness with respect to any employees who have not been paid have been properly accounted for on the books of the Operating Companies.

(d) Labor Matters. Since the respective incorporation dates, there has been no strike, work stoppage, slowdown or similar labor dispute or grievance involving the any of the

 

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Operating Companies or their respective employees, or any effort to organize the Operating Companies’ employees, or (to the knowledge of any Member of the Company Group) any threat of any of the foregoing, nor to its knowledge is any such action, dispute, grievance or effort currently pending or threatened. None of the Operating Companies is a party to any collective bargaining agreement.

Section 4.18 Affiliate Transactions

Except for the Related Documents or as set forth in Section 4.18 of the Disclosure Schedule, neither the Company, the WFOE nor any Operating Company has, directly or indirectly, purchased, acquired or leased any property from, or sold, transferred or leased any property to, or made any payment to, entered into any Contract or transaction with, or otherwise dealt with, any Related Person, except for compensation, customary indemnification and benefits of employees, officers and directors, in each case entered into in the ordinary course of business, upon customary terms and conditions and all of which have been previously disclosed to the Purchasers in writing. To the knowledge of any Member of the Company Group, no Related Person has any direct or indirect ownership interest in any Person with which the Company, the WFOE or any of the Operating Companies is affiliated or with which the Company, the WFOE or any of the Operating Companies has a business relationship, or any Person that competes with any of the Operating Companies; provided that the ownership of less than five per cent (5%) of the outstanding capital stock of any publicly-traded company that may compete with the Operating Companies shall not constitute a violation of this provision.

Section 4.19 Other Transactions

No Member of the Company Group, nor, to the knowledge of any Member of the Group, any Person acting on their behalf has, directly or indirectly, given or promised or offered to give any money, gift or other benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, or employee or agent of a customer or supplier, or other Person who did, does or may have the ability to help or hinder the business of the Operating Companies (or to assist in connection with any actual or proposed transaction), which (i) could subject any Member of the Company Group or such Person acting on their behalf to any civil or criminal liability or penalty, (ii) if not given in the past, could have had a Material Adverse Effect or (iii) if not continued in the future, could have a Material Adverse Effect.

Section 4.20 Compliance with Laws

Except as set forth in Section 4.20 of the Disclosure Schedules, each Member of the Company Group is, and at all times since its incorporation dates has been, in compliance in all material respects with all applicable Laws. No event has occurred or circumstance exists that could reasonably be expected to constitute or result in a violation by any Member of the Company Group of, or a failure on the part of any Member of the Company Group to comply with, nor has any Member of the Company Group received any written notice from any Governmental Body or any other Person regarding any actual or potential violation of, or failure to comply with, any applicable Law or any actual or potential obligation on the part of any Member of the Company Group to undertake or pay for any remedial action of any nature.

 

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Section 4.21 Governmental Authorizations

Except as set forth in Section 4.21 of the Disclosure Schedule each Member of the Company Group holds all Governmental Authorizations necessary to permit it to lawfully conduct its business as presently conducted and as proposed to be conducted and to own and operate its assets, and each such Governmental Authorization is valid and in full force and effect. Except as set forth in Section 4.21 of the Disclosure Schedule: (i) each Member of the Company Group is, and at all times since its incorporation date has been, in compliance in all material respects with the terms and conditions of each such Governmental Authorization; (ii) no event has occurred or circumstance exists that could reasonably be expected to constitute or result directly or indirectly in a violation of, or a failure to comply with any term or condition of, or the revocation, withdrawal, suspension, cancellation or termination of, or any modification to, any such Governmental Authorization; (iii) no Member of the Company Group has received any written notice from any Governmental Body or any other Person regarding any actual or potential violation of, or failure to comply with any term or condition of, or actual or potential revocation, withdrawal, suspension, cancellation, termination of, or any modification to, any such Governmental Authorization, or of its non-compliance or need for compliance or remedial actions under any Governmental Authorization in respect of the activities carried out directly or indirectly by the Operating Companies or the WFOE; and (iv) all filings required to have been made for renewal or otherwise with respect to such Governmental Authorizations have been duly and timely made.

Section 4.22 Environmental Laws

Except as set forth in Section 4.22 of the Disclosure Schedule:

(a) There are no claims, investigations, litigation, administrative proceedings, judgments, actions or Orders (whether final, pending or, to the knowledge of any Member of the Company Group, threatened, or any basis in fact known therefor) relating to the obligations of any Member of the Company Group under any Environmental Laws or Orders in respect thereof, or otherwise relating to any Hazardous Materials, discharges, emissions or other forms of pollution concerning any location where Hazardous Materials from or treated by (or required to be treated by) any Member of the Company Group, or any of their predecessors, have been treated or disposed of or otherwise are located or from which discharges, emissions or other forms of pollution emanate. No Member of the Company Group has received notice from any Governmental Body or other Person to the effect that facts, events or conditions referred to therein may interfere with or prevent compliance with, or may give rise to any liability under, any Environmental Law or Order in respect thereof. No Member of the Company Group has agreed to assume by contract or otherwise any Environmental Liability of any other Person.

(b) No Hazardous Materials are or have been stored, used, treated or disposed of by any Member of the Company Group, or discharged from or otherwise located at any facility or other location at which any Member of the Company Group has conducted or was required to conduct operations, except in compliance in all material respects with Environmental Laws or any permit or Order issued pursuant to any Environmental Law, and no part of such facility or other location at which any Member of the Company Group has conducted operations (including the groundwater located thereunder) is contaminated in any material respect by any Hazardous

 

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Material. No polychlorinated biphenyls (“PCBs”) or friable asbestos-containing materials are located at or in such facility or such other location in amounts or condition that would reasonably be expected to result in Environmental Liability.

(c) There has been no release by any Member of the Company Group or, to the knowledge of any Member of the Company Group, any third party, of Hazardous Materials at or from any property owned or used, or previously owned or used, by any Member of the Company Group, or arising from or relating to the operations of any Member of the Company Group or any third party in connection with any such property or otherwise in connection with the business of any Member of the Company Group, in violation of any Environmental Laws or in amounts or in a manner that could reasonably give rise to Environmental Liability.

(d) Each Member of the Company Group is and has at all times been in compliance in all material respects with all Environmental Laws and all Orders in respect thereof, and there are no past or present actions, activities, circumstances, conditions, events or incidents (including the presence, storage, use, disposal, discharge or release of any Hazardous Materials) that could form the basis of any claim against, or give rise to any Environmental Liability (contingent or otherwise) of any Member of the Company Group or their predecessors, which could individually or in the aggregate reasonably be expected to have a Material Adverse Effect. Each Member of the Company Group is and has been since its incorporation in full compliance with all applicable drinking water standards.

(e) No work, repair, construction or capital expenditure is required or planned in respect of the assets, business or operations of any Member of the Company Group pursuant to or for purposes of complying with any Environmental Law, nor has any Member of the Company Group received any notice of any such requirement, except for such work, repair, construction or capital expenditure as is not material to the business of any Member of the Company Group and is in the ordinary course of business.

(f) The Company has disclosed and made available to the Purchasers all information, including all studies, analyses, audits and test results, in the possession, custody or control of the Members of the Company Group relating to (i) the environmental conditions on, under or about any facilities of any Member of the Company Group or any other location at which any Member of the Company Group has conducted or was required to conduct operations, and (ii) Hazardous Substances used, managed, handled, transported, treated, generated, stored, discharged or released by any Member of the Company Group or any other Person at any time on or otherwise in connection with the use or operation of the properties or assets used in or held for use in connection with the business of the Members of the Company Group, to the extent that such information discloses conditions or circumstances that could reasonably be expected to result in any material Environmental Liability.

(g) Except as noted in Section 4.22 of the Disclosure Schedule, no matter disclosed in Section 4.22 of the Disclosure Schedule (if any), individually or in the aggregate, has resulted in or if adversely determined could reasonably be expected to result in a Material Adverse Effect.

 

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Section 4.23 Taxes

(a) Except as set forth on Section 4.23 of the Disclosure Schedule, each of the Operating Companies, or the affiliated, combined or unitary group of which any Operating Company is or was a member, has (i) filed when due (taking into account extensions) with the appropriate Governmental Bodies all tax returns, estimates and reports (“Returns”) required to be filed by it with respect to Taxes, (ii) prepared all such Returns in accordance with all applicable Laws, and (iii) paid when due all Taxes or has established reserves on its financial statements that, in the aggregate, are adequate therefor in accordance with GAAP. Complete and accurate copies of such Returns have been made available to the Purchasers. No Returns of any of the Operating Companies have been questioned or audited by any tax authority.

(b) There are no Taxes assessed or asserted in writing in respect of any Returns filed by any of the Operating Companies, or the affiliated, combined or unitary group of which any Operating Company is or was a member, as the case may be, or claimed in writing to be due by any taxing authority or otherwise that are not reserved for on the applicable financial statements of any of the Operating Companies in accordance with GAAP. No Return of any of the Operating Companies, or the common parent of any affiliated, combined or unitary group of which any of the Operating Companies is or was a member is currently being audited or questioned by any taxing authority (anywhere in the world) nor has any of the Operating Companies received written notice of any such audit or question. Neither any of the Operating Companies, nor the common parent of an affiliated, combined or unitary group of which any of the Operating Companies is or was a member, has executed or filed with any taxing authority (anywhere in the world) any agreement or other document extending, or having the effect of extending, the period of assessment or collection of any Taxes, or waiving any statute of limitations in respect of any Taxes. All final adjustments made by the applicable taxing authority or authorities with respect to any Return of the Operating Companies have been reported to the relevant state, local or foreign taxing authorities to the extent required by Law. No requests for ruling or determination letters are pending with any taxing authority with respect to any of the Operating Companies. No Member of the Company Group has made any elections pursuant to the U.S. Internal Revenue Code of 1986, as amended (the “Code”), or pursuant to the applicable tax laws of any jurisdiction other than the United States (other than elections that relate solely to methods of accounting, depreciation or amortization).

(c) Except as otherwise set forth on the Disclosure Schedule: Since their respective dates of incorporation, none of the Operating Companies has incurred any Taxes other than in the ordinary course of business, and each of the Operating Companies has made adequate provision on its respective books of account (in accordance with GAAP) for all actual and contingent Taxes with respect to its business, properties and operations for such period; each of the Operating Companies has withheld or collected from each payment made to each of its employees and other parties against which it was required to withhold or collect Taxes, the amount of all Taxes required to be withheld or collected therefrom, and has paid the same to the proper Government Body; and no claim has ever been made by a Government Body in a jurisdiction in which any of the Operating Companies files Returns that any of the Operating Companies is required to file a Return in that jurisdiction. None of the Operating Companies has ever engaged in a trade or business in the United States, as such terms are used for United States federal income tax purposes.

 

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(d) No Member of the Company Group (i) is a party to an agreement that provides for the payment of any amount that would constitute an “excess parachute payment” within the meaning of section 280G of the Code, (ii) has agreed to make, or is required to make, any adjustment pursuant to section 481(a) of the Code by reason of a change in accounting method initiated by the taxpayer or has knowledge that the Internal Revenue Service or any other taxing authority has proposed any such adjustment or change in accounting method, (iii) has any obligation under any tax sharing, tax indemnity or similar agreement, or (iv) has participated in any international boycott within the meaning of section 999 of the Code.

Section 4.24 Insurance

Except as set forth in Section 4.24 of the Disclosure Schedule: (a) all policies of insurance to which any of the Operating Companies is a party or that provide coverage to any of the Operating Companies are valid, outstanding and enforceable; are issued by an insurer that is financially sound and reputable; taken together, provide adequate insurance coverage for the assets and the operations of the Operating Companies for all risks normally insured against by a Person carrying on the same business as the Operating Companies and similar situated; and are sufficient for compliance with all Laws and the Company Contracts; (b) none of the Operating Companies has received any written refusal of coverage or any written notice that a defense will be afforded with reservation of rights or any written notice of cancellation or any other indication in writing that any policy of insurance is no longer in full force or effect or that the issuer of any policy of insurance is not willing or able to perform its obligations thereunder; (c) each of the Operating Companies has paid all premiums due, and has otherwise performed all of its obligations, under each policy of insurance to which it is a party or that provides coverage to any of the Operating Companies; and (d) each of the Operating Companies has given notice to the insurer of all claims that may be insured thereby.

Section 4.25 Books and Records

The books of account and other financial records of the Operating Companies since December 31, 2004, all of which have been made available to the Purchasers, are complete and correct, represent actual, bona fide transactions, and have been maintained in accordance with sound business practices and in material compliance with applicable legal and accounting requirements. The minute books of all Members of the Company Group, all of which have been made available to the Purchasers, contain accurate and complete records of all meetings held of, and corporate action taken by, their shareholders, their board of directors and committees of the board of directors, and no meeting of any such shareholders, board of directors or committee has been held for which minutes have not been prepared or are not contained in such minute books.

Section 4.26 Brokers

Other than the fees payable to Burnham Securities, Inc. as described on Section 4.26 of the Disclosure Schedule, which shall be paid by the Company on the Closing Date, no Member of the Company Group has incurred any liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or similar payments in connection with the Transactions

 

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Section 4.27 OFAC Compliance

(a) No Member of the Company Group, or to the knowledge of the Company, Jiantou is an OFAC Sanctioned Person. Each Member of the Company Group, and to the knowledge of the Company, Jiantou, and each of their respective Affiliates are in compliance with, and have not previously violated, the USA Patriot Act of 2001, as amended, and all other applicable U.S., Cayman Islands, and PRC anti-money laundering laws and regulations. None of (i) the purchase and sale of the Purchased Securities, (ii) the use of the Purchase Price, (iii) the execution, delivery and performance of this Agreement, or any of the Related Documents, or (iv) the consummation of the Transactions, or the fulfillment of the terms hereof or thereof, will result in a violation by anyone, including without limitation the Purchasers, of any of the OFAC Sanctions or of any anti-money laundering laws of the United States, Cayman Islands, or the PRC.

(b) For the purposes of Section 4.27(a):

(i) “OFAC Sanctions” means any sanctions program administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”) under authority delegated to the Secretary of the Treasury by the President of the United States or provided to the Secretary by statute, and any order or license issued by, or under authority delegated by, the President or provided to the Secretary by statute in connection with a sanctions program thus administered by OFAC. For ease of reference, and not by way of limitation, OFAC Sanctions programs are described on OFAC’s website at www.treas.gov/ofac.

(ii) “OFAC Sanctioned Person” means any government, country, corporation or other entity, group or individual with whom or which the OFAC Sanctions prohibit a U.S. Person from engaging in transactions, and includes without limitation any individual or corporation or other entity that appears on the current OFAC list of Specially Designated Nationals and Blocked Persons (the “SDN List”). For ease of reference, and not by way of limitation, OFAC Sanctioned Persons other than governments and countries can be found on the SDN List on OFAC’s website at www.treas.gov/offices/enforcement/ofac/sdn.

(iii) “U.S. Person” means any U.S. citizen, permanent resident alien, entity organized under the laws of the United States (including foreign branches), or any person (individual or entity) in the United States, and, with respect to the Cuban Assets Control Regulations, also includes any corporation or other entity that is owned or controlled by one of the foregoing, without regard to where it is organized or doing business.

Section 4.28 No U.S. Shareholder

No person that owns or that, upon application of the attribution and constructive ownership rules set forth in section 958 of the Code and the Treasury Regulations thereunder, is treated as constructively owning, any interest in any Member of the Company Group is, or is deemed to be, a United States Shareholder, as such term is defined in section 951(b) of the Code and the Treasury Regulations thereunder (a “U.S. Shareholder”), with respect to either the Company, the WFOE or any of the Operating Companies.

 

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Section 4.29 Solvency

Immediately prior to, and immediately subsequent to, the consummation of the sale of the Purchased Securities pursuant to this Agreement, each of the Company Group will be solvent. For purposes of this Agreement, “solvent” shall mean, with respect to any Person, (i) the fair value of the property of such Person is greater than the total amount of liabilities (including contingent liabilities) of such Person, (ii) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such person on its debts as they become absolute and matured, (iii) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person’s property would constitute an unreasonably small capital, and (iv) such Person has the ability to pay its debts as they become due, and does not intend to, or believe or reasonably should have believed that it will, incur debts beyond its ability to repay as they become due.

Section 4.30 Land Use Rights

The Operating Companies have fully paid the land use rights grant premium and/or transfer fees as required by the Contracts and have obtained legal land use rights thereunder to develop the Projects. The Company Group has good title, free and clear of Liens (other than Permitted Liens), to the land use rights for the ongoing Projects and the constructions thereon.

Section 4.31 Pre-Completion Sale

No Operating Company has engaged in any business of illegal or improper pre-completion sale of the premises included in the Projects since June 1, 2006.

Section 4.32 Henan Acquisition

The acquisition by the WFOE of one hundred percent (100%) of the issued and outstanding capital stock of Henan Xinyuan from the Management Shareholders (the “Henan Acquisition”) has been, except for consideration of $2,500,000 payable pursuant to the Henan Acquisition and approval by the PRC State Administration of Industry and Commerce, duly completed pursuant to the terms of the acquisition agreements attached hereto as Exhibit G (collectively, the “Henan Acquisition Agreement”), without any waiver or modification of any of the terms thereof, and all of the necessary permits and licenses in respect of the Henan Acquisition have been obtained under applicable Law. The Henan Acquisition Agreement is valid and enforceable under applicable Law, and will be fully performed when such consideration is paid.

Section 4.33 WFOE Positioning

The WFOE’s current business scope includes, among other things, the development of residential real estate, as reflected in the WFOE’s Governing Documents.

 

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Section 4.34 U.S. Foreign Corrupt Practices Act

None of the Company Group, or to the knowledge of the Company, Jiantou, nor any their respective Affiliates, directors, officers, agents or employees is currently making, directly or indirectly, any payment or promise to pay, or gift or promise to give or authorized such a promise or gift, of any money or anything of value, directly or indirectly, nor will the Purchase Price be given, directly or indirectly, to (a) any foreign official (as such term is defined in the U.S. Foreign Corrupt Practices Act (the “FCPA”)) for the purpose of influencing any official act or decision of such official or inducing him or her to use his or her influence to affect any act or decision of a governmental authority or (b) any foreign political party or official thereof, candidate for foreign political office, or official of a state-controlled entity or public international organization, for the purpose of influencing any official act or decision of such party, official or candidate or inducing such party, official or candidate to use his, her or its influence to affect any act or decision of a foreign governmental authority, in the case of both (a) and (b) above in order to assist the Company Group, or to the knowledge of the Company, Jiantou, or any of their respective Affiliates to obtain or retain business for, or direct business to the Company any of its Subsidiaries, or to the knowledge of the Company, Jiantou, or any their respective Affiliates, as applicable. None of the Company Group, or to the knowledge of the Company, Jiantou, nor any their respective Affiliates is currently making any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of funds or received or retained any funds in violation of any law, rule or regulation.

Section 4.35 Disclosure

(a) No statement made by or on behalf of any Member of the Company Group in (i) this Agreement, (ii) any certificates delivered pursuant to this Agreement, (iii) the Offering Memorandum delivered to the Purchasers in connection with the Transactions, or (iv) any financial information delivered or made available to the Purchasers in the course of their due diligence investigation of the Company Group contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.

(b) None of the Members of the Company Group is aware of any facts pertaining to any Member of the Company Group or its Affiliates, or the Business or their respective assets, which could adversely affect any Member of the Company Group or its Affiliates, or the Business or their respective assets, and which have not been disclosed in this Agreement (including the Disclosure Schedule), or otherwise disclosed to the Purchasers by the Company in writing.

Section 4.36 Jiantou

(a) Henan Xinyuan owns forty-five percent (45%) of the total outstanding equity capital of Jiantou. None of the Management Shareholders or Members of the Company Group has the power or authority to direct the management of Jiantou.

 

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ARTICLE 5

REPRESENTATIONS AND WARRANTIES OF PURCHASER

Each Purchaser, severally and not jointly, hereby represents and warrants, as to itself but not as to any other Purchaser, to the Company as follows

Section 5.1 Organization and Good Standing

Such Purchaser is a company, corporation or an exempted limited partnership, as applicable, duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization.

Section 5.2 Power and Authority

Such Purchaser has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and the Related Documents to which it is a party.

Section 5.3 Authorization, Execution and Enforceability

(a) The execution, delivery and performance by such Purchaser of this Agreement and the Related Documents to which it is a party have been duly authorized by all necessary corporate or limited partnership action, as applicable, on the part of such Purchaser. This Agreement and the Related Documents to which such Purchaser is a party are legal, valid and binding obligations of such Purchaser, enforceable against such Purchaser in accordance with their respective terms.

(b) Except as set forth on Section 5.3 of the Disclosure Schedule, no consent of, notice to, or filing with any Governmental Body or any other Person, including any creditor or shareholder of the Company, is required to be made or obtained in connection with the execution, delivery and performance by such Purchaser of this Agreement or the Related Documents to which it is a party, or the Transactions, or as a condition to the legality, validity or enforceability of this Agreement or the Related Documents to which it is a party, or the offer, issuance, sale or delivery of the Purchased Securities.

Section 5.4 Investment Representations

(a) Such Purchaser is acquiring the Purchased Securities, including the Conversion Shares and the Warrant Shares, as applicable, for its own account not as a nominee or agent, and not with a view to the distribution of any part thereof, and such Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. Such Purchaser does not have any contract, undertaking, agreement or arrangement with any Person to sell, transfer or grant participations to such Person or to other Person, with respect to any of the Purchased Securities. Such Purchaser understands that such Purchased Securities must be held indefinitely unless they are registered under the Securities Act or an exemption from such registration is available, and that such Purchased Securities may be transferred only in accordance with the Shareholders Agreement.

 

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(b) Such Purchaser understands that the purchase of the Purchased Securities involves substantial risk and that its financial condition and investments are such that it is in a financial position to hold the Purchased Securities for an indefinite period of time and to bear the economic risk of, and withstand a complete loss of its investment in, the Purchased Securities. In addition, by virtue of its expertise, the advice available to it and previous investment experience, such Purchaser has extensive knowledge and experience in financial and business matters, investments, securities and private placements and the capability to evaluate the merits and risks of the transactions contemplated by this Agreement. Such Purchaser represents that it is an “accredited investor” as that term is defined in Regulation D promulgated under the Securities Act.

(c) If such Purchaser is not a “United States Person” (as defined in Section 7701(a)(30) of the Code and is not acquiring the securities for the account or benefit of any United States Person, within the meaning of Regulation S under the Securities Act, such Purchaser (i) agrees not to resell the Purchased Securities except in accordance with the provisions of Regulation S under the Securities Act, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration, and agrees not to engage in hedging transactions with regard to such securities unless in compliance with the Securities Act, (ii) agrees that any certificates representing the Purchased Securities issued to the Purchaser shall contain a legend to the effect that transfer is prohibited except in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act or pursuant to an available exemption from registration and that hedging transactions with regard to such securities may not be conducted unless in compliance with the Securities Act, (iii) agrees that the Company is hereby required to refuse to register any transfer of any securities issued to the Purchaser not made in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration, (iv) represents that it has satisfied itself as to the full observance of the laws of the jurisdiction of its organization in connection with any invitation to subscribe for the Purchased Securities, including (w) the legal requirements of the jurisdiction of its organization for the purchase of Purchased Securities, (x) any foreign exchange restrictions applicable to such purchase, (y) any governmental or other consents that may need to be obtained, and (z) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Purchased Securities, and (iii) represents that its subscription and payment for and continued beneficial ownership of the Purchased Securities will not violate any applicable securities or other laws of the jurisdiction of its organization.

(d) In addition to any legend described above, such Purchaser understands that the certificates evidencing the Purchased Securities may bear a legend as set forth in the Shareholders Agreement.

(e) Such Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Purchased Securities and the business, management, properties, prospects and financial condition of the Company.

