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Share Exchange Agreement

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Sectors: Chemicals
Governing Law: New York, View New York State Laws
Effective Date: February 05, 2007
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SHARE EXCHANGE AGREEMENT


AMONG


DIVERSIFAX, INC


UPPER CLASS GROUP LIMITED


SHOUGUANG CITY HAOYUAN CHEMICAL COMPANY LIMITED


SHOUGUANG YUXIN CHEMICAL INDUSTRY CO, LTD.


AND


THE SHAREHOLDERS
OF


SHOUGUANG YUXIN CHEMICAL INDUSTRY CO, LTD.


LISTED ON SCHEDULE 1


DATED AS OF


February 5, 2007


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INDEX OF SCHEDULES AND EXHIBITS


Exhibits:


A. Certain Definitions


B. Form of Promissory Note


Schedules:


1. Shareholders of Shouguang Yuxin Chemical Industry Co, Ltd.


2. Shouguang Yuxin Chemical Industry Co, Ltd. Disclosure Schedule


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SHARE EXCHAGE AGREEMENT


This Share Exchange Agreement (the "Agreement") dated as of February 5, 2007, is entered into by and among Diversifax, Inc., a Delaware corporation ("DSFX"), Upper Class Group Limited, a British Virgin Island corporation and a wholly own subsidiary of DSFX ("UCG"), Shouguang City Haoyuan Chemical Company Limited, a wholly own subsidiary of UCG ("SCHC"), Shouguang Yuxin Chemical Industry Co, Ltd., a Shouguang corporation in China ("SYCI"), and the shareholders of SYCI listed on Schedule 1 to this Agreement (each, a "Shareholder" and, collectively, the "Shareholders").


RECITALS


A. The Shareholders collectively own 100% of the issued and outstanding shares of capital stock of SYCI (the "Shares") in accordance with on Schedule 1 to this Agreement.


B. SCHC is a wholly own subsidiary of UCG, and UCG is a wholly own subsidiary of DSFX. SCHC desires to purchase from the Shareholders, and the Shareholders desire to sell to SCHC the Shares in exchange for shares of DSFX Common Stock, all on the terms and subject to the conditions set forth in this Agreement (the "Exchange").


C. As a result of the Exchange, SCHC will become the sole shareholder of SYCI. DSFX will own SYCI through UCG and SCHC.


D. Certain capitalized terms used in this Agreement are defined on Exhibit A.


AGREEMENT


In consideration of the agreements, provisions and covenants set forth below, DSFX, UCG, SCHC, the Shareholders and SYCI, hereby agree as follows:


ARTICLE I.
EXCHANGE OF SHARES


1.1 AGREEMENT TO SELL.


Upon the terms and subject to all of the conditions contained herein, each of the Shareholders hereby agrees to sell, assign, transfer and deliver to SCHC, and SCHC hereby agrees to purchase and accept from each of the Shareholders, on the Closing Date, the Shares.


1.2 PURCHASE PRICE.


As full consideration for the sale, assignment, transfer and delivery of the Shares by the Shareholders to SCHC, and upon the terms and subject to all of the conditions contained herein, DSFX shall issue to the Shareholders an aggregate of 16,188,118 shares of Restricted DSFX Common Stock (the "Acquisition Shares") at $1.01 per share and pay cash (the "Cash Component") of $2,550,000 to the Shareholders. The Cash Component is payable by SCHC as follows: $2,550,000 is payable within six months after the Closing as evidenced by the promissory note annexed hereto as Exhibit B. The parties understand and acknowledge that such exchange is based upon an approximate valuation of SYCI at US $18,900,000.


1.3 MECHANICS OF EXCHANGE.


(a) At the Closing, each Shareholder shall be entitled to surrender the certificate or certificates that immediately prior to the Closing represented the SYCI Common Stock (the "Certificates") to the exchange agent designated by SCHC in exchange for the Acquisition Shares and the Cash Component.


(b) Promptly after the Closing, DSFX or its designated exchange agent shall make available to each Shareholder a letter of transmittal and instructions for use in effecting the surrender of Certificates in exchange for the Acquisition Shares. Upon surrender of a Certificate to such exchange agent together with the letter of transmittal, duly executed, the Shareholder shall be entitled to receive in exchange therefore such number of Acquisition Shares as such Shareholder has the right to receive in respect of the Certificate so surrendered pursuant to the provisions of this Article I.


1.4 NO FRACTIONAL SHARES.


No fraction of a share of DSFX Common Stock shall be issued in the Exchange. In lieu of fractional shares, the Shareholders upon surrender of their Certificates as set forth in Section 1.3 shall be paid an amount in cash, without interest, rounded to the nearest cent, determined by multiplying the fractional interest to which such Shareholder would otherwise be entitled by the DSFX Stock Price as of $1.01 per share agreed by all parties.


1.5 CLOSING.


The closing of the transactions contemplated by this Agreement (the "Closing") shall take place in New York, on or before February 15, 2007, (the "Closing Date"); provided, however, that if all of the other conditions set forth in Articles VI and VII hereof are not satisfied or waived, unless this agreement has been terminated under Section 9 hereof, or at such date, the Closing Date shall be the business day following the day on which all such conditions have been satisfied or waived, or at such other date, time and place as DSFX, UCG, SCHC, SYCI, and the Shareholders shall agree.


ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF SYCI


Except as set forth in the Disclosure Schedule attached hereto provided by SYCI (the "SYCI Disclosure Schedule"), the parts of which are numbered to correspond to the section numbers of this Agreement, each of SYCI and the Shareholders represents and warrants jointly and severally to DSFX and SCHC as follows:


2.1 ORGANIZATION AND QUALIFICATION.


SYCI is duly incorporated, validly and in good standing existing under the laws of China, has all requisite authority and power (corporate and other), governmental licenses, authorizations, consents and approvals to carry on its business as presently conducted and as contemplated to be conducted, to own, hold and operate its properties and assets as now owned, held and operated by it, to enter into this Agreement, to carry out the provisions hereof except where the failure to be in good standing or to have such governmental licenses, authorizations, consents and approvals will not, in the aggregate, either (i) have a Material Adverse Effect on the business, assets or financial condition of SYCI, or (ii) impair the ability of SYCI to perform its material obligations under this Agreement. SYCI duly qualified, licensed or domesticated as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or its properties owned or leased requires such qualification, licensing or domestication, except where the failure to be so qualified, licensed or domesticated will not have a Material Adverse Effect. Set forth on Part 2.1 of the SYCI Disclosure Schedule is a list of those jurisdictions in which SYCI presently conducts its business, owns, holds and operates its properties and assets.


2.2 SUBSIDIARIES.


SYCI do not own directly or indirectly, any equity or other ownership interest in any corporation, partnership, joint venture or other entity or enterprise. SYCI do not have any direct or indirect interests of stock ownership or otherwise in any corporation, partnership, joint venture, firm, association or business enterprise, and is not party to any agreement to acquire such an interest.


2.3 ARTICLES OF INCORPORATION AND BYLAWS.


The copies of the Articles of Incorporation and bylaws of SYCI (collectively, the "Organizational Documents") that have been delivered to DSFX and SCHC prior to the execution of this Agreement are true and complete and have not been amended or repealed. SYCI are not in violation or breach of any of the provisions of the Organizational Documents, except for such violations or breaches which, in the aggregate, will not have a Material Adverse Effect on SYCI.