(f) Such Purchaser understands that the Purchased Securities it is purchasing are characterized as “restricted securities” under the Securities Act laws because they are being acquired from the Company in a transaction not involving a public offering and that under such

 

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laws and applicable regulations such securities may be resold absent registration under the Securities Act only in certain limited circumstances. Such Purchaser further understands that no public market now exists for any of the securities issued by the Company and the Company has given no assurances that a public market will ever exist for the Company’s securities.

Section 5.5 No Conflicts

To the knowledge of such Purchaser, the execution and delivery of this Agreement and the Related Documents, and the consummation of the Transactions, will not, directly or indirectly (with or without notice or lapse of time): (a) breach any provision of any of its memorandum and articles of association or other organizational documents, as amended; (b) breach in any material respect any Law or Order to which such Purchaser and its respective assets may be subject; or (c) result in a violation or breach of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any material Governmental Authorization that is held by such Purchaser.

Section 5.6 Exculpation Among Purchasers

Such Purchaser acknowledges that it is not relying upon any Person, other than the Company and its officers and directors and the Management Shareholders, in making its investment or decision to invest in the Company. Such Purchaser agrees that no Purchaser nor any of its Affiliates or any controlling persons, members, officers, directors, partners, agents or employees of any Purchaser or its Affiliates shall be liable to any other Purchaser for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Purchased Securities.

ARTICLE 6

COVENANTS OF THE COMPANY AND THE MANAGEMENT SHAREHOLDERS

Section 6.1 Access and Investigation

Between the date of this Agreement and the Closing Date, upon reasonable advance notice, each Member of the Company Group shall (a) afford the Purchasers full and free access, during regular business hours, to its personnel, properties, Contracts, Governmental Authorizations, books and records and other documents and data, such rights of access to be exercised in a manner that does not unreasonably interfere with its operations; (b) furnish the Purchasers with copies of all such Contracts, Governmental Authorizations, books and records and other documents and data as any Purchaser may reasonably request; (c) furnish the Purchasers with such additional financial, operating and other relevant data and information as any Purchaser may reasonably request; and (d) otherwise cooperate and assist, to the extent reasonably requested by any Purchaser, with the Purchasers’ investigation of the properties, assets and financial condition of the Company Group. In addition, the Purchasers shall have the right to inspect the real property and tangible personal property of the Company Group, at the Purchasers’ sole cost and expense, for purposes of determining the physical condition and legal characteristics thereof.

 

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Section 6.2 Operation of Business

Between the date of this Agreement and the Closing Date, the Company shall, and shall cause the WFOE to, and the Management Shareholders shall cause each Operating Company to:

(a) conduct its business only in the ordinary course of business as currently conducted and as proposed to be conducted;

(b) operate in accordance with the 2006 Budget;

(c) use commercially reasonable efforts to preserve intact its current business organization, keep available the services of its officers, employees and agents, and maintain its relations and good will with suppliers, customers, landlords, creditors, employees, agents and others having business relationships with it;

(d) confer with the Purchasers prior to implementing operational decisions of a material nature;

(e) report periodically to the Purchasers concerning the status of its business, operations and finances;

(f) make no material changes in management personnel without prior consultation with the Purchasers;

(g) maintain its assets and properties in a state of repair and condition that complies with applicable Laws and is consistent with the requirements and normal conduct of its business;

(h) keep in full force and effect, without amendment or modification, all material rights relating to its business;

(i) comply with all Contracts, and the terms of all applicable Governmental Authorizations, Laws and Orders;

(j) pay and discharge promptly as they become due and payable all Taxes, assessments and other governmental charges or levies imposed upon it or its income or upon any of its property or assets, as well as all lawful claims of any kind which, if unpaid, might by Law become a Lien upon its property (other than Permitted Liens);

(k) continue in full force and effect the insurance coverage under its existing policies or substantially equivalent policies;

(l) except as required to comply with, not amend, modify or terminate any Plan without the express written consent of the Purchasers, and except as required under the provisions of any Plan, not make any contributions to or with respect to any Plan without the express written consent of the Purchasers; provided, it shall contribute that amount of cash to each Plan necessary to fully fund all of the benefit liabilities of such Plan on a plan-termination basis as of the Closing Date;

 

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(m) execute and deliver all documents and do all other acts that may be reasonably necessary or desirable to consummate the Transactions; and

(n) maintain all books and records in the ordinary course of business consistent with past practice.

Section 6.3 Negative Covenants

Except as otherwise expressly permitted or required hereby or by the Related Documents, between the date of this Agreement and the Closing Date, without the prior written consent of each of the Purchasers, the Company shall not, and shall cause the WFOE and the Operating Companies not to, conduct its business other than in the ordinary course consistent with past practice and, without limiting the generality of the foregoing, shall not:

(a) enter into any merger, consolidation or other business combination with, or acquire all or a substantial portion of the assets or stock of, any Person, or liquidate, dissolve, recapitalize or reorganize;

(b) sell, lease or otherwise dispose of any of its properties or assets, except in accordance with the 2006 Budget;

(c) purchase, lease or otherwise acquire any properties or assets, except in accordance with the 2006 Budget;

(d) engage in any business other than the business engaged in or proposed to be engaged in on the date hereof;

(e) create or suffer to exist any Lien upon or against any of its property or assets now owned or hereafter acquired, except Permitted Liens;

(f) make loans to any Person;

(g) create or incur any Indebtedness, or assume, guarantee or otherwise become liable for the Indebtedness of any other Person, except for the endorsement of checks and purchase money obligations incurred in the ordinary course of business;

(h) directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property to, or make any payment to, enter into any Contract or transaction with, or otherwise deal with, any Related Person, except for (i) compensation, customary indemnification and benefits of employees, officers and directors and (ii) with notice to the Purchasers, transactions in the ordinary course of business, in any case on an arm’s length basis on terms no less favorable than terms which would have been obtainable from a Person other than a Related Person;

(i) take or fail to take any action, as a result of which any of the changes or events listed in Section 4.11 or Section 4.12 could reasonably be expected to occur, or any of the other representations or covenants of the Company contained herein could reasonably be expected to be or become untrue or unfulfilled in any material respect;

 

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(j) amend, modify or terminate or any material Contract or Governmental Authorization, or amend, modify or restate any of the Governing Documents;

(k) increase the salary, bonus or other compensation payable to any of its directors, officers, employees or agents;

(l) authorize or issue any shares, or securities convertible into or exchangeable for, or other rights to acquire, any share or other securities;

(m) enter into any Contract with any holder or prospective holder of any securities providing for the granting to such holder of registration rights, preemptive rights, redemption rights, put rights, co-sale rights, special voting rights or protection against dilution;

(n) declare or make any dividends or distributions in respect of, or redeem, repurchase or otherwise acquire any, shares or other securities;

(o) make any capital expenditures not reflected in the 2006 Budget in excess of RMB 500,000 in the aggregate;

(p) change its fiscal year, modify in any material respect its tax reporting or accounting treatment practices, make any tax election, or replace its firm of independent auditors; or

(q) commit to do any of the foregoing.

Section 6.4 Required Consents

As promptly as practicable after the date of this Agreement, each Member of the Company Group shall make all filings required by Law to be made by it in order to consummate the Transactions, and shall cooperate with the Purchasers with respect to all filings that any Purchaser elects to make or shall be required by Law to make in connection with the Transactions and in obtaining all Required Consents.

Section 6.5 Notification

Between the date of this Agreement and the Closing Date, the Company shall promptly notify the Purchasers in writing if the Company becomes aware of (a) any fact or condition that makes any Member of the Company Group’s representations and warranties untrue as of the date of this Agreement, (b) the occurrence after the date of this Agreement of any fact or condition that would make any Member of the Company Group’s representations and warranties untrue had such representation or warranty been made as of the date of the occurrence of such fact or condition, (c) any breach of any Member of the Company Group’s covenants in this Agreement, or (d) any fact or condition that could reasonably be expected to make the satisfaction of the conditions in Article 8 unlikely or impossible. Should any such fact or condition require any change to the Disclosure Schedule, the Company shall promptly deliver to the Purchasers a supplement to the Disclosure Schedule specifying such change; provided, that such delivery shall not affect any rights of the Purchasers hereunder.

 

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Section 6.6 No Negotiation

Between the date of this Agreement and the Closing Date, the Management Shareholders and their Affiliates shall deal exclusively with the Purchasers in connection with any investment in any Member of the Company Group and shall not, and shall cause their respective Affiliates (including the WFOE and the Operating Companies) and any Person acting on behalf of the Management Shareholders or any of their Affiliates not to, directly or indirectly solicit, initiate, encourage or entertain any inquiries or proposals from, discuss or negotiate with, provide any non-public information to or consider the merits of any inquiries or proposals from any Person (other than the Purchasers) relating to the Transactions or any business combination transaction involving the WFOE or the Operating Companies, including the sale of equity (including in trust), the merger or consolidation of the WFOE and/or any Operating Company, or the sale of all or any material portion of the WFOE’s and/or any Operating Company’s business or assets, or any comparable transaction or other transaction that would be inconsistent with the Transactions. The Management Shareholders shall notify the Purchasers of any such inquiry or proposal promptly upon receipt or awareness of the same by the Management Shareholders, their respective Affiliates, or any Person acting on any of their behalf.

Section 6.7 Reasonable Best Efforts

Each Member of the Company Group shall use its reasonable best efforts to cause the conditions in Article 8 to be satisfied.

Section 6.8 2007 Budget

(a) Until the Closing, the Company shall deliver to the Purchasers as soon as practicable, but in any event within thirty (30) days after the end of each calendar month, an unaudited income statement, unaudited statement of cash flows for such month and an unaudited balance sheet, in each case for the Operating Companies on a consolidated and unconsolidated basis as of the end of such month, which shall be consistent with the Operating Companies’ past practices and in accordance with the accounting records of the Operating Companies, and shall fairly present in all material respects the financial condition and the results of operations, changes in shareholders’ equity and cash flows of the Operating Companies as at the respective dates of and for the periods referred to in such financial statements, all in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, except for recurring year-end audit adjustments and accruals which are not material and absence of the notes required by GAAP.

(b) The financial statements referred to in Section 6.8(a) shall be certified by the Company’s chief financial officer as to compliance with Section 6.8(a).

(c) Prior to the Closing, the Company shall deliver to the Purchasers the budget for fiscal year 2007, which shall be in a form and substance satisfactory to the Purchasers (the “2007 Budget”). The 2007 Budget shall be certified by the Company’s chief financial officer, which certificate shall state that the 2007 Budget have been prepared in good faith by the Company, that any projections included in the 2007 Budget have been be prepared in good faith and that the Company reasonably believes there is a reasonable basis for such projections.

 

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Section 6.9 Tax Matters

For so long as Blue Ridge China or EI holds at least 25% of the number of Series A Preferred Shares (or Common Shares issuable upon conversion of such Series A Preferred Shares) held by it on the date hereof:

(a) the Company shall, and shall cause the WFOE and the Operating Companies and any other Subsidiaries to, promptly and timely make any tax elections pursuant to the Code or any other applicable Law as may be required by the Purchasers in their sole discretion;

(b) prior to a Qualified Public Offering, the Company shall not, without the written consent of the Purchaser, issue or transfer shares (or rights to acquire shares) in the Company, and shall use its reasonable best efforts (and the Management Shareholders shall use their reasonable best efforts) to not permit issuances or transfers of shares or ownership interests (or rights to acquire ownership interests) in any Person who directly or indirectly owns shares in the Company, to any Person if following such issuance or transfer the Company, in the determination of counsel or accountants for the Purchaser, would be a “Controlled Foreign Corporation” (a “CFC”) as defined in the Code with respect to the shares held by any Purchaser. No later than two (2) months following the end of each Company taxable year, the Company shall provide the following information to the Purchasers: (i) the Company’s capitalization table as of the end of the last day of such taxable year and (ii) a report regarding the Company’s status as a CFC. In addition, the Company shall provide the Purchasers with access to such other Company information as may be reasonably required by such Purchasers to determine the Company’s status as a CFC, to determine whether each such Purchaser is required to report its pro rata portion of the Company’s “Subpart F income” (as defined in the Code) on its United States federal income tax return, or to allow such Purchasers to otherwise comply with applicable United States federal income tax laws. In the event that the Company is determined by counsel or accountants for the Purchasers to be a CFC as defined in the Code (or any successor thereto) with respect to the shares held by any Purchaser, the Company agrees to use commercially reasonable efforts to avoid generating for any taxable year in which the Company is a CFC, “subpart F income,” as such term is defined in Section 952 of the Code;

(c) the Company shall use its reasonable best efforts to avoid being a “passive foreign investment company” (“PFIC”) within the meaning of Section 1297 of the Code (or any successor thereto). In furtherance of the foregoing, the Company shall (no less frequently than as of the end of each calendar year and at such other times as it determines in good faith to be appropriate), in consultation with its professional advisors, take such reasonable steps as necessary to determine whether the Company could reasonably be expected to be classified as a PFIC or whether there is a material risk that it could be classified as a PFIC. The Company will promptly inform the Purchasers at any time that it determines that it could reasonably be expected to be so classified or there is a material risk thereof, and it will cooperate with the Purchasers in taking such actions as required by the first sentence of this paragraph (c) to avoid being a PFIC. In connection with a “Qualified Electing Fund” election made by any Purchaser pursuant to Section 1295 of the Code (or any successor thereto), the Company shall provide annual financial information to the Purchasers in a PFIC Annual Information Statement in such reasonable form as provided by the Purchasers and shall provide the Purchasers with access to such other Company information as may be required for purposes of filing United States federal income tax returns in connection with such Qualified Electing Fund election;

 

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(d) The representations, warranties and covenants in the forgoing paragraphs (b) and (c) shall be applicable with respect to each Subsidiary of the Company that would be classified as a corporation for U.S. Federal income tax purposes, and the Company shall cause such Subsidiary to comply with the foregoing as if such Subsidiary (and not just the Company) were named in such paragraphs. The Company shall also obtain representations, warranties and covenants from each entity in which it invests or has invested substantially to the effect of the representations, warranties and covenants contained in the foregoing paragraphs and such additional representations, warranties and covenants as shall be necessary to allow the Company to comply with the provisions of the foregoing provisions of this Section 6.9; and

(e) except to the extent that the Purchasers elect otherwise, and only if requested by the Purchasers, the Company shall take such reasonable actions, including making an election to be treated as a corporation or refraining from making an election to be treated as a partnership, as may be required to ensure that at all times the Company is treated as a corporation for United States federal income tax purposes;

provided that, all third-party reasonable fees and expenses in excess of $20,000 per year associated with the Company complying with this Section 6.9 shall be borne by the Purchasers.

Section 6.10 Corporate Governance

Prior to the Closing Date, the Company shall amend the WFOE’s Governing Documents and shall cause the WFOE to amend Henan Xinyuan’s Governing Documents, in order to reflect corporate governance systems satisfactory to the Purchasers.

Section 6.11 Foreign Exchange Settlement and Repatriation

Following the Closing Date and during the WFOE’s operational term, with such term to be approved by the Purchasers, the Company and Management Shareholder shall cause the WFOE’s capital to be freely and timely converted from foreign exchange into RMB according to the business needs approved by the Purchasers and all of the WFOE’s profits to be freely and timely repatriated to the Company.

Section 6.12 Corporate Restructuring

(a) Immediately following the Closing, Zhang Yong shall deposit $1,250,000 of the proceeds received from the Henan Acquisition into an escrow account in the name of Henan Xinyuan maintained by a banking institution specified by the Purchasers prior to the Closing Date. The terms of such escrow shall provide that the funds maintained therein shall be released only with the prior written consent of the Purchasers.

(b) Within a reasonable time after the Closing Date, but in no event later than October 31, 2006, Henan Xinyuan and Zhang Yong shall form a joint venture (the “Joint Venture”) on terms and conditions which shall be satisfactory to the Purchasers in their sole

 

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discretion, including, without limitation, (i) the contribution by Zhang Yong of $1,250,000 to the Joint Venture, (ii) the ownership of the equity of the Joint Venture in the following proportions: (X) Henan Xinyuan shall own ninety-nine percent (99%), and (Y) Zhang Yong shall own one percent (1%), and (iii) the subsequent contribution by Zhang Yong of such one percent (1%) interest to Henan Xinyuan for nominal consideration.

(c) Promptly after the Closing Date, the Management Shareholders and the Purchasers agree to enter into good faith discussions regarding the sale of all, but not less than all, of the Management Shareholders’ interests in Xinyuan Property Management Co., Ltd., Mingyuan Landscape Co., Ltd., Xinyuan Agency and Computer Network Co., Ltd. to Henan Xinyuan (collectively, the “Ancillary Businesses”) for the fair market value price of such companies and on terms and conditions acceptable to the Purchasers, the Management Shareholders and Henan Xinyuan, acting reasonably. Until the earlier of (i) one year after the Closing Date, and (ii) the date, if any, on which the discussions referred to in this Section 6.12(c) are terminated in good faith by the parties thereto, the Management Shareholders shall not (i) sell, assign, transfer, pledge, or otherwise dispose of or encumber, (ii) sell all or substantially all of the assets of, or (iii) liquidate, dissolve or wind up, any of the Ancillary Businesses, or agree to do any of the foregoing.

(d) As soon as practicable after the Closing Date, but in no event later than January 31, 2007, the Company shall cause Henan Xinyuan to transfer to the Management Shareholders all of the issued and outstanding capital stock of Beijing Cornwill Investment & Consultancy Co., Ltd., pursuant to applicable Law and pursuant to documentation satisfactory in form and substance to the Purchasers, provided that such transfer shall not result in any liability to the Company Group.

Section 6.13 Accounting Controls

Within a reasonable time after the Closing Date, but in no event later than January 1, 2007, the Company, the WFOE and each of the Operating Companies shall implement and maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Section 6.14 Equity Incentive Plan

Within a reasonable time after the Closing Date, but in no event later than October 31, 2006, the Company shall implement an equity incentive plan consisting of a stock option agreement and a stock bonus agreement for the benefit of certain employees, directors and advisors, pursuant to which the Company may issue a maximum of 6,802,495 Common Shares, which amount shall not exceed ten percent (10%) of the issued and outstanding capital stock of the Company (calculated on a fully-diluted basis), on such terms and conditions as shall be reasonably acceptable to the Purchasers (the “Equity Incentive Plan”).

 

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Section 6.15 Real Estate Projects

Promptly after the Closing Date, the Company shall cause the WFOE to duly obtain all permits and licenses necessary for the development of the Projects and to maintain the aforementioned permits and licenses during the WFOE’s operational term, which term shall be approved by the Purchasers.

Section 6.16 Agreements with Senior Management

Promptly after the Closing Date, the Company shall cause the WFOE and the Operating Companies to enter into Confidentiality, Non-Competition and Non-Solicitation Agreements with their respective Senior Management Personnel, to the extent they have not already been entered into prior to the Closing Date pursuant item 6 set forth on Schedule I.

ARTICLE 7

COVENANTS OF THE PURCHASERS

Section 7.1 Required Consents

As promptly as practicable after the date of this Agreement, each Purchaser shall make all filings required by Law to be made by it to consummate the Transactions. Each Purchaser shall cooperate with the Company with respect to all filings the Company shall be required by Law to make and in obtaining all Required Consents; provided, that no Purchaser shall be required to dispose of any of its assets or properties, or make any change to its business, or expend any material funds in order to comply with this Section 7.1.

Section 7.2 Notification

Between the date of this Agreement and the Closing Date, each Purchaser shall promptly notify the Company in writing if such Purchaser becomes aware of (a) any fact or condition that makes any of its representations and warranties untrue as of the date of this Agreement, (b) the occurrence after the date of this Agreement of any fact or condition that would make any of its representations and warranties untrue had such representation or warranty been made as of the date of the occurrence of such fact or condition, (c) any breach of any of its covenants in this Agreement, or (d) any fact or condition that could reasonably be expected to make the satisfaction of the conditions in Article 9 unlikely or impossible.

ARTICLE 8

CONDITIONS TO PURCHASERS’ CLOSING OBLIGATIONS

The obligations of the Purchasers to consummate the Transactions to be effected at the Closing are subject to the fulfillment or waiver on or before the Closing Date of each of the conditions set forth in this Article 8.

Section 8.1 Accuracy of Representations

All representations and warranties of each Member of the Company Group in this Agreement shall have been accurate in all material respects as of the date of this Agreement, and

 

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shall be accurate in all material respects as of the time of the Closing Date as if made on and as of such date, without giving effect to any supplement to the Disclosure Schedule; provided, that each of the representations and warranties in this Agreement that contains an express materiality qualification shall have been accurate in all respects as of the date of this Agreement, and shall be accurate in all respects as of the time of the Closing Date as if made on and as of such date, without giving effect to any supplement to the Disclosure Schedule.

Section 8.2 Performance of Covenants

All of the covenants and obligations that any Member of the Company Group is required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been duly performed and complied with in all material respects.

Section 8.3 Required Consents

Each of the Required Consents, including with respect to the Operating Companies, shall have been obtained in a form and substance reasonably acceptable to the Purchasers and shall be in full force and effect, and the Company shall have delivered copies thereof to the Purchasers. None of such Required Consents shall be subject to conditions that are unacceptable to the Purchasers in their reasonable judgment.

Section 8.4 No Adverse Proceedings

There shall not be existing or threatened against any Purchaser or any Member of the Company Group by any Governmental Body any action, claim, suit or other proceeding involving any challenge to, or seeking damages or other relief in connection with, any of the Transactions, or that may have the effect of preventing, delaying, making illegal, imposing limitations or conditions on or otherwise interfering with the Transactions.

Section 8.5 Changes in Law

After the date hereof, no Law or interpretation thereof shall have been enacted or made, nor shall any Order have been issued, by or on behalf of any Governmental Body, which, in the Purchasers’ reasonable judgment, would materially and adversely affect foreign investments in the PRC (including any Law, interpretation or Order limiting the ownership or control of domestic business ventures by foreign Persons, or the ability of foreign Persons to repatriate funds held by domestic business ventures) or would otherwise materially and adversely affect the Purchased Securities or the benefits expected to be derived by the Purchasers from the purchase of the Purchased Securities or by the Company from the sale of the Purchased Securities.

Section 8.6 Repayment of Loan

The aggregate principal amount outstanding under that certain loan agreement, dated as of December 1, 2005, by and between the Henan Xinyuan and Jiantou, shall have been paid to Henan Xinyuan in full and in cash in satisfaction of all of Jiantou’s obligations thereunder.

 

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Section 8.7 Certain Documents

As of the Closing Date, each of the following documents shall have been duly executed and delivered by the parties thereto (other than the Purchasers), each in substance and form satisfactory to the Purchasers, and each such document shall be in full force and effect and filed, as required or appropriate, with applicable Governmental Authorities, and no term or condition thereof shall have been supplemented, amended, modified or waived without the Purchasers’ prior written consent, and any transactions contemplated thereby shall have been consummated (or will be consummated concurrently with the Closing) in accordance with the terms and conditions thereof:

(a) the Related Documents, except for item 5 set forth on Schedule I;

(b) the Governing Documents of the WFOE and Henan Xinyuan;

(c) the Henan Acquisition Agreement; and

(d) any other Contract or document reasonably requested by the Purchasers.

Section 8.8 Officer’s Certificate

The Company shall have delivered to each of the Purchasers a certificate of the President (or comparable officer) of the Company, dated the Closing Date, certifying as to the satisfaction of the conditions set forth in Section 8.1 through Section 8.7.

Section 8.9 No Conflict

Neither the consummation nor the performance of any of the Transactions will, directly or indirectly (with or without notice or lapse of time), contravene or conflict with or result in a violation of or cause any Purchaser to suffer any adverse consequence under any applicable Law or Order.