2.4 AUTHORIZATION AND VALIDITY OF THIS AGREEMENT.


This Agreement and each of the Transaction Agreements constitute the legal, valid and binding obligation of each person or entity who is a party thereto (other than SCHC and DSFX), enforceable against each such person or entity in accordance with its terms, except as such enforcement is limited by general equitable principles, or by bankruptcy, insolvency and other similar laws affecting the enforcement of creditors rights generally. Each of the Shareholders and SYCI has all requisite legal capacity to execute and deliver this Agreement and the Transaction Agreements to which he or she is a party, and to perform its, his or her obligations hereunder and thereunder. The execution and delivery by SYCI and each Shareholders of this Agreement and the Transaction Agreements (to the extent either is a party thereto), and the consummation of the transactions contemplated herein and therein (the "Transactions") have been authorized by all necessary corporate or other action on the part of SYCI and each of the Shareholders. This Agreement and the Transaction Agreements have been duly executed and delivered by the parties thereto (other than SCHC and DSFX).


2.5 NO VIOLATION.


Neither the execution nor delivery of this Agreement or the Transaction Agreements, nor the consummation or performance of any of the Transactions by SYCI or the Shareholders will directly or indirectly:


(i) violate or conflict with any provision of the Organizational Documents of SYCI; (B) result in (with or without notice or lapse of time) a violation or breach of, or conflict with or constitute a default or result in the termination or in a right of termination or cancellation of, or accelerate the performance required by, or require notice under, any agreement, promissory note, lease, instrument or arrangement to which SYCI or any of its assets are bound or result in the creation of any Liens upon SYCI or any of its assets; (C) violate any order, writ, judgment, injunction, ruling, award or decree of any Governmental Body; ("Governmental Body"); (D) violate any statute, law or regulation of any jurisdiction as such statute, law or regulation that relates to the Shareholders, SYCI or any of the assets of SYCI; or (E) result in cancellation, modification, revocation or suspension of any permits, licenses, registrations, consents, approvals, authorizations or certificates issued or granted by any Governmental Body which are held by or granted to the Shareholders, or SYCI or which are necessary for the conduct of SYCI's business; or


(ii) to the knowledge of SYCI or any of the Shareholders, cause SYCI to become subject to, or to become liable for the payment of, any Tax (as hereinafter defined) or cause any of the assets owned by SYCI to be reassessed or revalued by any taxing authority or other Governmental Body.


None of SYCI or the Shareholders is or will be required to give any notice to or obtain any approval, consent, ratification, waiver or other authorization (a "Consent") from any person or entity (including, without limitation, any Governmental Body) in connection with (i) the execution and delivery of this Agreement or any of the Transaction Agreements, or (ii) the consummation or performance of any of the Transactions.


2.6 CAPITALIZATION AND RELATED MATTERS.


(a) Capitalization. The registered capital amount of SYCI is RMB 10,990,000, which equal to 100% ownership percentage of SYCI. Except as set forth in the preceding sentence, no other class of capital stock or other security of SYCI is authorized, issued, reserved for issuance or outstanding. The Shareholders, as of the Closing Date, are the lawful, record and beneficial owners of the Shares in accordance with the percentages set forth opposite each Seller's name on


Schedule 1 attached hereto. Shouguang City Haoyuan Group Ltd. and Wenxiang Yu, as of the Closing Date, are the lawful, record and beneficial owners of the total ownership interest of SYCI. Each of the Shareholders have, as of the date hereof and as of the Closing Date, valid and marketable title to their respective ownership interest of SYCI, free and clear of all Liens (including, without limitation, any claims of spouses under applicable community property laws) and are the lawful, record and beneficial owners of all of the Shares. Except as is issued to and held by the Shareholders or SYCI, no other class of capital stock or other security of SYCI, as applicable, is authorized, issued, reserved for issuance or outstanding. At the Closing, DSFX will be vested with good and marketable title to the ownership or the Shares, free and clear of all Liens (including, without limitation, any claims of spouses under applicable community property laws). No legend or other reference to any purported Lien appears upon any certificate representing the Shares. Each of the Shares has been duly authorized and validly issued and is fully paid and nonassessable. None of the outstanding capital or other securities of SYCI was issued, redeemed or repurchased in violation of the Securities Act of 1933, as amended (the "Securities Act"), or any other securities or "blue sky" laws.


(b) No Redemption Requirements. There are no authorized or outstanding options, warrants, equity securities, calls, rights, commitments or agreements of any character by which SYCI or any of the Shareholders is obligated to issue, deliver or sell, or cause to be issued, delivered or sold, any shares of capital stock or other securities of SYCI. There are no outstanding contractual obligations (contingent or otherwise) of SYCI to retire, repurchase, redeem or otherwise acquire any outstanding shares of capital stock of, or other ownership interests in, SYCI or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any other entity.


2.7 COMPLIANCE WITH LAWS AND OTHER INSTRUMENTS.


Except as would not have a Material Adverse Effect, the business and operations of SYCI have been and are being conducted in accordance with all applicable foreign, federal, provincial and local laws, rules and regulations and all applicable orders, injunctions, decrees, writs, judgments, determinations and awards of all courts and governmental agencies and instrumentalities. There are no permits, bonuses, registrations, consents, approvals, authorizations, certificates, or any waiver of the foregoing, which are required to be issued or granted by a Governmental Body for the conduct of the Business as presently conducted or the ownership of the assets of SYCI. Except as would not have a Material Adverse Effect, SYCI is not, and has not received notice alleging that it is, in violation of, or (with or without notice or lapse of time or both) in default under, or in breach of, any term or provision of the Organizational Documents or of any indenture, loan or credit agreement, note, deed of trust, mortgage, security agreement or other material agreement, lease, license or other instrument, commitment, obligation or arrangement to which SYCI is a party or by which any of SYCI's properties, assets or rights are bound or affected. To the knowledge of SYCI, no other party to any material contract, agreement, lease, license, commitment, instrument or other obligation to which SYCI is a party is (with or without notice or lapse of time or both) in default thereunder or in breach of any term thereof. SYCI is not subject to any obligation or restriction of any kind or character, nor is there, to the knowledge of SYCI, any event or circumstance relating to SYCI that materially and adversely affects in any way its business, properties, assets or prospects or that prohibits SYCI from entering into this Agreement and the Transaction Agreements or would prevent or make burdensome its performance of or compliance with all or any part of this Agreement, the Transaction Agreements or the consummation of the Transactions contemplated hereby or thereby.


2.8 CERTAIN PROCEEDINGS.


There are no outstanding or pending Proceeding that has been commenced against or involving SYCI or any of its assets and, to the knowledge of SYCI and the Shareholders, no matters of the foregoing nature are contemplated or threatened. None of SYCI or the Shareholders have been charged with, and is not threatened with, or under any investigation with respect to, any allegation concerning any violation of any provision of any federal, provincial, local or foreign law, regulation, ordinance, order or administrative ruling, and is not in default with respect to any order, writ, injunction or decree of any Governmental Body.


2.9 NO BROKERS OR FINDERS.


None of SYCI, the Shareholders, or any officer, director, independent contractor, consultant, agent or employee of SYCI has agreed to pay, or has taken any action that will result in any person or entity becoming obligated to pay or entitled to receive, any investment banking, brokerage, finder's or similar fee or commission in connection with this Agreement or the Transactions. SYCI and the Shareholders shall jointly and severally indemnify and hold DSFX harmless against any liability or expense arising out of, or in connection with, any such claim.


2.10 TITLE TO AND CONDITION OF PROPERTIES.


SYCI has good, valid and marketable title to all of its properties and assets (whether real, personal or mixed, and whether tangible or intangible) reflected as owned in its books and records, free and clear of all Liens. SYCI owns or holds under valid leases or other rights to use all real property, plants, machinery, equipment and all assets necessary for the conduct of its business as presently conducted, except where the failure to own or hold such property, plants, machinery, equipment and assets would not have a Material Adverse Effect on SYCI. No Person other than SYCI owns or has any right to the use or possession of the assets used in SYCI's business. The material buildings, plants, machinery and equipment necessary for the conduct of the business of SYCI as presently conducted are structurally sound, are in good operating condition and repair and are adequate for the uses to which they are being put or would be put in the Ordinary Course of Business, in each case, taken as a whole, and none of such buildings, plants, machinery or equipment is in need of maintenance or repairs, except for ordinary, routine maintenance and repairs that are not material in nature or cost.