Section 8.10 Secretary’s Certificates

The Company shall have delivered to each of the Purchasers a certificate of the Secretary of the Company, dated the Closing Date, attaching (i) correct and complete copies of the Governing Documents then in effect, (ii) correct and complete copies of all resolutions of the Board of Directors of the Company relating to the Transactions, and a certificate of good standing of the Company issued by the applicable Governmental Body no earlier than one Business Day before the Closing Date.

Section 8.11 Opinions of Counsel

(a) On the Closing Date, each Purchaser shall have received from King & Wood, counsel to the Company and the Management Shareholders, an opinion addressed to the Purchasers, in the form attached hereto as Exhibit E, dated as of the Closing Date.

 

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(b) On the Closing Date, each Purchaser shall have received from Maples and Calder, counsel to the Company, an opinion addressed to the Purchasers, in the form attached hereto as Exhibit F, dated as of the Closing Date.

Section 8.12 Proceedings and Documents

As of the Closing Date, all corporate and other proceedings taken or to be taken in connection with the Transactions and all documents incidental thereto shall be reasonably satisfactory in form and substance to the Purchasers and their counsel, and the Purchasers and their counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.

Section 8.13 Burnham Warrants

The Burnham Warrants shall have been issued to Burnham Securities, Inc. and Joel B. Gardner.

Section 8.14 Board of Directors

Mr. Justin Tang and Mr. Christopher Fiegen (or such other persons designated by the Purchasers) shall have been elected to serve on the Company’s Board of Directors in accordance with the Shareholders Agreement, and each Purchaser shall have received a certificate by the Secretary of the Company, reasonably satisfactory to the Purchasers, certifying as to the foregoing and attaching copies of required resolutions, and other evidence of effecting the forgoing shall have been delivered to the Purchasers.

Section 8.15 Budgets

The Company shall have delivered to the Purchasers the 2007 Budget, which shall be in a form and substance satisfactory to the Purchasers in their sole discretion, and the Company shall have operated in compliance with the 2006 Budget prior to the Closing Date.

Section 8.16 Revised Financial Statements

The Company shall have delivered to the Purchasers revised financial statements, which shall reflect all of the adjustments reasonably requested by the Purchasers prior to the Closing Date, in form and substance reasonably satisfactory to the Purchasers.

ARTICLE 9

CONDITIONS TO THE COMPANY’S AND THE

MANAGEMENT SHAREHOLDERS’ CLOSING OBLIGATIONS

The obligations of the Company and the Management Shareholders to consummate the Transactions to be effected at the Closing are subject to the fulfillment or waiver on or before the Closing Date of each of the conditions set forth in this Article 9.

 

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Section 9.1 Accuracy of Representations

All of the Purchasers’ representations and warranties in this Agreement shall have been accurate in all material respects as of the date of this Agreement, and shall be accurate in all material respects as of the time of the Closing as if made on and as of such date; provided, that each of the representations and warranties in this Agreement that contains an express materiality qualification shall have been accurate in all respects as of the date of this Agreement, and shall be accurate in all respects as of the Closing Date as if made on and as of such date.

Section 9.2 Performance of Covenants

All of the covenants and obligations that the Purchasers are required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been duly performed and complied with in all material respects.

Section 9.3 Officer’s Certificate

Each of the Purchasers shall have delivered to the Company and the Management Shareholders a certificate of an appropriate officer or director thereof, dated the Closing Date, certifying as to the satisfaction of the conditions set forth in Section 9.1 and Section 9.2.

Section 9.4 Payment of Purchase Price

Each of the Purchasers shall have delivered such Purchaser’s portion of the Purchase Price to the Company.

Section 9.5 No Adverse Proceedings

Since the date of this Agreement, there shall not have been commenced or threatened against any Member of the Company Group by any Governmental Body any action, claim, suit or other proceeding involving any challenge to, or seeking damages or other relief in connection with, any of the Transactions, or that may have the effect of preventing, delaying, making illegal, imposing limitations or conditions on or otherwise interfering with the Transactions.

Section 9.6 No Conflict

Neither the consummation nor the performance of any of the Transactions will, directly or indirectly (with or without notice or lapse of time), contravene or conflict with or result in a violation of or cause the Company to suffer any adverse consequence under any applicable Law or Order.

Section 9.7 Proceedings and Documents

As of the Closing Date, all corporate and other proceedings taken or to be taken in connection with the Transactions and all documents incidental thereto shall be reasonably satisfactory in form and substance to the Company and its counsel, and the Company and its counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.

 

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Section 9.8 Related Documents

As of the Closing Date, each of the Related Documents to which a Purchaser is a party shall have been duly executed and delivered by such Purchaser and shall be in full force and effect.

Section 9.9 Closing by One Purchaser Only

If (a) any of the conditions set forth in this Article 9 with respect to a Purchaser are not satisfied or waived (such Purchaser, the “Non-Closing Purchaser”), (b) all of the conditions set forth in this Article 9 with respect to the other Purchaser are satisfied or waived (such Purchaser, the “Closing Purchaser”), and (c) all of the conditions set forth in Article 8 are satisfied or waived, then upon written notice by the Closing Purchaser to the Non-Closing Purchaser (with a copy to the Company), all of the Non-Closing Purchaser’s rights hereunder shall be deemed to have been assigned and all of the Non-Closing Purchaser’s obligations hereunder shall be deemed to have been delegated to the Closing Purchaser (including with respect to the purchase of the Purchased Securities and payment of the Purchase Price), and the Non-Closing Purchaser shall no longer be a Purchaser for purpose of this Agreement or a party to any Related Document.

ARTICLE 10

INDEMNIFICATION

Section 10.1 Indemnification

(a) The Company agrees to indemnify, defend and hold harmless the Purchasers and their respective Affiliates, and the partners, members, shareholders, managers, directors, employees and agents of each of the foregoing, from and against and in respect of any and all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, interest and penalties, diminution in value of securities, costs and expenses (including, without limitation, reasonable legal fees and disbursements incurred in connection therewith and in seeking indemnification therefor, and any amounts or expenses required to be paid or incurred in connection with any action, suit, proceeding, claim, appeal, demand, assessment or judgment) (collectively, “Losses”), resulting from, arising out of, or imposed upon or incurred by any Person to be indemnified hereunder by reason of (i) any breach of any representation, warranty, covenant or agreement of the Company or the Management Shareholders contained in this Agreement or any agreement, certificate or document executed and delivered by the Company or any other Member of the Company Group pursuant hereto or in connection with any of the Transactions or (ii) any matter set forth on Schedule II.

(b) The Management Shareholders agree to indemnify, defend and hold harmless the Purchasers and their respective Affiliates, and the partners, members, shareholders, managers, directors, employees and agents of each of the foregoing, from and against and in respect of any and all Losses resulting from, arising out of, or imposed upon or incurred by any Person to be indemnified hereunder by reason of any breach of any representation, warranty, covenant or agreement of the Company contained in this Agreement or any agreement, certificate or document executed and delivered by the Company or any other Member of the Company Group

 

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pursuant hereto or in connection with any of the Transactions; provided, that the Management Shareholders shall not be obligated to indemnify the Purchaser under this Section 10.1 for any matter set forth in Schedule II, including to the extent any such matters are duplicated in the representations, warranties, covenants or agreements of the Company or the Management Shareholders contained in this Agreement or any agreement, certificate or document executed and delivered by the Company or any other Member of the Company Group pursuant hereto or in connection with any of the Transactions.

(c) Notwithstanding anything herein to the contrary, the Management Shareholders shall not be obligated to indemnify the Purchasers under this Section 10.1 in excess of an aggregate amount of $1,250,000 (the “Management Shareholders’ Indemnification Cap”); provided, however, that the Management Shareholders’ Indemnification Cap shall not apply to any Management Shareholder indemnification obligations arising out of, relating to or resulting from fraud or intentional misrepresentation by the Management Shareholders.

(d) Notwithstanding anything herein to the contrary, the Company shall not be obligated to indemnify the Purchasers under this Section 10.1 in excess of an aggregate amount of $25,000,000 (the “Company’s Indemnification Cap”); provided, however, that the Company’s Indemnification Cap shall not apply to any Company indemnification obligations arising out of, relating to or resulting from fraud or intentional misrepresentation by the Company.

Section 10.2 Procedures

Whenever a claim shall arise for indemnification under this Article 10, with the exception of claims for litigation expenses to be funded on an ongoing basis, the Person entitled to indemnification (the “Indemnified Party”) shall promptly notify the party from whom indemnification is sought (the “Indemnifying Party”) of such claim and, when known, the facts constituting the basis for such claim. Failure of an Indemnified Party to give reasonably prompt notice of any claim shall not release, waive or otherwise affect an Indemnifying Party’s obligations with respect thereto except to the extent that the Indemnifying Party can demonstrate actual loss and prejudice as a result of such failure. In the event of any such claim for indemnification resulting from or in connection with a claim or legal proceeding by a third party, the Indemnifying Party may, at its sole cost and expense, elect by notice to the Indemnified Party to assume the defense; provided, however, that the Indemnifying Party makes such election within 15 days after delivery of notice of claim from the Indemnified Party and agrees in writing to pay the full amount of such indemnification to the Indemnified Party. If an Indemnifying Party assumes the defense of any such claim or legal proceeding, the Indemnifying Party shall be entitled to select counsel satisfactory to the Indemnified Party and take all steps necessary in the settlement or defense thereof; provided, that no settlement shall be made without the prior written consent of the Indemnified Party unless the settlement involves only payment of money damages by the Indemnifying Party and a release of the Indemnified Party from all liability. The Indemnified Party may, at its own expense, participate in any such proceeding with the counsel of its choice. So long as the Indemnifying Party is in good faith defending such claim or proceeding, the Indemnified Party shall not compromise or settle such claim without the prior written consent of the Indemnifying Party. If the Indemnifying Party does not assume the defense of any such claim or litigation in accordance with the terms hereof, the Indemnified Party may defend against such claim or litigation in such manner as it may deem appropriate,

 

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including, but not limited to, settling such claim or litigation (after giving notice of the same to the Indemnifying Party) on such terms as the Indemnified Party may deem appropriate, and the Indemnifying Party will promptly indemnify the Indemnified Party in accordance with the provisions of Section 10.1.

Section 10.3 Survival; Right to Indemnification Not Affected by Knowledge

All representations, warranties, covenants, and obligations in this Agreement, the Disclosure Schedule, the certificate delivered pursuant to Section 8.8, and any other certificate or document delivered pursuant to this Agreement or any of the Related Documents will survive for a period of three years following the Closing; provided, however, that all representations and warranties relating to Section 4.17 (Employment Matters) and Section 4.23 (Taxes) hereof shall survive until 30 days after the expiration of the respective statute of limitations applicable to Section 4.17 and Section 4.23. The right to indemnification, payment of Losses or other remedy based on such representations, warranties, covenants and agreements will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or agreement. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of Losses, or other remedy based on such representations, warranties, covenants and agreements.

ARTICLE 11

TERMINATION

Section 11.1 Termination Events

By notice given prior to the Closing, this Agreement may be terminated as follows:

(a) by agreement of the Purchasers and the Company;

(b) by Blue Ridge China as to itself and by EI as to itself, if a material breach of any provision of this Agreement has been committed by any Member of the Company Group, which breach shall not be cured within a period of five (5) Business Days of receipt of written notice thereof from such Purchaser;

(c) by the Company or the Management Shareholders, if a material breach of any provision of this Agreement has been committed by a Purchaser, which breach shall not be cured within a period of five (5) Business Days of receipt of written notice thereof from the Company or the Management Shareholders, which notice shall be sent to each of the Purchasers; provided that a breach by the Non-Closing Purchaser shall not entitle the Company or the Management Shareholders to terminate this Agreement if the Closing Purchaser notifies the Company within such five (5) Business-Day period that it intends to send the notice referred to in Section 9.9, or if the Closing Purchaser sends such notice within such five (5) Business-Day period; and

 

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(d) by the Purchasers, the Management Shareholders or the Company if the Closing has not occurred on or before December 31, 2006, provided that such right of termination shall not be exercisable by any party which is then in material breach of this Agreement.

Section 11.2 Effect of Termination

Each party’s right of termination under Section 11.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of such right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 11.1, all obligations of the parties under this Agreement will terminate, except that the obligations of the parties in this Section 11.2 and Article 12 shall survive the termination of this Agreement; provided, that no such termination shall relieve any party of liability for any breach of this Agreement.

ARTICLE 12

MISCELLANEOUS

Section 12.1 Entire Agreement

This Agreement, together with the Related Documents, merges all previous negotiations and agreements among the parties hereto, either oral or written, and constitutes the entire agreement and understanding among the parties with respect to the subject matter hereof and thereof.

Section 12.2 Amendments; Waivers

No amendment, modification, or waiver of any provision of this Agreement shall be valid except by an agreement in writing executed by the parties hereto. Except as otherwise expressly set forth herein, no failure or delay by any party hereto in exercising any right, power or privilege hereunder (and no course of dealing between or among any of the parties) shall operate as a waiver of any such right, power or privilege. No waiver of any default on any one occasion shall constitute a waiver of any subsequent or other default. No single or partial exercise of any such right, power or privilege shall preclude the further or full exercise thereof.

Section 12.3 Severability

If any provision of this Agreement or the application thereof to any Person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by Law, but only as long as the continued validity, legality and enforceability of such provision or application does not materially (a) alter the terms of this Agreement, (b) diminish the benefits of this Agreement or (c) increase the burdens of this Agreement, for any Person.

Section 12.4 Assignment

The rights and obligations of the parties hereunder shall be binding upon and inure to the benefit of the parties hereto, their successors and permitted assigns. This Agreement may not be

 

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assigned (by operation of Law or otherwise) without the prior written consent of the parties; provided, that any Purchaser may assign its rights and delegate its duties hereunder to any of its Affiliates upon written notice to the Company and the other Purchasers, which notice shall identify the assignee, so long as such Purchaser remains liable for the performance of such Affiliate.

Section 12.5 Third Parties

Nothing herein, expressed or implied, is intended to or shall confer on any Person other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement.

Section 12.6 Notices

All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or sent by fax, overnight courier or electronic mail (provided that communications sent by electronic mail are concurrently sent by fax or overnight courier) in accordance with this Section 12.6), to the following addresses:

If to the Purchasers to:

Blue Ridge Capital Offshore Holdings LLC

660 Madison Avenue, 20th Floor New York, New York 10021

U.S.A.

Attention: Richard S. Bello

Fax: (212) 446-6201

E-mail: rbello@blueridgelp.com

with required copy (which shall not by itself constitute notice) to:

Blue Ridge Investment Consulting (Beijing) Co., Ltd.

3701 Tower A, Beijing Fortune Plaza

No. 7 Dongsanhuan Rd, Chaoyang District

Beijing, 100020, China

Attention: Justin Tang

Fax: +86 (10) 6530-8839

E-mail: justin@br-china.com

and

EI Fund II China, LLC

c\o Equity International

Two North Riverside Plaza

Suite 700

Chicago, Illinois 60606

Attention: Ira Chaplik

Fax: (312) 454-0157

E-mail: ichaplik@egii.com

 

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with a required copy (which shall not by itself constitute notice) to:

Friedman Kaplan Seiler & Adelman LLP

1633 Broadway, 46th Floor

New York, New York 10019

U.S.A.

Attention: Gary D. Friedman, Esq.

Fax: (212) 833-1250

E-mail: gfriedman@fklaw.com

and

TransAsia Lawyers Beijing

Suite 2218, China World Tower 1

1 Jianguomenwai Avenue

Beijing, 100004, China

Attention: Philip Qu, Esq.

Fax: (8610) 6505 8189

E-mail: pqu@TransAsiaLawyers.com

and

EI Fund II China, LLC

c\o Equity International

Two North Riverside Plaza

Suite 700

Chicago, Illinois 60606

Attention: Brian K. Richter

Fax: (312) 454-0157

E-mail: brichter@egii.com

If to the Management Shareholders to:

Xinyuan Real Estate, Ltd.

No. 18 Xinyuan Road

Zhengzhou, Henan 450011

Attention: Zhang Yong

Fax: +86-0371-65651686

E-mail: zyong63@163.com

 

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with a required copy (which shall not by itself constitute notice) to:

Hodgson Russ LLP

150 King Street West

P.O. Box 30, Suite 2309

Toronto, Ontario M5H 1J9

Canada

Attention: Omer Ozden, Esq.

Fax: (416) 595-5021

E-mail: oozden@hodgsonruss.com

and

King & Wood

47th Floor, Shun Hing Square, Diwang Commercial Center

5002 Shennan Road East

Shenzhen 518008, China

Attention: Wang Lixin

Fax: +86755-2216-3380

E-mail: lixinwang@kingandwood.com

If to the Company:

Xinyuan Real Estate, Ltd.

No. 18 Xinyuan Road

Zhengzhou, Henan 450011

Attention: Zhang Yong

Fax: +86-0371-65651686

E-mail: zyong63@163.com

with a required copy (which shall not by itself constitute notice) to:

Hodgson Russ LLP

150 King Street West

P.O. Box 30, Suite 2309

Toronto, Ontario M5H 1J9

Canada

Attention: Omer Ozden, Esq.

Fax: (416) 595-5021

E-mail: oozden@hodgsonruss.com

with required copies (which shall not by itself constitute notice) to the Purchasers and to the Management Shareholders at the addresses provided above (including copy recipients).

The burden of proving notice when notice is transmitted by fax or electronic mail shall be the responsibility of the party providing such notice.

 

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Section 12.7 Expenses

At the Closing, the Company shall reimburse the Purchasers for all of their reasonable costs and expenses, including the fees and expenses of any attorney or tax advisor retained by them, that they shall have incurred in connection with the legal, accounting and commercial due diligence process, the negotiation, execution, delivery and performance of this Agreement and the Related Documents and the consummation of the Transactions provided, that such reimbursement shall be limited to a maximum of $250,000. The Company or the Management Shareholders, as the case may be, shall also reimburse the Purchasers on demand for their reasonable costs (including attorneys’ fees and expenses) of enforcing any provision of this Agreement or the Related Documents in the event of a breach by any Member of the Company Group; provided, that such reimbursement shall be limited to a maximum of $250,000 per claim.

Section 12.8 Governing Law

This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York without application of principles of conflicts of law.

Section 12.9 Specific Performance

The parties agree that irreparable damage will occur in the event that either party fails to consummate the Transactions in accordance with the terms of this Agreement, and that the parties shall therefore be entitled to specific performance in such event, in addition to any other remedy at law or in equity.

Section 12.10 Submission to Jurisdiction

Any dispute arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be resolved by arbitration. The arbitration shall be administered by the International Chamber of Commerce (the “ICC”) in accordance with its commercial arbitration rules then in effect (the “Rules”). The place of arbitration shall be Hong Kong, Special Administrative Region. The number of arbitrators shall be three. The Company and the Management Shareholders, on the one hand, and the Purchasers, on the other hand, shall each appoint one arbitrator, and the two party-appointed arbitrators shall endeavor promptly to appoint the chairperson of the arbitral tribunal. To the extent reasonably feasible, the chairperson and each other arbitrator shall be or shall have been a judge, executive or professional with extensive experience with international commercial transactions that shall be willing to apply the laws of the State of New York to the substance of the dispute. If either the Company and Management Shareholders, on the one hand, or the Purchasers, on the other hand, fail to appoint their respective arbitrator within thirty days after receipt by respondent(s) of the demand for arbitration or if the two party-appointed arbitrators are unable to appoint the chairperson of the arbitral tribunal within thirty days of the appointment of the second arbitrator, then the ICC shall appoint such arbitrator or the chairperson, as the case may be, in accordance with the listing, ranking and striking provisions of the rules. The arbitrators shall apply the law of the State of New York to the substance of the dispute and the arbitration proceedings shall be conducted in English. The arbitrators shall not award punitive, exemplary, multiple or consequential damages. In the absence of fraud, any decision and award rendered by the

 

51

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arbitrators shall be final and binding on all parties, shall not be subject to appeal except as provided by law and may be entered and enforced in any court having jurisdiction. The parties hereby consent to the exclusive jurisdiction of (i) the Supreme Court of the State of New York and the United States District Court for the Southern District of New York, and (ii) courts with appropriate jurisdiction to hear such matters in Hong Kong, Special Administrative Region, for temporary injunctive or other relief in aid of arbitration or to prevent irreparable harm and to the non-exclusive jurisdiction of such courts for enforcement of any award by the arbitrators. Without prejudice to such provisional remedies as may be available under the jurisdiction of such courts, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunal’s orders to that effect. Each party shall bear its own arbitration expenses, and the Company and Management Shareholders, on the one hand, and the Purchasers, on the other hand, shall pay one-half of the ICC’s and the chairperson’s fees and expenses, unless the arbitrators determine that it would be equitable if all or a portion of the prevailing party’s expenses should be borne by the other party.

Section 12.11 Interpretation

As both parties have participated in the drafting of this Agreement, any ambiguity shall not be construed against either party as the drafter. Unless the context of this Agreement clearly requires otherwise, (a) ”or” has the inclusive meaning frequently identified with the phrase “and/or”, (b) ”including” has the inclusive meaning frequently identified with the phrase “including, but not limited to,” (c) references to “hereof,” “hereunder” or “herein” or words of similar import relate to this Agreement, (d) when a reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or a Section of this Agreement unless otherwise indicated, and (e) the terms defined hereunder shall have the meanings therein specified for all purposes of this Agreement, applicable to both the singular and plural forms of any of the terms defined herein. The section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. All terms and words used in this Agreement, regardless of the number and gender in which they are used, shall be deemed and construed to include any other number and any other gender as the context of this Agreement requires.

Section 12.12 Counterparts

This Agreement may be executed in two or more counterparts, each of which when so executed shall be an original, but all of which together shall constitute one agreement. Facsimile signatures shall be deemed original signatures.

Section 12.13 Confidentiality

No Member of the Company Group shall, and each Member of the Company Group shall cause their respective affiliates and advisors, and their respective directors, officers and representatives not to, disclose to anyone the fact that the Purchasers have executed this Agreement, or disclose to or discuss with anyone the terms of this Agreement, without the prior

 

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written consent of the Purchasers, except to their officers and advisors, as necessary, provided that they agree to maintain the confidentiality thereof, and except as may be necessary to consummate the Transactions.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

 

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SCHEDULE I

RELATED DOCUMENTS

 

1.	Shareholders Agreement.

 

2.	Warrants (Blue Ridge China and EI).

 

3.	Burnham Warrants.

 

4.	Indemnification Agreements with Directors designated by the Purchasers.

 

5.

Confidentiality, Non-Competition and Non-Solicitation Agreements, between the Senior Management Personnel of the WFOE and the Operating Companies, and the WFOE or their respective Operating Company, as applicable, to the extent not covered by item 6 below, in each case in form and substance satisfactory to the Purchasers.

 

6.	Confidentiality, Non-Competition And Non-Solicitation Agreements, in form and substance acceptable to the Purchasers, between the WFOE and each of the Management Shareholders and Zhang Longgen.

 

7.	Employment Agreements between WFOE and each of Zhang Yong and Zhang Longgen.

 

8.	Governing Documents of the Company, the WFOE and each Operating Company.

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SCHEDULE II

CERTAIN INDEMNIFICATION OBLIGATIONS

 

1.	Any underpayment by any Member of the Company Group of EIT on or prior to the Closing Date, except as already accrued in the audited financial statements of the Company, as of December 31, 2005.

 

2.	Any failure to pay or underpayment by any Member of the Company Group of statutory employee benefits (and any interest payable thereon or in connection therewith) on or prior to the Closing Date.

 

3.	Beijing Cornwill Investment & Consultancy Co., Ltd. or the dissolution or transfer thereof.

 

4.	Any amount by which projects completed on and as of the Closing Date have exceeded the amount budgeted therefor in the 2006 Budget by more than 5%.

 

5.	Any illegal or improper pre-completion sales of the premises prior to June 1, 2006.

 

6.	Henan Wanzhong Real Estate Co., Ltd. exceeding its development capacity as approved by the Governmental Bodies in developing project Central Garden.

 

7.	Henan Xinyuan exceeding its development capacity as approved by the Governmental Bodies in developing project Xinyuan Splendid.

 

8.	The ongoing litigations in which any Member of the Company Group is involved, and excluding any reasonable legal fees related thereto.

 

9.	Any activities of any Member of the Company Group and Jiantou prior to the date of this Agreement in violation of the representations and warranties in Section 4.34.

 

10.	Any and all Losses incurred by the Company, any Member of the Company Group, or the Purchaser, associated with, arising from, or in connection with, Jiantou.

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TABLE OF CONTENTS

 

				Page
Article 1 DEFINITIONS				1
Article 2 PURCHASE AND SALE				8
Section 2.1		Authorization of Securities		8
Section 2.2		Purchase and Sale		8
Section 2.3		Closing		8
Section 2.4		Delivery of Share Certificates		8
Article 3 USE OF PROCEEDS				9
Section 3.1		Use of Proceeds		9
Article 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY GROUP				9
Section 4.1		Organization, Good Standing and Qualification		9
Section 4.2		Power and Authority		9
Section 4.3		Authorization, Execution and Enforceability		9
Section 4.4		Consents		10
Section 4.5		No Conflicts		10
Section 4.6		Subsidiaries; Operating Companies		10
Section 4.7		Capitalization, Issuance and Transfer of Shares		11
Section 4.8		Compliance with Securities Laws		12
Section 4.9		Financial Statements		13
Section 4.10		Material Liabilities		13
Section 4.11		No Material Adverse Effect; Changes		13
Section 4.12		Legal Proceedings		15
Section 4.13		Real Property		15
Section 4.14		Sufficiency; Personal Property		17
Section 4.15		Intellectual Property		17
Section 4.16		Material Contracts		19
Section 4.17		Employment Matters		20
Section 4.18		Affiliate Transactions		21
Section 4.19		Other Transactions		21
Section 4.20		Compliance with Laws		21
Section 4.21		Governmental Authorizations		21
Section 4.22		Environmental Laws		22
Section 4.23		Taxes		23
Section 4.24		Insurance		25
Section 4.25		Books and Records		25
Section 4.26		Brokers		25
Section 4.27		OFAC Compliance		25
Section 4.28		No U.S. Shareholder		26
Section 4.29		Solvency		26
Section 4.30		Land Use Rights		27

 

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Section 4.31		Pre-Completion Sale		27
Section 4.32		Henan Acquisition		27
Section 4.33		WFOE Positioning		27
Section 4.34		U.S. Foreign Corrupt Practices Act		28
Section 4.35		Disclosure		28
Section 4.36		Jiantou		28
Article 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER				29
Section 5.1		Organization and Good Standing		29
Section 5.2		Power and Authority		29
Section 5.3		Authorization, Execution and Enforceability		29
Section 5.4		Investment Representations		29
Section 5.5		No Conflicts		31
Section 5.6		Exculpation Among Purchasers		31
Article 6 COVENANTS OF THE COMPANY and the management shareholders				31
Section 6.1		Access and Investigation		31
Section 6.2		Operation of Business		32
Section 6.3		Negative Covenants		33
Section 6.4		Required Consents		34
Section 6.5		Notification		34
Section 6.6		No Negotiation		35
Section 6.7		Reasonable Best Efforts		35
Section 6.8		2007 Budget		35
Section 6.9		Tax Matters		36
Section 6.10		Corporate Governance		37
Section 6.11		Foreign Exchange Settlement and Repatriation		37
Section 6.12		Corporate Restructuring		37
Section 6.13		Accounting Controls		38
Section 6.14		Equity Incentive Plan		38
Section 6.15		Real Estate Projects		39
Section 6.16		Agreements with Senior Management		39
Article 7 COVENANTS OF THE PURCHASERS				39
Section 7.1		Required Consents		39
Section 7.2		Notification		39
Article 8 CONDITIONS TO PURCHASERS’ CLOSING OBLIGATIONS				39
Section 8.1		Accuracy of Representations		39
Section 8.2		Performance of Covenants		40
Section 8.3		Required Consents		40
Section 8.4		No Adverse Proceedings		40
Section 8.5		Changes in Law		40
Section 8.6		Repayment of Loan		40
Section 8.7		Certain Documents		41
Section 8.8		Officer’s Certificate		41
Section 8.9		No Conflict		41

 

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Section 8.10		Secretary’s Certificates		41
Section 8.11		Opinions of Counsel		41
Section 8.12		Proceedings and Documents		42
Section 8.13		Burnham Warrants		42
Section 8.14		Board of Directors		42
Section 8.15		Budgets		42
Section 8.16		Revised Financial Statements		42
Article 9 CONDITIONS TO THE COMPANY’S AND THE MANAGEMENT SHAREHOLDERS’ CLOSING OBLIGATIONS				42
Section 9.1		Accuracy of Representations		43
Section 9.2		Performance of Covenants		43
Section 9.3		Officer’s Certificate		43
Section 9.4		Payment of Purchase Price		43
Section 9.5		No Adverse Proceedings		43
Section 9.6		No Conflict		43
Section 9.7		Proceedings and Documents		43
Section 9.8		Related Documents		44
Section 9.9		Closing by One Purchaser Only		44
Article 10 INDEMNIFICATION				44
Section 10.1		Indemnification		44
Section 10.2		Procedures		45
Section 10.3		Survival; Right to Indemnification Not Affected by Knowledge		46
Article 11 TERMINATION				46
Section 11.1		Termination Events		46
Section 11.2		Effect of Termination		47
Article 12 MISCELLANEOUS				47
Section 12.1		Entire Agreement		47
Section 12.2		Amendments; Waivers		47
Section 12.3		Severability		47
Section 12.4		Assignment		47
Section 12.5		Third Parties		48
Section 12.6		Notices		48
Section 12.7		Expenses		51
Section 12.8		Governing Law		51
Section 12.9		Specific Performance		51
Section 12.10		Submission to Jurisdiction		51
Section 12.11		Interpretation		52
Section 12.12		Counterparts		52
Section 12.13		Confidentiality		52

 

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Schedules

Disclosure Schedule

 

Schedule I		Related Documents
Schedule II		Certain Indemnification Obligations

Exhibits

 

Exhibit A		Form of Shareholders Agreement
Exhibit B		Form of Memorandum of Association
Exhibit C		Form of Warrant
Exhibit D		Form of Burnham Warrants
Exhibit E		Form of Legal Opinion of Counsel to the Company and the Management Shareholders
Exhibit F		Form of Legal Opinion of Counsel to the Company
Exhibit G		Henan Acquisition Agreement
Exhibit H		Form of Labor Agreement

 

iv

Exhibit 10.21

Zhengzhou General Construction Investment Company

Henan Xinyuan Real Estate Co., Ltd.

Zhengzhou Jiantou Project Consulting Co., Ltd.

Joint Shareholding

Zhengzhou Jiancheng Real Estate Co., Ltd., changing its name to

Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd.

Share Transfer Agreement

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Share Transfer Agreement

Party A: Zhengzhou General Construction Investment Company

Legal Representative: CHEN Xin, General Manager

Address: 1 Youai Road, Zhengzhou City, Henan Province

Party B: Henan Xinyuan Real Estate Co., Ltd.

Legal Representative: ZHANG Yong, Chairman of the Board

Address: 11 Jingjin Building, 25 Huanghe Road, Zhengzhou City

Party C: Zhengzhou Jiantou Project Consulting Co., Ltd.

Legal Representative: CHEN Min, Chairman of the Board

Address: 152 Songshan Road, Zhengzhou City

WHEREAS Parties A, B, and C have engaged in comprehensive feasibility discussions, investigations and research,

THEREFORE the three parties hereby unanimously agree to engage in equity shareholding cooperation and on the basis of Zhengzhou Jiancheng Real Estate Co., Ltd., which was jointly founded by Zhengzhou General Construction Investment Company and Zhengzhou Jiantou Project Consulting Co., Ltd., by changing the registered name of Zhengzhou Jiancheng Real Estate Co., Ltd. and injecting capital into it, thereby establishing Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd. (hereinafter referred to as “the Company”). For this purpose, Parties A, B, and C, in accordance with the “Company Law of the PRC”, “Contract Law of the PRC” and the stipulations of other relevant laws and regulations, and on the basis of the principles of equality, mutual benefit and friendly consultations, hereby establish this Equity Joint Venture Agreement.

 

Page 2 of 10

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Article 1: Consensus on Cooperation

1.1 Parties A, B, and C agree as follows: Based on the complementary strengths of Party A, with strengths in investment and financing, and Party B, with strengths in real estate development, Parties A, B and C shall cooperatively restructure Zhengzhou Jiancheng Real Estate Co., Ltd., thereby forming Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd., which shall embody the cooperative spirit of resource integration, shall be conducive to maximal utilization of the strengths of Parties A and B, and shall realize improved corporate efficiency and societal effectiveness on the real estate market.

1.2 The Company’s operations shall be primarily positioned as:

1.2.1 Participation in Tier I land development projects;

1.2.2 Participation in SOE land redevelopment projects;

1.2.3 Participation in governmental old city reconstruction projects and “urban village” reform projects;

1.2.4 Participation in governmental affordable housing projects;

1.2.5 Unless Party B agrees, non-participation in development projects that would compete with Party B.

Article 2: Company Type and Scope of Operations

2.1 The Company type is a Limited Liability Corporation.

2.2 The registered address of the Company is in Zhengzhou City, Henan Province.

Company address:                                         , Zhengzhou City, Henan Province

2.3 The Company’s mission statement is as follows: In accordance with national laws, regulations and other relevant rules, and following the orientation of the market, we shall do our utmost to improve the Company’s economic performance and the brand’s reputation when developing, selling, and renting real estate and accompanying service facilities. We shall pursue sustained and stable development of the Company, and shall do our best to increase the Company’s value in order to maximize the interests of the shareholders.

2.4 The Company’s scope of operations is: the development, sale and rental of real estate and accompanying service facilities.

Article 3 Registered Capital and Subscription

3.1 The Company’s registered capital shall be 10,000,000 (ten million) RMB.

 

Page 3 of 10

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3.2 Parties A, B and C shall contribute capital in the following ways and in the following amounts:

3.2.1 Party A shall inject 5,000,000 (five million) in cash, and shall hold 50% of the Company’s equity;

3.2.2 Party B shall inject 4,500,000 (four million five hundred thousand) in cash, and shall hold 45% of the Company’s equity;

3.2.3 Party C shall inject 550,000 (five hundred fifty thousand) in cash, and shall hold 5% of the Company’s equity.

3.3 Within 2 working days after registration of the change of the Company’s name, a temporary Company bank account will be opened, and within 3 days after the temporary bank account is opened, Parties A, B and C shall deposit their cash allocations into the Company’s temporary bank account, completing the capital contribution.

3.4 The capital contributions of Parties A, B and C shall be verified by a qualified institution, and after the verification report or correlated evidence is provided, Parties A and B shall transfer 45% of the equity to Party C, complete equity transfer change of registration, and modify the Company’s Articles of Incorporation.

3.5 After the change in Company registration is completed, the Company shall issue a “Proof of Capital Contribution Certificate” to each contributing party.

Article 4 Responsibilities, Representations, and Warrantees

4.1 The responsibilities of Parties A, B and C

4.1.1 Abide by the Articles of Incorporation of the Company

4.1.2 Subscribe capital in accordance with all representations made on the amount of capital and the method of capital injection;

4.1.3 Guard closely the Company’s trade secrets;

4.1.4 Warrant that the capital contributions are deposited on time and in the proper amounts;

4.1.5 Actively assist the Company in carrying out registration with departments of Industry and Commerce and other such matters;

4.1.6 Allocate profits in accordance with the equity ratio held by each party;

4.1.7 Carry out voting in accordance with the equity ratio held by each party;

4.1.8 Transfer, donate, or pledge the shares held by each party in accordance with the law, government regulations and the stipulations of the Company’s Articles of Incorporation;

4.1.9 In the event of the termination or liquidation of the Company, allocate the remaining assets of the Company in accordance with the equity holding ratio.

 

Page 4 of 10

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4.1.10 Other rights and obligations endowed by law, administrative regulations and the Company’s Articles of Incorporation.

4.2. Procedures for Changes to Company

4.2.1 Parties A, B and C jointly designate [                    ] as a representative or jointly entrust representative [                    ] to serve as applicant, to complete Company registration with the registration institution;

4.2.2 Should the application for establishment of the Company no longer represent the original cooperative intent of Parties A, B and C, then upon mutual agreement by Parties A, B and C, the application for establishment of the Company may be stopped, and all expenses incurred shall be equally divided among the 3 parties.

4.3 Party A representations: In accordance with the stipulations of the Company’s Articles of Incorporation, Party A represents that it will participate in all of the Company’s major policy decisions; fully support the Company with its strengths in capital superiority and government resources, and when Company construction or expansion projects require amortized capital, beyond providing funding in accordance with Party A’s equity holding, if there is still a gap in capital, Party A may use its own strengths to raise money to fill a portion of the capital gap; for the amortized capital in excess of Party A’s equity ratio, the Company shall, when the Company meets commercial bank loan conditions or when it is able to pay back loans, return the money to Party A as soon as possible.

4.4 Party B representations: Party B represents that it shall fully utilize its brand name and business management experience, and shall, in accordance with current laws and the permitted scope of business, choose and appoint qualified and experienced managers to diligently carry out Company business and, in accordance with the stipulations of the Company Articles of Incorporation, participate in major Company policy decisions and take responsibility for the daily operations of the Company.

4.5 Party C representations: Party C represents that it shall participate in the major policy decisions of the Company in accordance with the Company’s Articles of Incorporation.

4.6 Parties A, B, and C all agree: While meeting the precondition of executing the policy decisions and resolutions of the Board of Directors, the management, under the leadership of the General Manager, shall take full responsibility for the operations and management of the Company.

4.7 Parties A, B, and C all agree: The Company performance indexes may be merged to show on the balance sheets of the enterprises of contributing shareholders.

4.8 All of the unresolved issues from what was originally the Zhengzhou Jiancheng Real Estate Co., Ltd. shall be the responsibility of Party A to resolve. When necessary, Parties A, B, and C shall entrust an auditing firm to perform an audit.

Article 5 Transfer of Equity

5.1 Should a shareholder transfer all or a portion of equity to a non-shareholding party, then it must obtain the approval of the other shareholders. Shareholders who do not agree should purchase the capital contribution to be transferred. If they do not purchase the capital assets to be transferred, they shall be deemed as agreeing to the transfer.

 

Page 5 of 10

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5.2 When a shareholder transfers equity to a non-shareholding party, under equal conditions, the other shareholders have the right of first refusal to purchase the shares.

Article 6 Related Transactions

6.1 When the Company requires, for operational reasons, short term borrowing of capital from Party A and Party B, capital fee interest rates shall be calculated at a rate not higher than a bank loan interest rate offered during the same time period.

6.2 When the projects developed by the Company require related transactions with Party B and subsidiary companies controlled by Party B, these transactions shall be concluded through a written agreement, and the parties shall abide by the principles of equality, voluntarity, equal pricing, and compensation. The prices and fees for related transactions shall, in principle, not deviate from the standard for market prices or fees offered by independent third parties.

6.3 The rules governing other related transactions shall be established by the Board of Directors, and shall be executed after said rules are reported to the Shareholders’ meeting and the Shareholders’ meeting has granted approval.

Article 7 Board of Directors

7.1 After the Business License of the Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd. is changed, signed and issued, the Board of Directors shall be reorganized. The Company’s Board of Directors shall consist of 5 (five) directors. Party A shall recommend 3 (three) candidates for the Board, and Party B shall recommend 2 (two) candidates for the board.

7.2 The Company shall have 1 (one) Chairman of the Board, who will be appointed by Party A from among the 5 (five) members of the Board of Directors.

7.3 The Board of Directors shall exercise the following powers:

7.3.1 Responsibility for convening the Shareholders’ meeting, and reporting to the Shareholders’ meeting;

7.3.2 Execute the resolutions of the Shareholders’ meeting;

7.3.3 Determine the operational and investment plans of the Company;

7.3.4 Establish the annual fiscal budget and final accounting plans of the Company;

7.3.5 Establish the Company’s plans for profit sharing plan and remedy for losses;

7.3.6 Formulate plans for increasing or decreasing the registered capital of the Company, issuing bonds or other securities and publicly listing the Company;

 

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7.3.7 Formulate plans for major acquisitions, mergers, divisions, or dissolution of the Company;

7.3.8 Within the scope authorized by the Shareholders’ meeting, determine the venture capital investment, asset mortgage and other warrantee actions of the Company;

7.3.9 Hire or fire the Company’s General Manager and CFO; in accordance with nominations from the General Manager, hire or fire senior managers such as the Deputy General Manager(s), and determine the compensation and rewards and punitive measures for senior management;

7.3.10 Establish plans for amending the Company’s Articles of Incorporation;

7.3.11 Listen to the General Manager’s work report and inspect the General Manager’s performance;

7.3.12 Other powers as stipulated by laws, regulations or the Company’s Articles of Incorporation, and authorized by the Shareholders’ meeting.

7.4 The Company’s Board of Directors should explain to the Shareholders’ meeting the reservations expressed in the registered accountant’s auditing report on the Company’s financial report.

7.5 The Board of Directors shall establish the regulations for the Board Meetings, to guarantee the efficient operation and systematic decision making of the Board of Directors and in order to ensure the diligent fulfillment of Board responsibilities.

Article 8 Management Institution

8.1 The Company shall establish a Management Institution, which is responsible for the daily operational management of the Company. The Management Institution shall have one (1) General Manager, appointed by Party B; there shall be two (2) Deputy General Managers, one each appointed by Parties A and B; Party A shall appoint the CFO. The General Manager, Deputy General Managers and CFO shall be hired and fired by the Board of Directors; other management shall be appointed by Party B in accordance with the Company’s operational needs.

8.2 The General Manager reports to the Board of Directors, and has the following official powers in accordance with the “Company Law” and the Company’s Articles of Incorporation:

8.2.1 Direct the management of Company operations, organize implementation of the resolutions of the Board of Directors;

8.2.2 Formulate the Company’s annual plan and investment plans;

8.2.3 Formulate the Company’s internal management structure plan;

8.2.4 Formulate the Company’s basic management system;

8.2.5 Establish the Company’s rules and regulations;

 

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8.2.6 Submit hiring and firing recommendations for Deputy General Managers to the Board of Directors;

8.2.7 Hire or fire management not the responsibility of the Board of Directors to hire or fire;

8.2.8 Other powers vested by the Company’s Articles of Incorporation or authorized by the Board of Directors.

8.2.9 Fully responsible for implementation of projects authorized by the Company’s Board of Directors, sign relevant contracts, agreements and other legal documents as authorized by the Board of Directors.

8.3. The Deputy General Managers shall assist the General Manager.

8.4. The General Manager, Deputy General Managers, CFO and other senior managers shall do their utmost to fulfill their duties; should any of them engage in graft or a serious neglect of their duties, they may be replaced at any time through a resolution of the Board of Directors. The new managers shall be determined in compliance with the conditions described in Article 8.1.

Article 9 Taxes, Finances, Auditing and Labor Management

9.1 The Company shall pay all taxes in accordance with relevant laws and regulations.

9.2 The Company’s accounting year shall begin on January 1 and end on December 31.

9.3 The Company shall establish an accounting system in accordance with the relevant PRC accounting system regulations.

9.4 Within the accounting year, the Company shall, during the last 10 days of each month, produce a monthly financial report, copies of which shall be submitted to Parties A, B and C. The Company shall, in the last 30 days of the accounting year, create an annual financial report, copies of which shall be submitted to each shareholder and each member of the Board of Directors. The annual financial report must be verified for accuracy by an accounting firm that meets auditing qualifications.

9.5 At any time during the 3 months following the end of the fiscal year, Parties A, B and C have the right to appoint an accounting firm to examine the Company’s operational accounts and records. The associated fees shall be the responsibility of Parties A, B and C.

9.6 The recruitment, hiring, dismissal, salary, benefits and reward packages for employees of the Company shall be regulated by the collective or individual employment contracts which are set by the Board of Directors in accordance with relevant national labor management regulations and implementation provisions.

Article 10 Liability for Breach of Contract

10.1 Should Party A, B or C fail to promptly make capital contributions on the date or in the amount stipulated herein, starting calculations from the 1^st month of delayed payment, every month of delay shall cause the party in breach of contract to pay a fine of 10% of the amount owed. If the payment is delayed by 3 months, in addition to the party in breach owing a fine equal to 20% of the accumulated owed capital contribution, the party not in breach of contract has the right to demand termination of this Contract and to require the party in breach of contract to compensate for losses.

 

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10.2 Should one party be at fault such that this contract cannot be executed in whole or in part, the party at fault shall be held liable for breach of contract; if the fault is joint, then in accordance with the actual situation, each party found to be at fault shall be held liable for its portion of responsibility for fault.

10.3 Should unresolved issues from prior to Jiancheng Real Estate’s signature on this contract (or on the baseline date for fiscal auditing) cause the Company or Party B to incur loss, Party A shall be liable for compensation for such loss.

Article 11 Applicable Law and Dispute Resolution

11.1 Chinese law is applicable to this Contract.

11.2 Should a dispute arise, and consultations by the parties fail to reach resolution, any party may take the dispute to the People’s Court of jurisdiction for adjudication.

Article 12 Other

12.1 The terminology herein was jointly formed based on multiple discussions held by the three Parties, and is uniform in meaning. Interpretation of these terms by Parties A, B and C shall be based on the principle of honesty and trust, and shall not be distorted by any party in the execution of this Contract.

12.2 This Contract shall take effect on the date of signature and seal by the legal person of each Party.

12.3 This Contract shall be executed in 6 copies, with each Party to the Contract retaining one copy and with 3 copies to be used for the necessary procedures. Each copy has equally binding legal effect.

12.4 Upon this Contract taking effect, it supersedes all previous oral or written agreements by any Party to the contract. Should any such previous agreement contradict this Contract, this Contract shall supersede.

 

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Party A: Zhengzhou General Construction Investment Company (sealed)

Legal representative (signature): (signed by Chen Xin)

Party B: Henan Xinyuan Real Estate Co., Ltd. (sealed)

Legal representative (signature): (signed by Zhong Yong)

Party C: Zhengzhou Jiantou Project Consulting Co., Ltd. (sealed)

Legal representative (signature): (signed by Chen Min)

Date: August 20, 2005

Location of Signature: Zhengzhou City, Henan Province

 

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Exhibit 10.22

Henan Xinyuan Real Estate Co., Ltd.

Financial Consulting Services

Agreement

Location of Agreement Signature: Zhengzhou, Henan Province

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Party A: Henan Xinyuan Real Estate Co., Ltd.

Address: 8 Xinyuan Rd., Zhengzhou, Henan Province

Party B: Beijing Runzheng Investment Consulting Co., Ltd.

Address: Suites 1 – 117, 8 Banbi Street South Road, Haidian District, Beijing

Article 1: On the basis of sincere cooperation and to mutually seek the goal of development, Party A employs Party B to provide financial consulting services to the Company. Party B agrees to accept this appointment. Through amicable discussions, both Parties establish this Agreement.

Article 2: Through dedicated contact personnel and team service, Party B shall provide to Party A the financial consulting services as stipulated in Article 3 herein. That is, Party B shall designate and assign a dedicated personnel to maintain daily contact with Party A, and shall, in accordance with the services stipulated herein and in accordance with the reasonable demands of Party A, dispatch other personnel to provide professional services to Party A as stipulated in this Agreement. Of these personnel, Dr. Chui Yong shall serve as the team leader for Party B, and shall accept the corresponding duties arranged by Party A, providing direct and effective service to Party A.