2.11 ABSENCE OF UNDISCLOSED LIABILITIES.


SYCI have no debt, obligation or liability (whether accrued, absolute, contingent, liquidated or otherwise, whether asserted or unasserted, whether due or to become due, whether or not known to SYCI) arising out of any transaction entered into prior to the Closing Date or any act or omission prior to the Closing Date which individually or taken together would constitute a Material Adverse Effect on SYCI and have no debt, obligation or liability to each other or any of the Shareholders or their affiliates, except to the extent specifically set forth on or reserved against on the Balance Sheet of SYCI.


The financial statements are consistent with the books and records of SYCI and fairly present in all material respects the financial condition, assets and liabilities of SYCI, as applicable, taken as a whole, as of the dates and periods indicated, and were prepared in accordance with GAAP (except as otherwise indicated therein or in the notes thereto).


2.12 CHANGES.


SYCI has not, since September 30, 2006:


(a) Ordinary Course of Business. Conducted its business or entered into any transaction other than in the Ordinary Course of Business, except for this Agreement.


(b) Adverse Changes. Suffered or experienced any change in, or affecting, its condition (financial or otherwise), properties, assets, liabilities, business, operations, results of operations or prospects which would have a Material Adverse Effect;


(c) Loans. Made any loans or advances to any Person other than travel advances and reimbursement of expenses made to employees, officers and directors in the Ordinary Course of Business;


(d) Compensation and Bonuses. Made any payments of any bonuses or compensation other than regular salary payments, or increase in the salaries, or payment on any of its debts in the Ordinary Course of Business, to any of its shareholders, directors, officers, employees, independent contractors or consultants or entry into by it of any employment, severance, or similar contract with any director, officer, or employee, independent contractor or consultant; Adopted, or increased in the payments to or benefits under, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other employee benefit plan for or with any of its employees;


(e) Liens. Created or permitted to exist any Lien on any of its properties or assets other than Permitted Liens;


(f) Capital Stock. Issued, sold, disposed of or encumbered, or authorized the issuance, sale, disposition or encumbrance of, or granted or issued any option to acquire any shares of its capital stock or any other of its securities or any Equity Security, or altered the term of any of its outstanding securities or made any change in its outstanding shares of capital stock or its capitalization, whether by reason of reclassification, recapitalization, stock split, combination, exchange or readjustment of shares, stock dividend or otherwise; changed its authorized or issued capital stock; granted any stock option or right to purchase shares of its capital stock; issued any security convertible into any of its capital stock; granted any registration rights with respect to shares of its capital stock; purchased, redeemed, retired, or otherwise acquired any shares of its capital stock; declared or paid any dividend or other distribution or payment in respect of shares of capital stock of any other entity;


(g) Dividends. Declared, set aside, made or paid any dividend or other distribution to any of its shareholders;


(h) Material Contracts. Terminated or modified any of its Material Contract except for termination upon expiration in accordance with the terms of such agreements, a description of which is included in the SYCI's Disclosure Schedule;


(i) Claims. Released, waived or cancelled any claims or rights relating to or affecting SYCI in excess of $10,000 in the aggregate or instituted or settled any Proceeding involving in excess of $10,000 in the aggregate;


(j) Discharged Liabilities. Paid, discharged, cancelled, waived or satisfied any claim, obligation or liability in excess of $10,000 in the aggregate, except for liabilities incurred prior to the date of this Agreement in the Ordinary Course of Business;


(k) Indebtedness. Created, incurred, assumed or otherwise become liable for any Indebtedness or commit to any endeavor involving a commitment in excess of $10,000 in the aggregate, other than contractual obligations incurred in the Ordinary Course of Business;


(l) Guarantees. Guaranteed or endorsed in a material amount any obligation or net worth of any Person;


(m) Acquisitions. Acquired the capital stock or other securities or any ownership interest in, or substantially all of the assets of, any other Person;


(n) Accounting. Changed its method of accounting or the accounting principles or practices utilized in the preparation of its financial statements, other than as required by GAAP;


(o) Agreements. Entered into any agreement, or otherwise obligated itself, to do any of the foregoing.