Article 3: The content of the financial consulting services provided by Party B is as follows:

 

A.

Design a plan for Party A’s enterprise to list its assets on a US capital market, and lead implementation within the scope authorized by Party A:

 

1.

Through investigation and research about the actual situation, in order to publicly list Party A’s enterprise on a US capital market, and in order to design an IPO financing plan, make plans for raising more than $100,000,000.00 (one hundred million US dollars);

 

2.

Working together with the corresponding personnel in Party A and as authorized by Party A, assist with or lead implementation of the above-described plan, making modifications as necessitated by changes in the actual circumstances;

 

3.

Within the scope authorized by Party A, represent or assist Party A’s personnel as well as intermediary institutions involved in this IPO, (including but not limited to legal, auditing, underwriting, market-making, public relations and other institutions) to carry out professional negotiations and provide professional recommendations related to the aforementioned service projects;

 

4.

Provide relevant professional knowledge, guidance and training for personnel in Party A’s enterprise involved in this IPO;

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B.

After Party A’s enterprise listing, through real estate funds, mergers and acquisitions, project investments or other methods, promote implementation of domestic and international capital cooperation plans.

 

1.

After the public listing of Party A’s enterprise, at the request of Party A, formulate and provide in cooperation a design for a financing plan and plan investment for raising $500,000,000.00 (five hundred million US Dollars) for Party A’s enterprise or the company or project it designates, through real estate funds, mergers and acquisitions and project finance or other methods;

 

2.

Through Party B’s information channels and professional abilities, provide Party A with introductions to potential investors and cooperative parties for projects; in accordance with changes in the actual demands for capital, introduce equity or debt capital for Party A;

 

C.

Financial professional consulting services

The scope of consulting includes but is not limited to direct financing for the company in for this listing in the form of private raising of shares, real estate investment funds, trusts, project cooperation, etc.;

Article 4: Service

1. The service provided by Party B shall be provided in the form of written documents (planning documents, research reports, letters, faxes, etc.), oral communications (regularly scheduled discussions, lectures, or telephone communications, etc.) or other forms (email, etc.).

2. As needed for financial consulting work, the two parties may establish a dedicated working group. The leader of this working group shall be jointly appointed by the two parties, and list of members of the working group may be recommended and determined by both Parties. Through negotiation and discussion by the two parties, the membership of the working group may be changed.

3. Dr. Cui Yong, during the time of service, shall personally come to Party A’s site at least two days a month to provide consulting services.

Article 5: Dates of Service

Party B’s dates of service shall begin on the date of signature of this contract and shall terminate on April 15, 2012.

Article 6: Service Fees and Payment Methods

To complete the consulting services provided for in Article 3 herein, Party A must pay a consulting fee to Party B. The consulting fee shall be paid in cash or may be paid by other methods. Details are as follows:

1. To complete the consulting services provided for in Article 3 herein, Party A has already paid to Party B consulting fees starting from the date of signature of this contract through April 15, 2007.

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Party A must pay consulting fees of 240,000.00 (two hundred forty thousand) per year from April 16, 2007 to April 15, 2012. The consulting fees shall be paid twice a year; specifically, on April 16 of every year, a fee of 120,000.00 (one hundred twenty thousand) shall be paid, and on October 16 of every year, 120,000.00 (one hundred twenty thousand) shall be paid.

2. All of the relevant fees incurred by Party B’s employees working on the project at the request of Party A shall be the responsibility of Party A; such fees include transportation, and room and board costs incurred outside of Beijing proper.

Article 7: Rights of Party A

 

1.

Party A has the right to obtain the services stipulated in Article 3 herein.

 

2.

Party A holds the power to make decisions over business operations, and has the right to ultimately determine whether or not to adopt the consulting recommendations and opinions provided by Party B.

Article 8: Party A’s Obligations

 

1.

Party A shall clearly and without error report to Party B its true intentions on the matters entrusted to Party B, and shall provide the necessary personnel assistance to Party B for completion of Party B’s work. Party A shall provide the necessary materials and information to Party B in a timely manner, and shall ensure that all of the information and materials provided are true, accurate, and complete.

 

2.

Party A shall, in accordance with the payment standards and payment methods agreed upon by both Parties, pay consulting fees.

Article 9: Party B’s Rights

 

1.

As required by the work, Party B has the right to understand, read, obtain and implement materials and information relevant to its financial consulting responsibilities.

 

2.

In accordance with the payment standards and payment methods agreed upon by both Parties, obtain consulting fees from Party A.

Article 10: Obligations of Party B

 

1.

Rigorously execute consulting responsibilities within the scope authorized by Party A, do not exceed the scope authorized by Party A or engage in behavior damaging to Party A’s interests.

 

2.

Party B shall scrupulously observe professional ethics, and shall maintain confidentiality for Party A’s materials, information or other trade secrets that Party B comes into contact with in the process of providing financial consulting services. Party B shall also take appropriate measures to maintain the confidentiality and safekeeping of relevant materials.

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3.

Prohibition of competitive business: Prior to the IPO and within one year after the IPO stipulated herein, Party B may not provide assistance with overseas financing or IPO business for other enterprises that are engaged in businesses the same as or similar to Party A’s primary business.

 

4.

Disclosure obligation: In the process of assisting Party A to merge with or acquire a third party, Party B may not obtain any extra consulting fee from Party A. Should Party B obtain a fee from the third party, it must disclose this to Party A in advance.

Article 11: Confidentiality

 

1.

Confidential information shall refer to any form of tangible or intangible, exclusive or confidential information or materials of Party A or its parent company, subsidiaries, related companies, companies within the corporate group or any company with a business or contractual relationship (hereinafter “Related Companies”) obtained by Party B in the process of providing consulting services to Party A. The above-described confidential information includes but is not limited to:

 

(1)

Party A’s operations and financial situation;

 

(2)

Party A’s investment and financing business;

 

(3)

Party A’s channels for obtaining land;

 

(4)

Party A’s suppliers and clients;

 

(5)

The records and documents of Party A’s Board of Directors;

 

(6)

Party A’s compensation and incentive system and assessment mechanisms;

 

(7)

Party A’s files and documents;

 

(8)

Other relevant information about Party A’s plans, expenses, marketing, etc.

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2.

Confidentiality obligations: During the time that it provides consulting services to Party A or during the time after which it, for any reason, terminates consulting services (hereinafter “Confidentiality Period”), unless laws or regulations have mandatory requirements to the contrary, Party B shall protect all above-described confidential and exclusive information of Party A, and unless Party A agrees in writing in advance or unless otherwise provided herein, Party B may not by any method directly or indirectly disclose, copy or distribute to any other person (including but not limited to any employees of Party A), company or entity such confidential information of Party A or Related Companies. Party B also may not use the above-described confidential information for its own interests or the interests of any other person, company, or entity.

 

3.

No permission or guarantee: Party A does not grant Party B permission to use any of its trade secrets or intellectual property rights, nor does it imply authorization of the above-described permission via transmission of its confidential information or other information to Party B. In addition, Party A’s disclosure of confidential information does not constitute or include any statement or guarantee of the accuracy or completeness of such information.

 

4.

Severability: No matter what the reason, should any clause of this contract or the contract itself be deemed invalid, be dissolved by both Parties or either of the 2 parties, or be terminated, such invalidity, dissolution or termination shall not affect the validity if this clause.

Article 12: Party B Indemnity Clause

Party A assumes full risk for all of Party A’s operational decisions made with reference to the consulting opinions of Party B. Party B shall not be held liable.

Article 13: Liability for Breach of Contract

 

1.

Should any party violate the stipulations of the Contract, this shall constitute breach of Contract. The party in breach of contract must pay a fine of no more than 5% of the consulting fees contained herein.

 

2.

Should Party B seriously violate the work ethics of the Board of Directors, obligations regarding the prohibition on competing work, or confidentiality obligations, causing Party A to incur loss, Party B shall be held liable in accordance with the corresponding laws and regulations. At the same time, should Party B violate work ethics, obligations regarding the prohibition on competing work or confidentiality obligations, Party A has the right to immediately terminate this Contract. This termination does not constitute a breach of contract by Party A.

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Article 14: Effectiveness of Contract

This Contract takes effect from the date of signature and seal by both Parties.

Article 15: Contract Termination

 

1.

While this contract continues to be in effect, should major changes such as force majeure or changes in policy, economic, financial, or legal situations arise or if the parties experience a change in personnel such that Party A, Party B or both Parties are unable to carry out their duties under this Contract, the Parties may agree upon termination of this Contract, and neither party shall be held liable for breach of contract.

 

2.

Through negotiation and consensus of both Parties, this Contract may be terminated in writing. Consulting fees collected by Party B prior to the date of contract termination shall not be refunded by Party B.

Article 16: Dispute Resolution

Any and all disputes that should arise from the interpretation and execution of this Contract or related to this Contract shall first be resolved through negotiated settlement by both Parties. If such negotiated settlement fails, the dispute shall be submitted to the Zhengzhou Arbitration Commission, which shall carry out such arbitration in accordance with the rules of the arbitration commission and relevant national regulations. The outcome of the arbitration commission shall be final and shall be legally binding on both Parties.

Article 17: Other Matters

Other matters not addressed in this Contract shall be resolved through mutual negotiation by both Parties or through the signing of a supplementary agreement. The supplementary agreement(s) and this Contract have equally binding legal power.

Article 18: Text Versions

This Contract shall have 4 (four) original copies, with each party retaining 2 (two). Each copy has equally binding legal power.

Article 19: Other

This Contract and the “Stock Futures Agreement” shall simultaneously be signed and shall simultaneously take legal effect. Upon this Contract taking effect, the “Financial Services Hiring Agreement” signed by Party A and Beijing Huiye Huacheng Investment Consulting Co., Ltd., on April 16, 2005 shall terminate.

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This page is the Signature Page

Party A: (sealed) Henan Xinyuan Real Estate Co., Ltd.

Authorized representative (signature): (Zhang Yong)

December 27, 2006

Party B: (sealed) Beijing Runzheng Investment Consulting Company, Ltd.

Authorized Representative (signature) (Cui Yong)

December 27, 2006

Exhibit 10.23a

Share Transfer Agreement

This agreement was signed by each party in Zhengzhou on September 1, 2006

Party A: Zhang Yong

Identification Number: 410103196310021930

Party B: Henan Xinyuan Real Estate Co., Ltd.

Address: Xinyuan Road No. 18, Xinyuan Mingjia Building 43, Zhengzhou City

Legal Representative: Zhang Yong

Party C: Zhengzhou Mingyuan Landscape Engineering Co., Ltd.

Address: Xinyuan Road No. 18, Jinshui District, Zhengzhou City

Legal Representative: Zhang Yong

Whereas:

1. Party C is a limited liability company operating lawfully and established in accordance with Chinese law under the legal entity business license no.: 4101002212449. The current scope of business consists of: landscape engineering and management (operating under license).

2. Party A lawfully owns 60% of Part C’s shares (hereinafter the “shares”);

3. Party A intends to transfer shares to Party B; Party B has agreed to receive Party A’s intended share transfer in accordance with this agreement;

4. Party B and Party C, in accordance with the internal management procedures of their respective companies, have each duly received the authorization and permission regarding this share transfer;

 

Page 1 (of 6)

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On the basis of the aforementioned, Party A and Party B have amicably negotiated the aforementioned share transfer from Party A to Party B with each party agreeing to the following articles:

Article 1. Share transfer price, payment period and method

1.1 Party A agrees to transfer shares to Party B at a provisional cost of Renminbi 600,000.00 (hereinafter the “provisional cost”); Party B agrees to receive the share transfer at the provisional cost.

1.2 In accordance with the results of a legally prudent investigation and audit as put forth in article 2.4 of this agreement, Party A and Party B shall act on the final cost (hereinafter the “final cost”) of the share transfer, which shall be linked to a fair and reasonable market price to be agreed upon in further consultation. The aforementioned consultation must be completed before December 31, 2006.

1.3 As stipulated in article 2.2 of this agreement, within three business days of completing industrial and commercial registration for the shares, Party B must remit payment of the provisional cost to Party A into a mutually agreed upon account (as indicated in the attachment).

Within one month from the day both parties reach agreement on the final cost, Party B must pay in cash the difference between the final cost and the provisional cost in a single installment to Party A (if the final cost is higher than the provisional cost), or Party A must refund in cash the difference between the final cost and the provisional cost in a single installment to Party B (if the final cost is lower than the provisional cost), the sole exception being in cases where this agreement provides alternative stipulations.

Before each party has come to an agreement on the final cost, no party may utilize the provisional cost funds remitted to the account specified in the attachment.

Article 2. Promises and guarantees

2.1 Party A guarantees full ownership of the shares with effective disposition and assurance that the shares have no encumbrances and are immune from third party recovery, or else Party A shall be responsible for all economic losses incurred by Party B there from. In addition, Party A shall provide compensation for any and all direct or indirect losses or damages to Party B as a result of any action by Party A or Party C that leads to a third party bringing legal action or administrative penalties against Party C before change of share registration is complete.

2.2 Party A promises that the industrial and commercial registration modification¹ tasks for the share transfer of this agreement shall be completed before September 7, 2006.

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1	This translation of is attested to at http://www.eastlaw.net/cases/corp/HKgreenvalley-sharedisputes.htm

 

Page 2 (of 6)

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2.3 Party B promises to pay the share transfer costs in the manner agreed upon in this agreement.

2.4 Party A must make every effort to cooperate with Party B in the completion of a legally prudent investigation of Party C and must employ the services of an internationally recognized accounting firm to perform the audit of Party C.

2.5 If the legally prudent investigation or audit specified in article 2.4 of this agreement discovers any substantive deficiencies in the business or financial activities of Party C, or if Parties A and B cannot come to an agreement on the final cost as stipulated in article 1.2 of this agreement, then the share transfer of this agreement shall be null and void. Party B must then immediately cooperate with Party A to modify industrial and commercial registration to reinstate Party A’s status as a shareholder, Party A must simultaneously and immediately return to Party B any provisional costs that have been paid, the sole exception being if any party is unable to enter into good faith negotiations as stipulated article 1.2 of this agreement.

Article 3. Liability for breach of contract

Upon this agreement becoming effective, each party must conscientiously fulfill its obligations. If any party does not properly and completely fulfill its obligations, it shall be liable for the compensation of the damages to the abiding party.

Article 4. Dispute resolution

Any disputes that arise between the parties in the process of fulfilling the obligations of this agreement must be resolved through amicable negotiation. If agreement cannot be reached, any party may take legal action in a court of jurisdiction.

Article 5. Modifying, suspending or terminating the agreement

Each party may negotiate to modify, suspend or terminate this agreement under the following circumstances:

1. Parties are unable to fulfill the obligations of this agreement due to force majeure.

2. Each party comes to agreement via negotiation.

3. Other circumstances as stipulated by law.

Article 6. Share transfer fees

The fees relevant to the aforementioned share transfer (such as notarial charges, stamp taxes) shall be the responsibility of the individual parties.

 

Page 3 (of 6)

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Article 7. Supplementary articles

7.1 This agreement shall take effect after the authorized representative from each party has signed and affixed an official seal (if applicable).

7.2 This agreement consists of three originals with each party retaining one original, all of which have the same legal effect.

(No text below this point)

 

Page 4 (of 6)

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(No text on this page)²

Party A: Zhang Yong

[Partial Seal³]

Party B:

Authorized Representative:

[Seal] Henan Xinyuan Real Estate Co., Ltd.

[Partial Seal⁴]

Party C:

Authorized Representative:

[Seal] Zhengzhou Mingyuan Landscape Engineering Co., Ltd.

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2	Signatory page

3	Part of a seal is visible on the right hand side of the page. It is not legible.

4	A second partial seal is visible on the right hand side of the page. It is also not legible.

 

Page 5 (of 6)

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Attachment 1: Party A and Party B mutually designated accounts

China Merchants Bank      Authorized Signature Card⁵

[Partial Seal⁶]

[Partial Seal⁷]

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5	The scanned authorized signature card is only partially legible and cannot be translated in its present state.

6	Part of a seal is visible on the right hand side of the page. It is not legible.

7	A second partial seal is visible on the right hand side of the page. It is also not legible.

 

Page 6 (of 6)

Exhibit 10.23(b)

Share Transfer Agreement

This agreement was signed by each party in Zhengzhou on September 1, 2006

Party A: Yang Yuyan

Identification Number: 41010519631014102X

Party B: Henan Xinyuan Real Estate Co., Ltd.

Address: Xinyuan Road No. 18, Xinyuan Mingjia Building 43, Zhengzhou City

Legal Representative: Zhang Yong

Party C: Zhengzhou Mingyuan Landscape Engineering Co., Ltd.

Address: Xinyuan Road No. 18, Jinshui District, Zhengzhou City

Legal Representative: Zhang Yong

Whereas:

1. Party C is a limited liability company operating lawfully and established in accordance with Chinese law under the legal entity business license no.: 4101002212449. The current scope of business consists of: landscape engineering and management (operating under license).

2. Party A lawfully owns 40% of Part C’s shares (hereinafter the “shares”);

3. Party A intends to transfer shares to Party B; Party B has agreed to receive Party A’s intended share transfer in accordance with this agreement;

4. Party B and Party C, in accordance with the internal management procedures of their respective companies, have each duly received the authorization and permission regarding this share transfer;

 

Page 1 (of 6)

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On the basis of the aforementioned, Party A and Party B have amicably negotiated the aforementioned share transfer from Party A to Party B with each party agreeing to the following articles:

Article 1. Share transfer price, payment period and method

1.1 Party A agrees to transfer shares to Party B at a provisional cost of Renminbi 400,000.00 (hereinafter the “provisional cost”); Party B agrees to receive the share transfer at the provisional cost.

1.2 In accordance with the results of a legally prudent investigation and audit as put forth in article 2.4 of this agreement, Party A and Party B shall act on the final cost (hereinafter the “final cost”) of the share transfer, which shall be linked to a fair and reasonable market price to be agreed upon in further consultation. The aforementioned consultation must be completed before December 31, 2006.

1.3 As stipulated in article 2.2 of this agreement, within three business days of completing industrial and commercial registration for the shares, Party B must remit payment of the provisional cost to Party A into a mutually agreed upon account (as indicated in the attachment).

Within one month from the day both parties reach agreement on the final cost, Party B must pay in cash the difference between the final cost and the provisional cost in a single installment to Party A (if the final cost is higher than the provisional cost), or Party A must refund in cash the difference between the final cost and the provisional cost in a single installment to Party B (if the final cost is lower than the provisional cost), the sole exception being in cases where this agreement provides alternative stipulations.

Before each party has come to an agreement on the final cost, no party may utilize the provisional cost funds remitted to the account specified in the attachment.

Article 2. Promises and guarantees

2.1 Party A guarantees full ownership of the shares with effective disposition and assurance that the shares have no encumbrances and are immune from third party recovery, or else Party A shall be responsible for all economic losses incurred by Party B there from. In addition, Party A shall provide compensation for any and all direct or indirect losses or damages to Party B as a result of any action by Party A or Party C that leads to a third party bringing legal action or administrative penalties against Party C before change of share registration is complete.

2.2 Party A promises that the industrial and commercial registration modification¹ tasks for the share transfer of this agreement shall be completed before September 7, 2006.

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1	This translation of is attested to at http://www.eastlaw.net/cases/corp/HKgreenvalley-sharedisputes.htm

 

Page 2 (of 6)

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2.3 Party B promises to pay the share transfer costs in the manner agreed upon in this agreement.

2.4 Party A must make every effort to cooperate with Party B in the completion of a legally prudent investigation of Party C and must employ the services of an internationally recognized accounting firm to perform the audit of Party C.

2.5 If the legally prudent investigation or audit specified in article 2.4 of this agreement discovers any substantive deficiencies in the business or financial activities of Party C, or if Parties A and B cannot come to an agreement on the final cost as stipulated in article 1.2 of this agreement, then the share transfer of this agreement shall be null and void. Party B must then immediately cooperate with Party A to modify industrial and commercial registration to reinstate Party A’s status as a shareholder, Party A must simultaneously and immediately return to Party B any provisional costs that have been paid, the sole exception being if any party is unable to enter into good faith negotiations as stipulated article 1.2 of this agreement.

Article 3. Liability for breach of contract

Upon this agreement becoming effective, each party must conscientiously fulfill its obligations. If any party does not properly and completely fulfill its obligations, it shall be liable for the compensation of the damages to the abiding party.

Article 4. Dispute resolution

Any disputes that arise between the parties in the process of fulfilling the obligations of this agreement must be resolved through amicable negotiation. If agreement cannot be reached, any party may take legal action in a court of jurisdiction.

Article 5. Modifying, suspending or terminating the agreement

Each party may negotiate to modify, suspend or terminate this agreement under the following circumstances:

1. Parties are unable to fulfill the obligations of this agreement due to force majeure.

2. Each party comes to agreement via negotiation.

3. Other circumstances as stipulated by law.

Article 6. Share transfer fees

The fees relevant to the aforementioned share transfer (such as notarial charges, stamp taxes) shall be the responsibility of the individual parties.

 

Page 3 (of 6)

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Article 7. Supplementary articles

7.1 This agreement shall take effect after the authorized representative from each party has signed and affixed an official seal (if applicable).

7.2 This agreement consists of three originals with each party retaining one original, all of which have the same legal effect.

(No text below this point)

 

Page 4 (of 6)

---

(No text on this page)²

Party A: Yang Yuyan

Party B:

Authorized Representative:

[Seal] Henan Xinyuan Real Estate Co., Ltd.

Party C:

Authorized Representative:

[Seal] Zhengzhou Mingyuan Landscape Engineering Co., Ltd.

---

2	Signatory page

 

Page 5 (of 6)

---

Attachment 1: Party A and Party B mutually designated accounts

China Merchants Bank      Authorized Signature Card³

[Partial Seal⁴]

[Partial Seal⁵]

---

3	The scanned authorized signature card is only partially legible and cannot be translated in its present state.

4	Part of a seal is visible on the right hand side of the page. It is not legible.

5	A second partial seal is visible on the right hand side of the page. It is also not legible.

 

Page 6 (of 6)

Exhibit 10.24(a)

Share Transfer Agreement

This agreement was signed by each party in Zhengzhou on September 1, 2006

Party A: Zhang Yong

Identification Number: 41010396310021930

Party B: Henan Xinyuan Real Estate Co., Ltd.

Address: Xinyuan Road No. 18, Xinyuan Mingjia Building 43, Zhengzhou City

Legal Representative: Zhang Yong

Party C: Zhengzhou Xinyuan Computer Network Engineering Co., Ltd.

Address: Xinyuan Road No. 18, Jinshui District, Zhengzhou City

Legal Representative: Zhang Yong

Whereas:

1. Party C is a limited liability company operating lawfully and established in accordance with Chinese law under the legal entity business license no.: 4101052102093. The current scope of business consists of: computer technology services, computer software development and product repair and after-sale services, security and protection engineering, the sale of: computers and computer accessories, monitoring and control equipment, and communications equipment (not including wireless) (the aforementioned items receive special national approval from the state and operate under valid license).

2. Party A lawfully owns 60% of Part C’s shares (hereinafter the “shares”);

3. Party A intends to transfer shares to Party B; Party B has agreed to receive Party A’s intended share transfer in accordance with this agreement;

4. Party B and Party C, in accordance with the internal management procedures of their respective companies, have each duly received the authorization and permission regarding this share transfer;

 

Page 1 (of 6)

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On the basis of the aforementioned, Party A and Party B have amicably negotiated the aforementioned share transfer from Party A to Party B with each party agreeing to the following articles

Article 1. Share transfer price, payment period and method

1.1 Party A agrees to transfer shares to Party B at a provisional cost of Renminbi 1,200,000.00 (hereinafter the “provisional cost”); Party B agrees to receive the share transfer at the provisional cost.

1.2 In accordance with the results of a legally prudent investigation and audit as put forth in article 2.4 of this agreement, Party A and Party B shall act on the final cost (hereinafter the “final cost”) of the share transfer, which shall be linked to a fair and reasonable market price to be agreed upon in further consultation. The aforementioned consultation must be completed before December 31, 2006.

1.3 As stipulated in article 2.2 of this agreement, within three business days of completing industrial and commercial registration for share , Party B must remit payment of the provisional cost to Party A into a mutually agreed upon account (as indicated in the attachment).

Within one month from the day both parties reach agreement on the final cost, Party B must pay in cash the difference between the final cost and the provisional cost in a single installment to Party A (if the final cost is higher than the provisional cost), or Party A must refund in cash the difference between the final cost and the provisional cost in a single installment to Party B (if the final cost is lower than the provisional cost), the sole exception being in cases where this agreement provides alternative stipulations.

Before each party has come to an agreement on the final cost, no party may utilize the provisional cost funds remitted to the account specified in the attachment.

Article 2. Promises and guarantees

2.1 Party A guarantees full ownership of the shares with effective disposition and assurance that the shares have no encumbrances and are immune from third party recovery, or else Party A shall be responsible for all economic losses incurred by Party B there from. In addition, Party A shall provide compensation for any and all direct or indirect losses or damages to Party B as a result of any action by Party A or Party C that leads to a third party bringing legal action or administrative penalties against Party C before change of share registration is complete.

2.2 Party A promises that the industrial and commercial registration modification¹ tasks for the share transfer of this agreement shall be completed before September 7, 2006.

---

1	This translation of is attested to at http://www.eastlaw.net/cases/corp/HKgreenvalley-sharedisputes.htm

 

Page 2 (of 6)

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2.3 Party B promises to pay the share transfer costs in the manner agreed upon in this agreement.

2.4 Party A must make every effort to cooperate with Party B in the completion of a legally prudent investigation of Party C and must employ the services of an internationally recognized accounting firm to perform the audit of Party C.

2.5 If the legally prudent investigation or audit specified in article 2.4 of this agreement discovers any substantive deficiencies in the business or financial activities of Party C, or if Parties A and B cannot come to an agreement on the final cost as stipulated in article 1.2 of this agreement, then the share transfer of this agreement shall be null and void. Party B must then immediately cooperate with Party A to modify industrial and commercial registration to reinstate Party A’s status as a shareholder, Party A must simultaneously and immediately return to Party B any provisional costs that have been paid, the sole exception being if any party is unable to enter into good faith negotiations as stipulated article 1.2 of this agreement.

Article 3. Liability for breach of contract

Upon this agreement becoming effective, each party must conscientiously fulfill its obligations. If any party does not properly and completely fulfill its obligations, it shall be liable for the compensation of the damages to the abiding party.

Article 4. Dispute resolution

Any disputes that arise between the parties in the process of fulfilling the obligations of this agreement must be resolved through amicable negotiation. If agreement cannot be reached, any party may take legal action in a court of jurisdiction.

Article 5. Modifying, suspending or terminating the agreement

Each party may negotiate to modify, suspend or terminate this agreement under the following circumstances:

1. Parties are unable to fulfill the obligations of this agreement due to force majeure.

2. Each party comes to agreement via negotiation

3. Other circumstances as stipulated by law.

 

Page 3 (of 6)

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Article 6. Share transfer fees

The fees relevant to the aforementioned share transfer (such as notarial charges, stamp taxes) shall be the responsibility of the individual parties.

Article 7. Supplementary articles

7.1 This agreement shall take effect after the authorized representative from each party has signed and affixed an official seal (if applicable).

7.2 This agreement consists of three originals with each party retaining one original, all of which have the same legal effect.

(No text below this point)

 

Page 4 (of 6)

---

(No text on this page)²

Party A: Zhang Yong

Party B:

Authorized Representative:

[Seal] Henan Xinyuan Real Estate Co., Ltd.

Party C:

Authorized Representative:

[Seal] Zhengzhou Xinyuan Computer Network Engineering Co., Ltd.

---

2	Signatory page

 

Page 5 (of 6)

---

Attachment 1: Party A and Party B mutually designated accounts

China Merchants Bank      Authorized Signature Card³

[Partial Seal⁴]

---

3	The scanned authorized signature card is only partially legible and cannot be translated in its present state.

4	Part of a seal is visible on the right hand side of the page. It is not legible.

 

Page 6 (of 6)

Exhibit 10.24(b)

Share Transfer Agreement

This agreement was signed by each party in Zhengzhou on September 1, 2006

Party A: Yang Yuyan

Identification Number: 41010519631014102X

Party B: Henan Xinyuan Real Estate Co., Ltd.

Address: Xinyuan Road No. 18, Xinyuan Mingjia Building 43, Zhengzhou City

Legal Representative: Zhang Yong

Party C: Zhengzhou Xinyuan Computer Network Engineering Co., Ltd.

Address: Xinyuan Road No. 18, Jinshui District, Zhengzhou City

Legal Representative: Zhang Yong

Whereas:

1. Party C is a limited liability company operating lawfully and established in accordance with Chinese law under the legal entity business license no.: 4101052102093. The current scope of business consists of: computer technology services, computer software development and product repair and after-sale services, security and protection engineering, the sale of: computers and computer accessories, monitoring and control equipment, and communications equipment (not including wireless) (the aforementioned items receive special national approval from the state and operate under valid license).

2. Party A lawfully owns 40% of Part C’s shares (hereinafter the “shares”);

3. Party A intends to transfer shares to Party B; Party B has agreed to receive Party A’s intended share transfer in accordance with this agreement;

4. Party B and Party C, in accordance with the internal management procedures of their respective companies, have each duly received the authorization and permission regarding this share transfer;

 

Page 1 (of 6)

---

On the basis of the aforementioned, Party A and Party B have amicably negotiated the aforementioned share transfer from Party A to Party B with each party agreeing to the following articles

Article 1. Share transfer price, payment period and method

1.1 Party A agrees to transfer shares to Party B at a provisional cost of Renminbi 800,000.00 (hereinafter the “provisional cost”); Party B agrees to receive the share transfer at the provisional cost.

1.2 In accordance with the results of a legally prudent investigation and audit as put forth in article 2.4 of this agreement, Party A and Party B shall act on the final cost (hereinafter the “final cost”) of the share transfer, which shall be linked to a fair and reasonable market price to be agreed upon in further consultation. The aforementioned consultation must be completed before December 31, 2006.

1.3 As stipulated in article 2.2 of this agreement, within three business days of completing industrial and commercial registration for share , Party B must remit payment of the provisional cost to Party A into a mutually agreed upon account (as indicated in the attachment).

Within one month from the day both parties reach agreement on the final cost, Party B must pay in cash the difference between the final cost and the provisional cost in a single installment to Party A (if the final cost is higher than the provisional cost), or Party A must refund in cash the difference between the final cost and the provisional cost in a single installment to Party B (if the final cost is lower than the provisional cost), the sole exception being in cases where this agreement provides alternative stipulations.

Before each party has come to an agreement on the final cost, no party may utilize the provisional cost funds remitted to the account specified in the attachment.

Article 2. Promises and guarantees

2.1 Party A guarantees full ownership of the shares with effective disposition and assurance that the shares have no encumbrances and are immune from third party recovery, or else Party A shall be responsible for all economic losses incurred by Party B there from. In addition, Party A shall provide compensation for any and all direct or indirect losses or damages to Party B as a result of any action by Party A or Party C that leads to a third party bringing legal action or administrative penalties against Party C before change of share registration is complete.

2.2 Party A promises that the industrial and commercial registration modification¹ tasks for the share transfer of this agreement shall be completed before September 7, 2006.

---

1	This translation of is attested to at http://www.eastlaw.net/cases/corp/HKgreenvalley-sharedisputes.htm

 

Page 2 (of 6)

---

2.3 Party B promises to pay the share transfer costs in the manner agreed upon in this agreement.

2.4 Party A must make every effort to cooperate with Party B in the completion of a legally prudent investigation of Party C and must employ the services of an internationally recognized accounting firm to perform the audit of Party C.

2.5 If the legally prudent investigation or audit specified in article 2.4 of this agreement discovers any substantive deficiencies in the business or financial activities of Party C, or if Parties A and B cannot come to an agreement on the final cost as stipulated in article 1.2 of this agreement, then the share transfer of this agreement shall be null and void. Party B must then immediately cooperate with Party A to modify industrial and commercial registration to reinstate Party A’s status as a shareholder, Party A must simultaneously and immediately return to Party B any provisional costs that have been paid, the sole exception being if any party is unable to enter into good faith negotiations as stipulated article 1.2 of this agreement.

Article 3. Liability for breach of contract

Upon this agreement becoming effective, each party must conscientiously fulfill its obligations. If any party does not properly and completely fulfill its obligations, it shall be liable for the compensation of the damages to the abiding party.

Article 4. Dispute resolution

Any disputes that arise between the parties in the process of fulfilling the obligations of this agreement must be resolved through amicable negotiation. If agreement cannot be reached, any party may take legal action in a court of jurisdiction.

Article 5. Modifying, suspending or terminating the agreement

Each party may negotiate to modify, suspend or terminate this agreement under the following circumstances:

1. Parties are unable to fulfill the obligations of this agreement due to force majeure.

2. Each party comes to agreement via negotiation

3. Other circumstances as stipulated by law.

 

Page 3 (of 6)

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Article 6. Share transfer fees

The fees relevant to the aforementioned share transfer (such as notarial charges, stamp taxes) shall be the responsibility of the individual parties.

Article 7. Supplementary articles

7.1 This agreement shall take effect after the authorized representative from each party has signed and affixed an official seal (if applicable).

7.2 This agreement consists of three originals with each party retaining one original, all of which have the same legal effect.

(No text below this point)

 

Page 4 (of 6)

---

(No text on this page)²

Party A: Yang Yuyan

Party B:

Authorized Representative:

[Seal] Henan Xinyuan Real Estate Co., Ltd.

Party C:

Authorized Representative:

[Seal³]

[Seal] Zhengzhou Xinyuan Computer Network Engineering Co., Ltd.

---

2	Signatory page

3	First seal is blacked out.

 

Page 5 (of 6)

---

Attachment 1: Party A and Party B mutually designated accounts

China Merchants Bank      Authorized Signature Card⁴

[Partial Seal⁵]

---

4	The scanned authorized signature card is only partially legible and cannot be translated in its present state.

5	Part of a seal is visible on the right hand side of the page. It is not legible.

 

Page 6 (of 6)

Exhibit 10.25

Share Transfer Agreement

This agreement was signed by each party in Zhengzhou on September 1, 2006

Party A: Yang Yuyan

Identification Number: 41010519631014102X

Party B: Henan Xinyuan Real Estate Co., Ltd.

Address: Xinyuan Road No. 18, Xinyuan Mingjia Building 43, Zhengzhou City

Legal Representative: Zhang Yong

Party C: Henan Xinyuan Real Estate Agency Co., Ltd.

Address: Xinyuan Road No. 18, Xinyuan Mingjia Building 43, Zhengzhou City

Legal Representative: Yang Yuyan

Whereas:

1. Party C is a limited liability company operating lawfully and established in accordance with Chinese law under the legal entity business license no.: 4100001008485. The current scope of business consists of: acting as an agent for the sale of real estate, planning, purchasing, leasing, mortgaging and other activities related to real estate as well as providing real estate information and consulting services.

2. Party A lawfully owns 55% of Part C’s shares (hereinafter the “shares”);

3. Party A intends to transfer shares to Party B; Party B has agreed to receive Party A’s intended share transfer in accordance with this agreement;

4. Party B and Party C, in accordance with the internal management procedures of their respective companies, have each duly received the authorization and permission regarding this share transfer;

 

Page 1 (of 6)

---

On the basis of the aforementioned, Party A and Party B have amicably negotiated the aforementioned share transfer from Party A to Party B with each party agreeing to the following articles:

Article 1. Share transfer price, payment period and method

1.1 Party A agrees to transfer shares to Party B at a provisional cost of Renminbi 550,000.00 (hereinafter the “provisional cost”); Party B agrees to receive the share transfer at the provisional cost.

1.2 In accordance with the results of a legally prudent investigation and audit as put forth in article 2.4 of this agreement, Party A and Party B shall act on the final cost (hereinafter the “final cost”) of the share transfer, which shall be linked to a fair and reasonable market price to be agreed upon in further consultation. The aforementioned consultation must be completed before December 31, 2006.

1.3 As stipulated in article 2.2 of this agreement, within three business days of completing industrial and commercial registration for the shares, Party B must remit payment of the provisional cost to Party A into a mutually agreed upon account (as indicated in the attachment).

Within one month from the day both parties reach agreement on the final cost, Party B must pay in cash the difference between the final cost and the provisional cost in a single installment to Party A (if the final cost is higher than the provisional cost), or Party A must refund in cash the difference between the final cost and the provisional cost in a single installment to Party B (if the final cost is lower than the provisional cost), the sole exception being in cases where this agreement provides alternative stipulations.

Before each party has come to an agreement on the final cost, no party may utilize the provisional cost funds remitted to the account specified in the attachment.

Article 2. Promises and guarantees

2.1 Party A guarantees full ownership of the shares with effective disposition and assurance that the shares have no encumbrances and are immune from third party recovery, or else Party A shall be responsible for all economic losses incurred by Party B there from. In addition, Party A shall provide compensation for any and all direct or indirect losses or damages to Party B as a result of any action by Party A or Party C that leads to a third party bringing legal action or administrative penalties against Party C before the change of share registration is complete.

2.2 Party A promises that the industrial and commercial registration modification¹ tasks for the share transfer of this agreement shall be completed before September 7, 2006.

---

1	This translation of is attested to at http://www.eastlaw.net/cases/corp/HKgreenvalley-sharedisputes.htm

 

Page 2 (of 6)

---

2.3 Party B promises to pay the share transfer costs in the manner agreed upon in this agreement.

2.4 Party A must make every effort to cooperate with Party B in the completion of a legally prudent investigation of Party C and must employ the services of an internationally recognized accounting firm to perform the audit of Party C.

2.5 If the legally prudent investigation or audit specified in article 2.4 of this agreement discovers any substantive deficiencies in the business or financial activities of Party C, or if Parties A and B cannot come to an agreement on the final cost as stipulated in article 1.2 of this agreement, then the share transfer of this agreement shall be null and void. Party B must then immediately cooperate with Party A to modify industrial and commercial registration to reinstate Party A’s status as a shareholder, Party A must simultaneously and immediately return to Party B any provisional costs that have been paid, the sole exception being if any party is unable to enter into good faith negotiations as stipulated article 1.2 of this agreement.

Article 3. Liability for breach of contract

Upon this agreement becoming effective, each party must conscientiously fulfill its obligations. If any party does not properly and completely fulfill its obligations, it shall be liable for the compensation of the damages to the abiding party.

Article 4. Dispute resolution

Any disputes that arise between the parties in the process of fulfilling the obligations of this agreement must be resolved through amicable negotiation. If agreement cannot be reached, any party may take legal action in a court of jurisdiction.

Article 5. Modifying, suspending or terminating the agreement

Each party may negotiate to modify, suspend or terminate this agreement under the following circumstances:

1. Parties are unable to fulfill the obligations of this agreement due to force majeure.

2. Each party comes to agreement via negotiation.

3. Other circumstances as stipulated by law.

 

Page 3 (of 6)

---

Article 6. Share transfer fees

The fees relevant to the aforementioned share transfer (such as notarial charges, stamp taxes) shall be the responsibility of the individual parties.

Article 7. Supplementary articles

7.1 This agreement shall take effect after the authorized representative from each party has signed and affixed an official seal (if applicable).

7.2 This agreement consists of three originals with each party retaining one original, all of which have the same legal effect.

(No text below this point)

 

Page 4 (of 6)

---

(No text on this page)²

Party A: Yang Yuyan

Party B:

Authorized Representative:

[Seal:] Henan Xinyuan Real Estate Co., Ltd.

Party C:

Authorized Representative:

[Seal:] Henan Xinyuan Real Estate Agency Co., Ltd.

---

2	Signatory page

 

Page 5 (of 6)

---

Attachment 1: Party A and Party B mutually designated accounts

China Merchants Bank      Authorized Signature Card³

[Partial Seal⁴]

---

3	The scanned authorized signature card is only partially legible and cannot be translated in its present state.

4	Part of a seal is visible on the right hand side of the page. The text is not visible.

 

Page 6 (of 6)

Exhibit 10.26(a)

Share Transfer Agreement

This agreement was signed by each party in Zhengzhou on September 1, 2006

Party A: Zhang Yong

Identification Number: 410103196310021930

Party B: Henan Xinyuan Real Estate Co., Ltd.

Address: Xinyuan Road No. 18, Xinyuan Mingjia Building 43, Zhengzhou City

Legal Representative: Zhang Yong

Party C: Henan Xinyuan Property Management Co., Ltd.

Address: Xinyuan Road No. 18, Jinshui District, Zhengzhou City

Legal Representative: Zhang Yong

Whereas:

1. Party C is a limited liability company operating lawfully and established in accordance with Chinese law under the legal entity business license no.: 4100002000740. The current scope of business consists of: property management (licensed), organizational culture (excluding performances), and athletic exchange programs (the aforementioned programs must comply with state laws and regulations, the scope of operation is based on appraisal and possession of a valid license, operations cannot commence before permission approval is received.)

2. Party A lawfully owns 80% of Part C’s shares (hereinafter the “shares”);

3. Party A intends to transfer shares to Party B; Party B has agreed to receive Party A’s intended share transfer in accordance with this agreement;

4. Party B and Party C, in accordance with the internal management procedures of their respective companies, have each duly received the authorization and permission regarding this share transfer;

 

Page 1 (of 6)

---

On the basis of the aforementioned, Party A and Party B have amicably negotiated the aforementioned share transfer from Party A to Party B with each party agreeing to the following articles

Article 1. Share transfer price, payment period and method

1.1 Party A agrees to transfer shares to Party B at a provisional cost of Renminbi 2,400,000.00 (hereinafter the “provisional cost”); Party B agrees to receive the share transfer at the provisional cost.

1.2 In accordance with the results of a legally prudent investigation and audit as put forth in article 2.4 of this agreement, Party A and Party B shall act on the final cost (hereinafter the “final cost”) of the share transfer, which shall be linked to a fair and reasonable market price to be agreed upon in further consultation. The aforementioned consultation must be completed before December 31, 2006.

1.3 As stipulated in article 2.2 of this agreement, within three business days of completing industrial and commercial registration for the shares, Party B must remit payment of the provisional cost to Party A into a mutually agreed upon account (as indicated in the attachment).

Within one month from the day both parties reach agreement on the final cost, Party B must pay in cash the difference between the final cost and the provisional cost in a single installment to Party A (if the final cost is higher than the provisional cost), or Party A must refund in cash the difference between the final cost and the provisional cost in a single installment to Party B (if the final cost is lower than the provisional cost), the sole exception being in cases where this agreement provides alternative stipulations.

Before each party has come to an agreement on the final cost, no party may utilize the provisional cost funds remitted to the account specified in the attachment.

Article 2. Promises and guarantees

2.1 Party A guarantees full ownership of the shares with effective disposition and assurance that the shares have no encumbrances and are immune from third party recovery, or else Party A shall be responsible for all economic losses incurred by Party B there from. In addition, Party A shall provide compensation for any and all direct or indirect losses or damages to Party B as a result of any action by Party A or Party C that leads to a third party bringing legal action or administrative penalties against Party C before change of share registration is complete.

2.2 Party A promises that the industrial and commercial registration modification¹ tasks for the share transfer of this agreement shall be completed before September 7, 2006.

---

1	This translation of is attested to at http://www.eastlaw.net/cases/corp/HKgreenvalley-sharedisputes.htm

 

Page 2 (of 6)

---

2.3 Party B promises to pay the share transfer costs in the manner agreed upon in this agreement.

2.4 Party A must make every effort to cooperate with Party B in the completion of a legally prudent investigation of Party C and must employ the services of an internationally recognized accounting firm to perform the audit of Party C.

2.5 If the legally prudent investigation or audit specified in article 2.4 of this agreement discovers any substantive deficiencies in the business or financial activities of Party C, or if Parties A and B cannot come to an agreement on the final cost as stipulated in article 1.2 of this agreement, then the share transfer of this agreement shall be null and void. Party B must then immediately cooperate with Party A to modify industrial and commercial registration to reinstate Party A’s status as a shareholder, Party A must simultaneously and immediately return to Party B any provisional costs that have been paid, the sole exception being if any party is unable to enter into good faith negotiations as stipulated article 1.2 of this agreement.

Article 3. Liability for breach of contract

Upon this agreement becoming effective, each party must conscientiously fulfill its obligations. If any party does not properly and completely fulfill its obligations, it shall be liable for the compensation of the damages to the abiding party.

Article 4. Dispute resolution

Any disputes that arise between the parties in the process of fulfilling the obligations of this agreement must be resolved through amicable negotiation. If agreement cannot be reached, any party may take legal action in a court of jurisdiction.

Article 5. Modifying, suspending or terminating the agreement

Each party may negotiate to modify, suspend or terminate this agreement under the following circumstances:

1. Parties are unable to fulfill the obligations of this agreement due to force majeure.

2. Each party comes to agreement via negotiation.

3. Other circumstances as stipulated by law.

 

Page 3 (of 6)

---

Article 6. Share transfer fees

The fees relevant to the aforementioned share transfer (such as notarial charges, stamp taxes) shall be the responsibility of the individual parties.

Article 7. Supplementary articles

7.1 This agreement shall take effect after the authorized representative from each party has signed and affixed an official seal (if applicable).

7.2 This agreement consists of three originals with each party retaining one original, all of which have the same legal effect.

(No text below this point)

 

Page 4 (of 6)

---

(No text on this page)²

Party A: Zhang Yong

Party B:

Authorized Representative:

[Seal] Henan Xinyuan Real Estate Co., Ltd.

Party C:

Authorized Representative:

[Seal] Henan Xinyuan Property Management Co., Ltd.

---

2	Signatory page

 

Page 5 (of 6)

---

Attachment 1: Party A and Party B mutually designated accounts

China Merchants Bank      Authorized Signature Card³

[Partial Seal⁴]

[Partial Seal⁵]

---

3	The scanned authorized signature card is only partially legible and cannot be translated in its present state.

4	Part of a seal is visible on the right hand side of the page. It is not legible.

5	A second partial seal is visible on the right hand side of the page. It is also not legible.

 

Page 6 (of 6)

Exhibit 10.26(b)

Share Transfer Agreement

This agreement was signed by each party in Zhengzhou on September 1, 2006

Party A: Yang Yuyan

Identification Number: 41010519631014102X

Party B: Henan Xinyuan Real Estate Co., Ltd.

Address: Xinyuan Road No. 18, Xinyuan Mingjia Building 43, Zhengzhou City

Legal Representative: Zhang Yong

Party C: Henan Xinyuan Property Management Co., Ltd.

Address: Xinyuan Road No. 18, Jinshui District, Zhengzhou City

Legal Representative: Zhang Yong

Whereas:

1. Party C is a limited liability company operating lawfully and established in accordance with Chinese law under the legal entity business license no.: 4100002000740. The current scope of business consists of: property management (licensed), organizational culture (excluding performances), and athletic exchange programs (the aforementioned programs must comply with state laws and regulations, the scope of operation is based on appraisal and possession of a valid license, operations cannot commence before permission approval is received.)

2. Party A lawfully owns 20% of Part C’s shares (hereinafter the “shares”);

3. Party A intends to transfer shares to Party B; Party B has agreed to receive Party A’s intended share transfer in accordance with this agreement;

4. Party B and Party C, in accordance with the internal management procedures of their respective companies, have each duly received the authorization and permission regarding this share transfer;

 

Page 1 (of 6)

---

On the basis of the aforementioned, Party A and Party B have amicably negotiated the aforementioned share transfer from Party A to Party B with each party agreeing to the following articles

Article 1. Share transfer price, payment period and method

1.1 Party A agrees to transfer shares to Party B at a provisional cost of Renminbi 600,000.00 (hereinafter the “provisional cost”); Party B agrees to receive the share transfer at the provisional cost.