2.13 MATERIAL CONTRACTS.


SYCI has delivered to DSFX, prior to the date of this Agreement, true, correct and complete copies of each of its Material Contracts.


(a) No Defaults. The Material Contracts of SYCI are valid and binding agreements of SYCI, as applicable, and are in full force and effect and are enforceable in accordance with their terms. Except as would not have a Material Adverse Effect, SYCI is not in breach or default of any of its Material Contracts to which it is a party and, to the knowledge of SYCI, no other party to any of its Material Contracts is in breach or default thereof. Except as would not have a Material Adverse Effect, no event has occurred or circumstance has existed that (with or without notice or lapse of time) would (a) contravene, conflict with or result in a violation or breach of, or become a default or event of default under, any provision of any of its Material Contracts or (b) permit SYCI or any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate or modify any of its Material Contracts. SYCI has not received any notice and have no knowledge of any pending or threatened cancellation, revocation or termination of any of its Material Contracts to which it is a party, and there are no renegotiations of, or attempts to renegotiate.


2.14 TAX RETURNS AND AUDITS.


(a) Tax Returns. (a) All material Tax Returns required to be filed by or on behalf of SYCI have been timely filed and all such Tax Returns were (at the time they were filed) and are true, correct and complete in all material respects; (b) all Taxes of SYCI required to have been paid (whether or not reflected on any Tax Return) have been fully and timely paid, except those Taxes which are presently being contested in good faith or for which an adequate reserve for the payment of such Taxes has been established on SYCI Balance Sheet; (c) no waivers of statutes of limitation have been given or requested with respect to SYCI in connection with any Tax Returns covering SYCI or with respect to any Taxes payable by it; (d) no Governmental Body in a jurisdiction where SYCI does not file Tax Returns has made a claim, assertion or threat to SYCI that SYCI is or may be subject to taxation by such jurisdiction; (e) SYCI has duly and timely collected or withheld, paid over and reported to the appropriate Governmental Body all amounts required to be so collected or withheld for all periods under all applicable laws; (f) there are no Liens with respect to Taxes on the property or assets of SYCI other than Permitted Liens; (g) there are no Tax rulings, requests for rulings, or closing agreements relating to SYCI for any period (or portion of a period) that would affect any period after the date hereof; and (h) any adjustment of Taxes of SYCI made by a Governmental Body in any examination that SYCI is required to report to the appropriate provincial, local or foreign taxing authorities has been reported, and any additional Taxes due with respect thereto have been paid. No state of fact exists or has existed which would constitute ground for the assessment of any tax liability by any Governmental Body. All Tax Returns filed by SYCI are true, correct and complete.


(b) No Adjustments, Changes. Neither SYCI nor any other Person on behalf of SYCI (a) has executed or entered into a closing agreement pursuant to Section 7121 of the Code or any predecessor provision thereof or any similar provision of provincial, local or foreign law; or (b) has agreed to or is required to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of provincial, local or foreign law.


(c) No Disputes. There is no pending audit, examination, investigation, dispute, proceeding or claim with respect to any Taxes of or Tax Return filed or required to be filed by SYCI, nor is any such claim or dispute pending or contemplated. SYCI has made available to DSFX true, correct and complete copies of all Tax Returns, examination reports and statements of deficiencies assessed or asserted against or agreed to by SYCI since January 1, 2004, and any and all correspondence with respect to the foregoing. SYCI does not have any outstanding closing agreement, ruling request, requests for consent to change a method of accounting, subpoena or request for information to o
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