1.2 In accordance with the results of a legally prudent investigation and audit as put forth in article 2.4 of this agreement, Party A and Party B shall act on the final cost (hereinafter the “final cost”) of the share transfer, which shall be linked to a fair and reasonable market price to be agreed upon in further consultation. The aforementioned consultation must be completed before December 31, 2006.

1.3 As stipulated in article 2.2 of this agreement, within three business days of completing industrial and commercial registration for the shares, Party B must remit payment of the provisional cost to Party A into a mutually agreed upon account (as indicated in the attachment).

Within one month from the day both parties reach agreement on the final cost, Party B must pay in cash the difference between the final cost and the provisional cost in a single installment to Party A (if the final cost is higher than the provisional cost), or Party A must refund in cash the difference between the final cost and the provisional cost in a single installment to Party B (if the final cost is lower than the provisional cost), the sole exception being in cases where this agreement provides alternative stipulations.

Before each party has come to an agreement on the final cost, no party may utilize the provisional cost funds remitted to the account specified in the attachment.

Article 2. Promises and guarantees

2.1 Party A guarantees full ownership of the shares with effective disposition and assurance that the shares have no encumbrances and are immune from third party recovery, or else Party A shall be responsible for all economic losses incurred by Party B there from. In addition, Party A shall provide compensation for any and all direct or indirect losses or damages to Party B as a result of any action by Party A or Party C that leads to a third party bringing legal action or administrative penalties against Party C before change of share registration is complete.

2.2 Party A promises that the industrial and commercial registration modification¹ tasks for the share transfer of this agreement shall be completed before September 7, 2006.

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1	This translation of is attested to at http://www.eastlaw.net/cases/corp/HKgreenvalley-sharedisputes.htm

 

Page 2 (of 6)

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2.3 Party B promises to pay the share transfer costs in the manner agreed upon in this agreement.

2.4 Party A must make every effort to cooperate with Party B in the completion of a legally prudent investigation of Party C and must employ the services of an internationally recognized accounting firm to perform the audit of Party C.

2.5 If the legally prudent investigation or audit specified in article 2.4 of this agreement discovers any substantive deficiencies in the business or financial activities of Party C, or if Parties A and B cannot come to an agreement on the final cost as stipulated in article 1.2 of this agreement, then the share transfer of this agreement shall be null and void. Party B must then immediately cooperate with Party A to modify industrial and commercial registration to reinstate Party A’s status as a shareholder, Party A must simultaneously and immediately return to Party B any provisional costs that have been paid, the sole exception being if any party is unable to enter into good faith negotiations as stipulated article 1.2 of this agreement.

Article 3. Liability for breach of contract

Upon this agreement becoming effective, each party must conscientiously fulfill its obligations. If any party does not properly and completely fulfill its obligations, it shall be liable for the compensation of the damages to the abiding party.

Article 4. Dispute resolution

Any disputes that arise between the parties in the process of fulfilling the obligations of this agreement must be resolved through amicable negotiation. If agreement cannot be reached, any party may take legal action in a court of jurisdiction.

Article 5. Modifying, suspending or terminating the agreement

Each party may negotiate to modify, suspend or terminate this agreement under the following circumstances:

1. Parties are unable to fulfill the obligations of this agreement due to force majeure.

2. Each party comes to agreement via negotiation.

3. Other circumstances as stipulated by law.

 

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Article 6. Share transfer fees

The fees relevant to the aforementioned share transfer (such as notarial charges, stamp taxes) shall be the responsibility of the individual parties.

Article 7. Supplementary articles

7.1 This agreement shall take effect after the authorized representative from each party has signed and affixed an official seal (if applicable).

7.2 This agreement consists of three originals with each party retaining one original, all of which have the same legal effect.

(No text below this point)

 

Page 4 (of 6)

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(No text on this page)²

Party A: Yang Yuyan

Party B:

Authorized Representative:

[Seal] Henan Xinyuan Real Estate Co., Ltd.

Party C:

Authorized Representative:

[Seal] Henan Xinyuan Property Management Co., Ltd.

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2	Signatory page

 

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Attachment 1: Party A and Party B mutually designated accounts

China Merchants Bank      Authorized Signature Card³

[Partial Seal⁴]

[Partial Seal⁵]

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3	The scanned authorized signature card is only partially legible and cannot be translated in its present state.

4	Part of a seal is visible on the right hand side of the page. It is not legible.

5	A second partial seal is visible on the right hand side of the page. It is also not legible.

 

Page 6 (of 6)

Exhibit 10.27(a)

Share Transfer Agreement

This agreement was signed by each party in Zhengzhou on August 7, 2006

Party A: Zhang Yong

Identification Number: 410103196310021930

Party B: Xinyuan Real Estate (Henan) Development Co., Ltd.¹

Address: Jingkai fifth Avenue No. 129, Economic and Technology Development Zone, Zhengzhou City

Legal Representative: Zhang Yong

Party C: Henan Xinyuan Real Estate Co., Ltd.

Address: Xinyuan Road No. 18, Xinyuan Mingjia Building 43, Zhengzhou City

Legal Representative: Zhang Yong

Whereas:

1. Party C is a limited liability company operating lawfully and established in accordance with Chinese law under the legal entity business license no.: 4100002002197. The current scope of business consists of: real estate (licensed) and the development of complete services and facilities, sales. Housing leases (licensed).

2. Party A lawfully owns 80% of Part C’s shares;

3. Party A intends to transfer its ownership of 80% of Party C’s shares to Party B; Party B has agreed to receive Party A’s transfer of 80% of Party C’s shares in accordance with this agreement;

4. Party B and Party C, in accordance with the internal management procedures of their respective companies, have each duly received the authorization and permission regarding this share transfer;

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1	Xinyuan Real Estate (Henan) Development Co., Ltd. is the previous name of Xinyuan (China) Real Estate, Ltd.

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On the basis of the aforementioned, Party A and Party B have amicably negotiated the aforementioned transfer of the Party C shares held by Party A to Party B with each party agreeing to the following articles

Article 1. Share transfer price, payment period and method

1.1 Party A agrees to transfer shares its ownership of 80% of Party C’s shares to Party B at a price of Renminbi 16,000,000.00; Party B agrees to receive the share transfer at the aforementioned price.

1.2 Party B agrees to abide by the following deadline and payment method for the aforementioned share transfer costs: within three months from the day this agreement is signed, the aforementioned share transfer costs must be paid in cash in a single installment.

Article 2. Promises and guarantees

2.1 Party A hereby guarantees full ownership of the aforementioned shares it intends to transfer to Party B with effective disposition and assurance that the shares have no encumbrances and are immune from third party recovery, or else Party A shall be responsible for all economic losses incurred by Party B there from.

2.2 Party B guarantees to pay the share transfer costs in the manner agreed upon in this agreement.

Article 3. Liability for breach of contract

Upon this agreement becoming effective, each party must conscientiously fulfill its obligations. If any party does not properly and completely fulfill its obligations, it shall be liable for the compensation of the damages to the abiding party.

Article 4. Dispute resolution

Any disputes that arise between the parties in the process of fulfilling the obligations of this agreement must be resolved through amicable negotiation. If agreement cannot be reached, any party may take legal action in a court of jurisdiction.

Article 5. Modifying, suspending or terminating the agreement

Each party may negotiate to modify, suspend or terminate this agreement under the following circumstances:

[Illegible text²]

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1. Parties are unable to fulfill the obligations of this agreement due to force majeure.

2. Each party comes to agreement via negotiation.

3. Other circumstances as stipulated by law.

Article 6. Share transfer fees

The fees relevant to the aforementioned share transfer (such as notarial charges, stamp taxes) shall be the responsibility of the individual parties.

Article 7. Supplementary articles

7.1 This agreement shall take effect after the authorized representative from each party has signed and affixed an official seal.

7.2 This agreement consists of two originals with each party retaining one original, all of which have the same legal effect.

(No text below this point)

[Illegible text³]

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3	This text appears to be the storage file path for the document. It is illegible and irrelevant to the translation.

 

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(No text on this page)⁴

Party A: Zhang Yong

Party B: Xinyuan Real Estate (Henan) Development Co., Ltd.

Authorized Representative: Zhang Yong

[Seal] Xinyuan Real Estate (Henan) Development Co., Ltd.

[Illegible text⁵]

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4	Signatory page

5	This text appears to be the storage file path for the document. It is illegible and irrelevant to the translation.

 

4

Exhibit 10.27(b)

Share Transfer Agreement

This agreement was signed by each party in Zhengzhou on August 7, 2006

Party A: Yang Yuyan

Identification Number: 410105631014102

Party B: Xinyuan Real Estate (Henan) Development Co., Ltd.¹

Address: Jingkai fifth Avenue No. 129, Economic and Technology Development Zone, Zhengzhou City

Legal Representative: Zhang Yong

Party C: Henan Xinyuan Real Estate Co., Ltd.

Address: Xinyuan Road No. 18, Xinyuan Mingjia Building 43, Zhengzhou City

Legal Representative: Zhang Yong

Whereas:

1. Party C is a limited liability company operating lawfully and established in accordance with Chinese law under the legal entity business license no.: 4100002002197. The current scope of business consists of: real estate (licensed) and the development of complete services and facilities, sales. Housing leases (licensed).

2. Party A lawfully owns 20% of Part C’s shares;

3. Party A intends to transfer its ownership of 20% of Party C’s shares to Party B; Party B has agreed to receive Party A’s transfer of 20% of Party C’s shares in accordance with this agreement;

4. Party B and Party C, in accordance with the internal management procedures of their respective companies, have each duly received the authorization and permission regarding this share transfer;

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1	Xinyuan Real Estate (Henan) Development Co., Ltd. is the previous name of Xinyuan (China) Real Estate, Ltd.

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On the basis of the aforementioned, Party A and Party B have amicably negotiated the aforementioned transfer of the Party C shares held by Party A to Party B with each party agreeing to the following articles

Article 1. Share transfer price, payment period and method

1.1 Party A agrees to transfer shares its ownership of 20% of Party C’s shares to Party B at a price of Renminbi 4,000,000.00; Party B agrees to receive the share transfer at the aforementioned price.

1.2 Party B agrees to abide by the following deadline and payment method for the aforementioned share transfer costs: within three months from the day this agreement is signed, the aforementioned share transfer costs must be paid in cash in a single installment.

Article 2. Promises and guarantees

2.1 Party A hereby guarantees full ownership of the aforementioned shares it intends to transfer to Party B with effective disposition and assurance that the shares have no encumbrances and are immune from third party recovery, or else Party A shall be responsible for all economic losses incurred by Party B there from.

2.2 Party B guarantees to pay the share transfer costs in the manner agreed upon in this agreement.

Article 3. Liability for breach of contract

Upon this agreement becoming effective, each party must conscientiously fulfill its obligations. If any party does not properly and completely fulfill its obligations, it shall be liable for the compensation of the damages to the abiding party.

Article 4. Dispute resolution

Any disputes that arise between the parties in the process of fulfilling the obligations of this agreement must be resolved through amicable negotiation. If agreement cannot be reached, any party may take legal action in a court of jurisdiction.

Article 5. Modifying, suspending or terminating the agreement

Each party may negotiate to modify, suspend or terminate this agreement under the following circumstances:

[Illegible text²]

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1. Parties are unable to fulfill the obligations of this agreement due to force majeure.

2. Each party comes to agreement via negotiation.

3. Other circumstances as stipulated by law.

Article 6. Share transfer fees

The fees relevant to the aforementioned share transfer (such as notarial charges, stamp taxes) shall be the responsibility of the individual parties.

Article 7. Supplementary articles

7.1 This agreement shall take effect after the authorized representative from each party has signed and affixed an official seal.

7.2 This agreement consists of two originals with each party retaining one original, all of which have the same legal effect.

(No text below this point)

[Illegible text³]

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3	This text appears to be the storage file path for the document. It is illegible and irrelevant to the translation.

 

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(No text on this page)⁴

Party A: Yang Yuyan

Party B: Xinyuan Real Estate (Henan) Development Co., Ltd.

Authorized Representative: Zhang Yong

[Seal] Xinyuan Real Estate (Henan) Development Co., Ltd.

[Illegible text⁵]

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4	Signatory page

5	This text appears to be the storage file path for the document. It is illegible and irrelevant to the translation.

 

4

Exhibit 10.28

[Stamp] 000010

Henan Wanzhong Real Estate Co., Ltd.

Share Transfer Agreement

 

Transferor		Yang Yuyan		(Party A)
Transferee		Henan Xinyuan Real Estate Co., Ltd.		(Party B)

In accordance with the “Company Law of the People’s Republic of China” and the by-laws of the Henan Wanzhong Real Estate Co., Ltd. (hereinafter the “Company”), Party A and Party B under the principles of equality and mutual benefit have undertaken negotiations and have received the consent of the Company stockholders to enter into the following agreement:

1. Party A is willing to transfer to Party B shares from the Company in Renminbi (longform) two million Yuan, (¥2,000,000.00 Yuan) in total (from which [no value entered]    yuan), Party B is willing to accept the transfer sum of 1,827,759.066 Yuan.

2. The share transfer shall be completed on March 16, 2006

3. Starting from the day the share transfer is completed, Party A will no longer enjoy the rights nor bear the obligations pertinent to the share transfer. Party B acknowledges the Company by-laws and shall enjoy the rights and bear the obligations of shareholder of the Company.

 

Party A		Yang Yuyan		Party B [Seal] Henan Wanzhong Real Estate Co., Ltd.

 

(Seal or signature)		(Seal or signature)
		March 16, 2006

Exhibit 21.1

SUBSIDIARIES OF XINYUAN REAL ESTATE CO., LTD

 

•

Xinyuan Real Estate, Ltd., incorporated in Cayman Islands

 

•

Xinyuan (China) Real Estate, Ltd., incorporated in the People’s Republic of China

 

•

Suzhou Xinyuan Real Estate Development Co., Ltd., incorporated in the People’s Republic of China

 

•

Anhui Xinyuan Real Estate Co., Ltd., incorporated in the People’s Republic of China

 

•

Xinyuan Real Estate (Chengdu) Co., Ltd., incorporated in the People’s Republic of China

 

•

Henan Xinyuan Real Estate Co., Ltd., incorporated in the People’s Republic of China

 

•

Qingdao Xinyuan Real Estate Co., Ltd., incorporated in the People’s Republic of China

 

•

Henan Wanzhong Real Estate Co., Ltd., incorporated in the People’s Republic of China

 

•

Shandong Xinyuan Real Estate Co., Ltd., incorporated in the People’s Republic of China

 

•

Henan Xinyuan Property Management Co., Ltd., incorporated in the People’s Republic of China

 

•

Zhengzhou Mingyuan Landscape Engineering Co., Ltd., incorporated in the People’s Republic of China

 

•

Zhengzhou Xinyuan Computer Network Engineering Co., Ltd., incorporated in the People’s Republic of China

 

•

Henan Xinyuan Real Estate Agency Co., Ltd., incorporated in the People’s Republic of China

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the reference to our firm under the caption “Experts”, “Our Summary Consolidated Financial and Operating Data”, “Selected Consolidated Financial and Operating Data” and to the use of our report dated August 28, 2007 in the Registration Statement (Form F-1) and related Prospectus of Xinyuan Real Estate Co., Ltd. for the registration of its common shares.

Shanghai, PRC

November 14, 2007

Exhibit 23.4

October 9, 2007

Mr. Zhang Longgen

Chief Financial Officer

Xinyuan Real Estate Co., Ltd.

No. 18 Xinyuan Road, Zhengzhou, Henan 450011

People’s Republic of China

Subject:    WRITTEN CONSENT OF AMERICAN APPRAISAL CHINA LIMITED

Dear Ms. Zhang:

We hereby consent to the references to our name and our final appraisal reports addressed to the board of directors of Xinyuan Real Estate Co., Ltd. (the “Company”), and to references to our valuation methodologies, assumptions and conclusions associated with such reports, in the Registration Statement on Form F-1 of the Company and any amendments thereto (the “Registration Statement”) filed or to be filed with the U.S. Securities and Exchange Commission. We further consent to the filing of this letter as an exhibit to the Registration Statement.

In giving such consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the U.S. Securities Act of 1933, as amended, or the rules and regulations adopted by the Securities and Exchange Commission thereunder (the “Act”), nor do we admit that we are experts with respect to any part of such Registration Statement within the meaning of the term “experts” as used in the Act.

In reaching our value conclusions, we relied on the accuracy and completeness of the financial statements and other data provided to us by the Company and its representatives. We did not audit or independently verify such financial statements or other data and take no responsibility for the accuracy of such information. Our valuation reports were used as part of the Company’s analysis and due diligence in reaching their value determination as stated in this registration.

 

Valuation / Transaction Consulting / Real Estate Advisory / Fixed Asset Management

Exhibit 99.1

XINYUAN REAL ESTATE CO., LTD.

CODE OF BUSINESS CONDUCT AND ETHICS

 

1.	INTRODUCTION

This Code of Business Conduct and Ethics (the “Code”) contains general guidelines for conducting the business of Xinyuan Real Estate Co., Ltd., a company incorporated in the Cayman Islands, and its subsidiaries (the “Company”). To the extent this Code requires a higher standard than required by commercial practice or applicable laws, rules or regulations, we adhere to these higher standards.

This Code is designed to deter wrongdoing and to promote:

 

(i)

honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

 

(ii)

full, fair, accurate, timely and understandable disclosure in reports and documents that the Company will file with, or submit to, the U.S. Securities and Exchange Commission (the “SEC”) and in other public communications made by the Company;

 

(iii)

compliance with applicable governmental laws, rules and regulations;

 

(iv)

prompt internal reporting of violations of the Code; and

 

(v)

accountability for adherence to the Code.

This Code applies to all of the directors, officers and employees of the Company, whether they work for the Company on a full-time, part-time, consultative, or temporary basis. We refer to all persons covered by this Code as “Company employees” or simply “employees.” This Code is intended to qualify as a code of ethics for the purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules thereunder.

The Board of Directors of the Company (the “Board”) has appointed or will appoint a compliance officer for the Company (the “Compliance Officer”). If you have any questions regarding the Code or would like to report any violation of the Code, please call or email the Compliance Officer. Certain provisions of this Code apply specifically to the Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Administration Officer, controller, and any other persons who perform similar functions for the Company (each an “executive officer”) and any questions or violations of the Code involving an executive officer shall be directed or reported to any of our independent directors on the Board or the members of the Nominating and Corporate Governance Committee of the Board, and any such questions or violations will be reviewed directly by the Board or the Nominating and Corporate Governance Committee of the Board.

 

2.	REPORTING VIOLATIONS OF THE CODE

All employees have a duty to report any known or suspected violation of this Code, including any violation of laws, rules, regulations or policies that apply to the Company. Reporting a known or suspected violation of this Code by others will not be considered an act of disloyalty, but an action to safeguard the reputation and integrity of the Company and its employees.

If you know of or suspect a violation of this Code, it is your responsibility to immediately report the violation to the Compliance Officer, who will work with you to investigate your concern. Any suspected violation of this Code involving an executive officer shall be directed or reported to any of our independent directors on the Board or to the Nominating and Corporate Governance Committee of the Board. All questions and reports of known or suspected violations of this Code will be treated with sensitivity and discretion. The Compliance Officer, the Board or the Nominating and Corporate Governance Committee of the Board and the Company will protect your confidentiality to the extent possible, consistent with the law and the Company’s need to investigate your concern.

 

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It is the Company’s policy that any employee who violates this Code will be subject to appropriate discipline in accordance with applicable laws, including termination of employment, based upon the facts and circumstances of each particular situation. Your conduct as an employee of the Company, if it does not comply with the law or with this Code, can result in serious consequences for both you and the Company.

The Company strictly prohibits retaliation against an employee who, in good faith, seeks help or reports known or suspected violations. An employee inflicting reprisal or retaliation against another employee for reporting a known or suspected violation will be subject to disciplinary action in accordance with applicable laws, up to and including termination of employment.

 

3.	CONFLICT OF INTEREST

3.1 Identifying Conflicts of Interest

A conflict of interest occurs when an employee’s private interest interferes, or appears to interfere, in any way with the interests of the Company as a whole. You should actively avoid any private interest that may influence your ability to act in the interests of the Company or that may make it difficult to perform your work objectively and effectively. Executive officers have an obligation, in the event a conflict of interest arises related to them, to provide full disclosure and refrain from the decision making process related to the matter in question.

In general, the following should be considered conflicts of interest:

 

a)

Competing Business. No employee may be concurrently employed by a business that competes with the Company or deprives it of any business.

 

b)

Corporate Opportunity. No employee should use corporate property, information or his or her position with the Company to secure a business opportunity that would otherwise be available to the Company. If you discover a business opportunity that is in the Company’s line of business, through the use of the Company’s property, information or position, you must first present the business opportunity to the Company before pursuing the opportunity in your individual capacity.

 

c)

Financial Interests.

 

(i)

No employee may have any financial interest (ownership or otherwise), either directly or indirectly through a spouse or other family member, in any other business entity if such financial interest adversely affects the employee’s performance of duties or responsibilities to the Company, or requires the employee to devote certain time during such employee’s working hours at the Company;

 

(ii)

no employee may hold any ownership interest in a privately-held company that is in competition with the Company;

 

(iii)

an employee may hold up to but no more than 5.0% ownership interest in a publicly traded company that is in competition with the Company; and

 

(iv)

no employee may hold any ownership interest in a company that has a material business relationship with the Company.

If an employee’s ownership interest in a business entity described in clause (iii) above increases to more than 5.0%, the employee must immediately report such ownership to the Compliance Officer.

 

d)

Loans or Other Financial Transactions. No employee may obtain loans or guarantees of personal obligations from, or enter into any other personal financial transaction with, any company that is a material customer, supplier or competitor of the Company. This guideline does not prohibit arms-length transactions with recognized banks or other financial institutions.

 

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e)

Service on Boards and Committees. No employee should serve on a board of directors or trustees or on a committee of any entity (whether profit or not-for-profit) whose interests reasonably could be expected to conflict with those of the Company. Employees must obtain prior approval from the Board before accepting any such board or committee position. The Company may revisit its approval of any such position at any time to determine whether service in such position is still appropriate.

It is difficult to list all of the ways in which a conflict of interest may arise, and we have provided only a few, limited examples. If you are faced with a difficult business decision that is not addressed above, ask yourself the following questions:

 

•

Is it legal?

 

•

Is it honest and fair?

 

•

Is it in the best interests of the Company?

3.2 Disclosure of Conflicts of Interest

The Company requires that employees fully disclose any situations that reasonably could be expected to give rise to a conflict of interest. If you suspect that you have a conflict of interest, or something that others could reasonably perceive as a conflict of interest, you must report it immediately to the Compliance Officer. If a director or executive officer suspects they have a conflict of interest, or something that others could reasonably perceive as a conflict of interest, they should discuss it with the Chairman of the Nominating and Corporate Governance Committee of the Board. Conflicts of interest may only be waived by the Board, or the Nominating and Corporate Governance Committee of the Board, and any waiver granted to an executive officer or director of the Company will be promptly disclosed to the public, to the extent required by law or the rules of any exchange on which the Company’s securities are listed.

3.3 Family Members and Work

The actions of family members outside the workplace may also give rise to conflicts of interest because they may influence an employee’s objectivity in making decisions on behalf of the Company. If a member of an employee’s family is interested in doing business with the Company, the criteria as to whether to enter into or continue the business relationship, and the terms and conditions of the relationship, must be no less favorable to the Company compared with those that would apply to a non-relative seeking to do business with the Company under similar circumstances.

Employees should report any situation involving family members that could reasonably be expected to give rise to a conflict of interest to their supervisor or the Compliance Officer. For purposes of this Code, “family members” or “members of your family” include your spouse, brothers, sisters and parents, in-laws and children.

 

4.	GIFTS AND ENTERTAINMENT

The giving and receiving of gifts is common business practice. Appropriate business gifts and entertainment are welcome courtesies designed to build relationships and understanding among business partners. However, gifts and entertainment should never compromise, or appear to compromise, your ability to make objective and fair business decisions.

It is the responsibility of employees to use good judgment in this area. As a general rule, employees may give or receive gifts or entertainment to or from customers or suppliers only if the gift or entertainment could not be viewed as an inducement to any particular business decision. All gifts

 

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and entertainment expenses made on behalf of the Company must be properly accounted for on expense reports, and all gift and entertainment expenses exceeding RMB1,000 made on behalf of the Company must be approved by the head of the relevant department of the Company.

Employees may only accept appropriate gifts. We encourage employees to submit gifts received to the Company. While it is not mandatory to submit small gifts, gifts of over RMB200 must be submitted immediately to the administration department of the Company.

The Company’s business conduct is founded on the principle of “fair transaction.” Therefore, no employee may give or receive kickbacks, bribe others, or secretly give or receive commissions or any other personal benefits.

 

5.	THE FOREIGN CORRUPT PRACTICES ACT

The U.S. Foreign Corrupt Practices Act (the “FCPA”) prohibits the Company and its employees and agents from offering or giving money or any other item of value to win or retain business or to influence any act or decision of any governmental official, officer or employee of a government-owned or -controlled business or company, political party, candidate for political office or official of a public international organization. Stated more concisely, the FCPA prohibits paying or offering bribes, kickbacks or other inducements to government officials. This prohibition also extends to payments to a sales representative or agent if there is reason to believe that the payment will be used indirectly for a prohibited payment to government officials. Violation of the FCPA is a crime that can result in severe fines and criminal penalties, as well as disciplinary action by the Company, up to and including termination of employment.

Certain small facilitation payments to government officials may be permissible under the FCPA if intended to secure routine governmental action. Governmental action is “routine” if it is ordinarily and commonly performed by a low-level government official and does not involve the exercise of discretion. For instance, “routine” functions would include setting up a telephone line or expediting a shipment through customs. To ensure legal compliance, all facilitation payments must receive prior written approval from the Compliance Officer and must be clearly and accurately reported as a business expense.

 

6.	FAIR DEALING

The Company strives to compete and to succeed through superior performance and products and without the use of unethical or illegal practices. Accordingly, the Company’s employees should respect the rights of, and should deal fairly with, the Company’s customers, suppliers, competitors and employees and should not take unfair advantage of anyone through manipulation, concealment, abuse of privileged information or any material misrepresentation. For example, an individual should not:

 

(i)

give or receive kickbacks, bribe others, or secretly give or receive commissions or any other personal benefits;

 

(ii)

spread rumors about competitors, customers or suppliers that the individual knows to be false;

 

(iii)

intentionally misrepresent the nature of quality of the Company’s products; or

 

(iv)

otherwise seek to advance the Company’s interests by taking unfair advantage of anyone through unfair dealing practices, including engaging in unfair practices through a third party.

 

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7.	PROTECTION AND USE OF COMPANY ASSETS

Employees should protect the Company’s assets and ensure their efficient use for legitimate business purposes only. Theft, carelessness and waste have a direct impact on the Company’s profitability. The use of the funds or assets of the Company, whether for personal gain or not, for any unlawful or improper purpose is strictly prohibited.

To ensure the protection and proper use of the Company’s assets, each employee should:

 

(i)

exercise reasonable care to prevent theft, damage or misuse of Company property;

 

(ii)

promptly report the actual or suspected theft, damage or misuse of Company property;

 

(iii)

safeguard all electronic programs, data, communications and written materials from inadvertent access by others; and

 

(iv)

use Company property only for legitimate business purposes.

 

8.	ACCURACY OF FINANCIAL REPORTS AND OTHER PUBLIC COMMUNICATIONS

Upon the completion of the Company’s initial public offering, the Company will be a public company which is required to report its financial results and other material information about its business to the public and the SEC. It is the Company’s policy to promptly disclose accurate and complete information regarding its business, financial condition and results of operations. Employees must strictly comply with all applicable standards, laws, regulations and policies for accounting and financial reporting of transactions, estimates and forecasts. Inaccurate, incomplete or untimely reporting will not be tolerated and can severely damage the Company and result in legal liability.

Employees should be on guard for, and promptly report, any possibility of inaccurate or incomplete financial reporting. Particular attention should be paid to:

 

(i)

financial results that seem inconsistent with the performance of the underlying business;

 

(ii)

transactions that do not seem to have an obvious business purpose; and

 

(iii)

requests to circumvent ordinary review and approval procedures.

The Company’s senior financial officers and other executive officers and employees working in the finance and accounting department have a special responsibility to ensure that all of the Company’s financial disclosures are full, fair, accurate, timely and understandable. The Company’s senior financial officers and chief executive officer must familiarize himself or herself with the disclosure requirements applicable to the Company and its disclosure controls and procedures and must ensure the Company complies with its timely disclosure obligations under applicable laws or the rules of any exchange on which the Company’s securities are listed. Any practice or situation that might undermine this objective should be reported to the Compliance Officer.

The Company’s senior financial officers and other executive officers must not knowingly misrepresent or cause others to misrepresent, facts about the Company to others, including to the Company’s directors and auditors and to governmental regulators and self-regulatory organizations.

Employees are prohibited from directly or indirectly taking any action to coerce, manipulate, mislead or fraudulently influence the Company’s independent auditors for the purpose of rendering the financial statements of the Company materially misleading. Prohibited actions include but are not limited to those actions taken to coerce, manipulate, mislead or fraudulently influence an auditor:

 

(i)

to issue or reissue a report on the Company’s financial statements that is not warranted in the circumstances (due to material violations of U.S. GAAP, generally accepted auditing standards or other professional or regulatory standards);

 

(ii)

not to perform audit, review or other procedures required by generally accepted auditing standards or other professional standards;

 

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(iii)

not to withdraw an issued report; or

 

(iv)

not to communicate matters to the Company’s audit committee of the Board.

Employees with information relating to questionable accounting or auditing matters may also confidentially, and anonymously if they desire, submit the information in writing to the Company’s audit committee of the Board.

 

9.	COMPANY RECORDS

Accurate and reliable records are crucial to the Company’s business and form the basis of its earnings statements, financial reports and other disclosures to the public. The Company’s records are the source of essential data that guides business decision-making and strategic planning. Company records include, but are not limited to, business operating data and information, payroll, timecards, travel and expense reports, e-mails, accounting and financial data, measurement and performance records, electronic data files and all other records maintained in the ordinary course of our business.

All Company records must be complete, accurate and reliable in all material respects. There is never an acceptable reason to make false or misleading entries. Undisclosed or unrecorded funds, payments or receipts are strictly prohibited. You are responsible for understanding and complying with the Company’s record keeping policy. Contact the Compliance Officer if you have any questions regarding the record keeping policy.

 

10.	COMPLIANCE WITH LAWS AND REGULATIONS; INSIDER TRADING

It is the responsibility of each executive officer to promote adherence with the standards and restrictions imposed by all applicable laws, rules and regulations. Each employee has an obligation to comply with the laws of the cities, provinces, regions and countries in which the Company operates. This includes, without limitation, laws covering commercial bribery and kickbacks, copyrights, trademarks and trade secrets, information privacy, insider trading, offering or receiving gratuities, employment harassment, environmental protection, occupational health and safety, false or misleading financial information, misuse of corporate assets or foreign currency exchange activities. Employees are expected to understand and comply with all laws, rules and regulations that apply to your position at the Company. If any doubt exists about whether a course of action is lawful, you should seek advice immediately from the Compliance Officer.

Employees are prohibited from trading securities while in possession of material nonpublic information, whether of the Company or other companies. “Material nonpublic” information includes any information, positive or negative, that has not yet been made available or disclosed to the public and that might be of significance to an investor, as part of the total mix of information, in deciding whether to buy or sell stock or other securities. Employees must comply with any insider trading policy implemented by the Company.

Such insiders also are prohibited from giving “tips” on material nonpublic information, that is, directly or indirectly disclosing such information to any other person, including family members, other relatives and friends, so that they may trade in our stock or other securities.

 

11.	CONFIDENTIALITY

An Employee must maintain the confidentiality of all information entrusted to him or her by the Company, its suppliers, its customers and other individuals or entities related to the Company’s business. Confidential information includes any nonpublic information that if disclosed might be useful to the Company’s competitors or harmful to the Company, or its customers or suppliers. Confidential information includes, among other things, the Company’s customer lists and details, new product plans, new marketing platforms or strategies, computer software, trade secrets, research and development findings, manufacturing processes, or the Company’s acquisition or sale prospects.

 

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Employees in possession of confidential information must take steps to secure such information. Employees must take steps to ensure that only other Employees who have a “need to know” the confidential information in order to do their job can access it, and to avoid discussion or disclosure of confidential information in public areas (for example, in elevators, on public transportation, and on cellular phones). An Employee may only disclose confidential information when disclosure is authorized by the Company or legally required.

Upon termination of employment, or at such other time as the Company may request, each Employee must return to the Company any medium containing confidential information, and may not retain duplicates. An Employee has an ongoing obligation to preserve confidential information, even after his or her termination of employment with the Company, until such time as the Company discloses such information publicly or the information otherwise becomes available to the public through no fault of the Employee.

 

12.	WORKPLACE ENVIRONMENT

12.1 Discrimination and Harassment

The Company is firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment based on race, ethnicity, religion, gender, age, national origin or any other protected class. For further information, you should consult the Compliance Officer.

12.2 Health and Safety

The Company is committed to providing employees with a safe and healthy work environment. Each employee has responsibility for maintaining a safe and healthy workplace for other employees by following environmental, safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions. Violence and threatening behavior are not permitted

Each employee is expected to perform his or her duty to the Company in a safe manner, free of the influences of alcohol, illegal drugs or other controlled substances. The use of illegal drugs or other controlled substances in the workplace is prohibited.

 

13.	WAIVERS OF THE CODE

Waivers of this Code will be granted on a case-by-case basis and only in extraordinary circumstances. Waivers of this Code may be made only by the Board, or the Nominating and Corporate Governance Committee of the Board, and any waiver granted to an executive officer or director of the Company will be promptly disclosed to the public, to the extent required by law or the rules of any exchange on which the Company’s securities are listed.

 

14.	CONCLUSION

This Code contains general guidelines for conducting the business of the Company consistent with the highest standards of business ethics. If you have any questions about these guidelines, please contact the Compliance Officer. We expect all employees to adhere to these standards. Each employee is separately responsible for his or her actions. Conduct that violates the law or this Code cannot be justified by claiming that it was ordered by a supervisor or someone in higher management. If you engage in conduct prohibited by the law or this Code, you will be deemed to have acted outside the scope of your employment. Such conduct will subject you to disciplinary action, including termination of employment.

* * * * * * * * * * * * *

 

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CERTIFICATION OF COMPLIANCE

 

TO:	Compliance Officer

FROM:                                         

 

RE:	Code of Business Conduct and Ethics of Xinyuan Real Estate Co., Ltd.

I have received, reviewed, and understand the above-referenced Code of Business Conduct and Ethics (the “Code”) and hereby undertake, as a condition to my present and continued employment at or association with Xinyuan Real Estate Co., Ltd. and/or any of its affiliated entities (collectively, the “Company”), to comply fully with the Code.

I hereby certify that I have adhered to the Code during the time period that I have been associated with the Company.

I agree to adhere to the Code in the future.

 

Name:

Date:

Exhibit 99.2

EXECUTION COPY

NONCOMPETITION COVENANT AND AGREEMENT

THIS NONCOMPETITION COVENANT AND AGREEMENT (this “Agreement”) is made and entered into as of this 13th day of April, 2007, by Mr. ZHANG Yong, an individual residing in the city of Zhengzhou, in Henan Province in the People’s Republic of China (the “PRC”), (PRC ID No. 410103196310021930) (“Executive”) for the benefit of the parties listed in Schedule I attached hereto (the “Purchasers”).

RECITALS

WHEREAS, Executive serves as the President of Xinyuan Real Estate Co., Ltd. (the “Company”);

WHEREAS, Executive is also a shareholder of the Company;

WHEREAS, pursuant to the purchase agreements dated of even date herewith among the Company, the wholly-owned subsidiaries of the Company, the Controlling Shareholders (as defined therein) and the Purchasers respectively, and other related documents pertaining to such purchase (collectively, the “Transaction Documents”), the Company shall issue and sell to Purchasers, and Purchasers shall purchase, (i) an aggregate of 750 units consisting of units of Guaranteed Senior Secured Floating Rate Notes (the “Floating Rate Notes”) and warrants (the “Warrants”), for an aggregate consideration of US$75,000,000 and (ii) 2% Convertible Subordinated Notes due 2012 (together with the Floating Rate Notes, the “Notes”) for an aggregate consideration of US$25,000,000;

WHEREAS, to induce the Purchasers to consummate the transactions under the Transaction Documents, and to preserve for the Purchasers the valuable rights procured by Purchasers pursuant to the Transaction Documents, Executive agreed to certain covenants to be made by Executive for the benefit of the Purchasers regarding certain future activities and actions by Executive;

AGREEMENT

NOW, THEREFORE, in consideration of the mutual agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

Section 1. Definitions. Capitalized terms used in this Agreement shall have the meanings set forth below.

1.1 “Agreement” is defined in the Preamble.

1.2 “Business” shall mean the acquisition, development, sale and management of residential real estate in the PRC.

 

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1.3 “Company” is defined in the Recitals.

1.4 “Company Affiliate” shall mean any entity engaged in the Business which is controlled, directly or indirectly, by the Company.

1.5 “Competitive Business” shall mean any business that is in the Business and competes with the Company or any Company Affiliate.

1.6 “Executive” is defined in the Preamble.

1.7 “Notes” is defined in the Recitals.

1.8 “PRC” is defined in the Preamble.

1.9 “Purchasers” is defined in the Preamble.

1.10 “Term” is defined in Section 2.1.

1.11 “Trade Secret” shall mean any information, including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans, actual or future services, or lists of actual or potential customers or suppliers that are not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use.

1.12 “Transaction Documents” is defined in the Recitals.

1.13 “Work Product” shall mean all intellectual property rights, including all Trade Secrets, U.S. and international copyrights, patentable ideas or inventions, discoveries and improvements, and other intellectual property rights, in any documentation, programming, technology, or other work that relates to the business and interests of the Company and that was or is conceived or developed by Executive, or delivered by Executive to the Company at any time during the term of Executive’s employment with the Company.

Section 2. Covenants.

2.1 Noncompetition and Nonsolicitation. During the period commencing as of the date hereof and for so long as the later of (i) any of the Notes remain outstanding and (ii) any Warrants remain outstanding (such period, the “Term”), Executive hereby agrees that Executive (including his spouse, infant children, siblings, any company or undertaking in which he holds a controlling interest, or any person related by marriage or consanguinity) will not, directly or indirectly, engage in, or have any interest in, any person, firm, corporation, or business (whether as an executive, officer, director, agent, security holder, consultant, investor or similar position) that engages in a Competitive Business, or otherwise interfere with the business of the Company or Company Affiliates, including without limitation:

 

2

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(a) either on his own behalf or on behalf of any other person, solicit business similar to the Business from any customer, supplier, distributor of, or a person in a similar commercial relationship with, the Company or Company Affiliates; and

(b) either on his own behalf or on behalf of any other person, solicit, employ or otherwise engage as an employee, independent contractor, or otherwise any person who is and was, at any time during one year prior to such solicitation, employment or engagement, an employee of the Company or Company Affiliates, or in any manner induce any employee of the Company or Company Affiliates to terminate his or her employment therewith.

Notwithstanding the foregoing paragraphs of this Section 2.1:

(i) Executive may own, directly or indirectly, as an investor, securities of any corporation (the stock of which is publicly traded) engaging in a Competitive Business, so long as Executive’s aggregate holdings in each such corporation shall not constitute more than five percent (5%) of such corporation’s voting stock;

(ii) Executive represents that the entities identified in Schedule II represent the pre-existing relationships disclosed by the Company in the Disclosure Schedules to the Purchase Agreement which form part of the Transaction Documents and do not engage in a Competitive Business and for the foregoing reason, the Executive may continue his involvement as a shareholder, officer or director of such entities so long as such entities do not engage in a Competitive Business during such involvement; and

(iii) Executive may serve as a shareholder, director or officer of any entity that is not engaged in a Competitive Business.

2.2 Continued Employment. Executive agrees that during the Term, (a) except in the event of an involuntary termination, he will continue to serve as the President or a senior officer of the Company; and (b) he will not voluntarily resign as a director of the Company.

2.3 Confidentiality and Other Covenants. Executive agrees that:

(a) he shall keep confidential any information, including Trade Secrets, relating to the Company, Company Affiliates, and the Business (unless such disclosure is permitted in writing by the Company, required under law or by order of any governmental or regulatory authority, or relates to information already in the public domain, or to a third party who has rightfully obtained such Trade Secrets without breach of any confidentiality obligation);

(b) all Work Product of Executive conceived (whether solely or jointly with others) within the scope of his employment with the Company belongs to the Company and any and all of his rights to such Work Product, to the extent not yet assigned, are hereby assigned to the Company;

 

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(c) upon the termination of his employment with the Company, at the request of the Company, he shall return to the Company all of the Company’s proprietary items in his possession or under his control and shall not retain any copies or other physical embodiment of any of such items; and

(d) upon the termination of his employment with the Company, he shall not hold himself out as an employee, agent or representative of the Company.

2.4 Termination. The parties agree that the Term shall terminate, and this Agreement shall be deemed terminated and of no further effect, without necessity of further action by Executive or the Purchasers, upon the expiration of the Term.

2.5 Specific Enforcement. Upon a breach by Executive of Section 2.1 or 2.3, in addition to such damages as the Purchasers can show they have sustained, directly or indirectly, by reason of said breach and in addition to any other remedies to which Purchasers may be entitled under the laws of the PRC, the Purchasers shall be entitled to injunctive relief against Executive if such relief is applicable and available, as monetary compensation alone would be inadequate and insufficient. Nothing in this Agreement shall be construed as limiting the Purchasers’ remedies in any way.

Section 3. Miscellaneous.

3.1 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, in each case, to the extent permitted by applicable law, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable, to the extent permitted by applicable law.

3.2 Counterparts. This may be executed in counterparts, each of which shall be deemed to be an original, and all such counterparts together shall constitute but one and the same instrument.

3.3 Governing Law; Arbitration. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF PEOPLE’S REPUBLIC OF CHINA. All disputes arising out of or in connection with this Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by three arbitrators appointed as follows: one arbitrator shall be

 

4

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appointed by the Purchasers, one arbitrator shall be appointed by Executive, and the third arbitrator shall be appointed jointly by the two arbitrators appointed by the parties. The place of arbitration shall be in Hong Kong. The arbitration shall be conducted in English. The arbitration awards shall be final and binding upon the parties.

3.4 Assignment. Executive agrees that this Agreement shall inure to the benefits of all holders of the Notes, whether or not the Purchasers.

3.5 Notice. Any notices to be given hereunder by either party to the other may be effectuated either by personal delivery in writing or by mail, postage prepaid, with return receipt requested. Notices shall be addressed to the parties as follows:

If to the Purchasers:

The addresses of the Purchasers as indicated in Schedule I

If to Executive:

Mr. ZHANG Yong

No. 129, 5th Avenue

Zhengzhou Economic and Technology Development Zone

Henan Province, P.R. China

or to such other address as either the parties may designate by written notice to each other. Notices delivered personally shall be deemed duly given on the date of actual receipt; mailed notices shall be deemed duly given as of the fifth day after the date so mailed. Notices hereunder may be delivered by electronic facsimile transmission (fax) if confirmation by sender is made within three business days by mail or personal delivery.

3.6 Third Party Beneficiary Rights. This Agreement has been made and is made solely for the benefit of, and shall be binding upon, the Purchasers (and their respective successors and assigns) and Executive, and no other person shall acquire or have any rights under or by virtue of this Agreement.

3.7 Attorney’s Fees. If any party shall bring a procedure to enforce this Agreement, the prevailing party shall be entitled to recover the reasonable attorneys’ fees and costs incurred by such party from the unsuccessful party.

[signature page follows]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Noncompetition Covenant and Agreement as of the date first set forth above.

 

[SIGNATURE PAGE TO NONCOMPETITION COVENANT AND AGREEMENT]

 

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Accepted by:

PURCHASERS:

DILLON READ FINANCIAL TRADING PRODUCTS LTD.

 

By		/s/ Bryan Choo				/s/ Richard Thomas
Name:		Bryan Choo				Richard Thomas
Title:		Executive Director				Managing Director

[SIGNATURE PAGE TO NONCOMPETITION COVENANT AND AGREEMENT]

 

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Accepted by:

PURCHASERS:

DILLON READ FINANCE LP

 

By		/s/ Bryan Choo				/s/ Richard Thomas
Name:		Bryan Choo				Richard Thomas
Title:		Executive Director				Managing Director

[SIGNATURE PAGE TO NONCOMPETITION COVENANT AND AGREEMENT]

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Accepted by:

PURCHASERS:

MERRILL LYNCH INTERNATIONAL

 

By		/s/ Joseph Bretti
Name:		Joseph Bretti
Title:		Vice President

[SIGNATURE PAGE TO NONCOMPETITION COVENANT AND AGREEMENT]

 

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Accepted by:

PURCHASERS:

POLYGON GLOBAL OPPORTUNITIES MASTER FUND

 

By		/s/ M J BANCROFT
Name:		M J BANCROFT
Title:

[SIGNATURE PAGE TO NONCOMPETITION COTENANT AND AGREEMENT]

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Accepted by:

PURCHASERS:

DRAWBRIDGE GLOBAL MACRO MASTER FUND LTD

 

By
Name:
Title:

[SIGNATURE PAGE TO NONCOMPETITION COVENANT AND AGREEMENT]

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Accepted by:

PURCHASERS:

FORUM ASIAN REALTY INCOME II L.P.

By: Forum Asian Realty Income II GP Limited,

Its general partner

 

By:		/s/ Russell C. Platt
Name:		Russell C. Platt
Title:		Authorized Signatory

[SIGNATURE PAGE TO NONCOMPETITION COVENANT AND AGREEMENT]

 

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SCHEDULE I

Purchasers and Notice Addresses

DRAWBRIDGE GLOBAL MACRO MASTER FUND LTD

Address:

Ugland House, South Church Street

George Town, Grand Cayman

Facsimile:

Email:

POLYGON GLOBAL OPPORTUNITIES MASTER FUND

Address:

Polygon Investment Partners HK Limited

Suite 1501 - 1502

Cheung Kong Center

2 Queen’s Road Central

Hong Kong

Fax: +852 3762 6301

Email:

MERRILL LYNCH INTERNATIONAL

Address:

Merrill Lynch Financial Center

2 King Edward Street

London EC1A 1HQ

England

Facsimile:

Email:

FORUM PARTNERS ASIAN REALTY INCOME II, LP

Address:

Suite 2604, 26th Floor, Alexandra House

18 Chater Road, Central

Hong Kong

Facsimile:

Email:

DILLON READ FINANCE LP

Address:

5 Temasek Boulevard

#18-00 Suntec Tower Five

Singapore

Facsimile:

Email:

DILLON READ FINANCIAL TRADING PRODUCTS LTD.

Address:

5 Temasek Boulevard

#18-00 Suntec Tower Five

Singapore

Facsimile:

Email:

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Schedule II

Pre-Existing Relationships