Teri Domi SIleel London EC2M ZEE Dlmdial .<>Jun-05) oi ihe share purchase and shareholders agreemeni (ihe "Agreemenrj. which is anached as a word documeni wiih ihis leher. To ihe exlem ihai any oiher issues arise ol a maierial naiure, will endeavour lo aise ihem wuh you verbally or in prior lo ihe aciual compleiion meeiing which we expeci lo rake place in ihe nexi 43 hours . Unless ihe coniexi oiherwise requires. ierms deiined in ihe Agreement will be used in ihis leher. Final drah -- share purchase and shareholders agreemem Parties Ruslan Fomichev (RF) and Vasily Feganov are panies io ihe Agreemem as ihe benelicial owners oi ihe shares in ihe Company. The legal owner oi ihe shares you are acquiring is a nominee loriwo ompanies, Twinsphere and Agrandise Associaies. Your Cypiim lawyers have seen ihe declaraiions oi irusi. The Founders are warraniing ihai ihese Mo oompanies are nominees lor ihem. No documeniary evidence has been produced ior ihis and you are relying ihis coniraciual proieciion ihai ihe Founders are ihe uliimaie benelicial owners oi ihe shares. The Founders wish ihe purchase price lo be paid io Ansiead Holdings lnc. Ansiead Holdings lnc. is a parry io ihe Agreemeni ior ihe sole purpose oi acknow ledging ihai ii is auihorised by ihe Founders io receive paymem oi ihe purchase price. DGP dw YID 141,25 Kamila Fax siepnen Aldrich Anne eonsuinnrs ank wasun angu neien Slreemn Nicnoius Emmi "Wm" Paul Oshawa Jnne Mann Tum ousunce ronn ereeger Anne eoies higei ank Yaskev Dwglas Mr Scot Young 03 June 2005 Page 2 of 6 Recitals Resurs is stated as owning not less than 59.77% of Spektr as you have been told by RF that Resurs has acquired further shares since the last shareholders list was made available. We have had no details as to how these purchases have been funded or at what cost. You have agreed to leave the matter of share purchases from Spektr shareholders as a matter for the Founders to progress and we are instructed to make no further enquiry. Operative Provisions 4.11 On the issue of directorships of the Group Companies, we understand that Gwilym Davies is to be a director of each Group Company. Taking the Group Companies in turn:1. Parasol – there are two existing directors. Your one director will have equal voting rights with the existing director. 2. Resurs – there is one director (VP). A board of directors will need to be established and the Founders have agreed to appoint the same number of directors as you appoint so there will be equal voting rights. 3. Spektr – the position here is more complicated. Spektr has five directors. Directors in Russian companies cannot have weighted voting rights and are elected by cumulative voting, so while Moscow governmen t retains its shares, it has enough to appoint a director. In Spektr a holding of 16.6% of the shares is enough to be able to appoint a director due to the system of cumulative voting. Only after the developer and the Moscow government have been bought o ut and Resurs owns nearly all the shares in Spektr can the number of directors be changed to give either Ruslan or you a veto at board level. The deadlock position on the board which will exist with Parasol and Resurs, will not exist with Spektr. The Spe ktr board could chose to do things which you do not agree with so you are relying on the assurance of RF that he can control the directors of Spektr (other than the Moscow government director). The consent items (see point 7.3 below) cannot be included in the Charter Documents of Spektr as matters requiring the consent of a Shareholder (e.g. Resurs). The only way to give you a direct veto on the consent matters in Spektr would be to require a unanimous vote of the Spektr board to approve a consent matter. This would give a right of veto to each director, including the Moscow government director, which would not be appropriate. This means that you will need to rely on the rights against the Founders under the Agreement to enforce the consent items. 5.1/5.2 Although there has been discussions on obtaining funding from Sperbank, the obligation for you to arrange $10m loan funding remains in the Agreement. Your obligation is to provide the funding within 10 Business Days of a request from Parasol and wi thin the following general time frame: US$1,000,000 earlier than 31 July 2005  US$2,000,000 to 2,500,000 earlier than 31 July 2005  US$3,000,000 no later than 1 October 2005  The balance after 1 October on 10 Business Days notice If you fail to provide the $10m loan funding except because of national emergency, civil war, change in law or change in political system rendering similar funding impossible and if the funding is not otherwise made available to the Company (e .g. by Sperbank), L.DGP.clw.Y10.141_25 Mr Scot Young 03 June 2005 Page 3 of 6 the Founders ha ve a call option to buy your shares for US$16.5million. You have agreed to accept this condition as part of the commercial deal. 5.3 The budgets for the operation of the Group will not be subject to your approval, except to the extent that they are ap proved by each Group company ’s board of directors. The deadlock position will exist in relation to Parasol and Resurs but not in relation to the Spektr board. As the trading company, the Spektr budget will be the important budget for the property development. You will be relying on the fact that the Founders have an equal interest in operating to a budget on the numbers they have suggested to you to operate as a financial control on the budget. Although there is an obligation to keep you generally infor med about the business the specific obligations to provide cash flow and budgets are on an annual basis. These would normally be supplied on a more regular basis if tight financial control was required. 5.5.1 There is an obligation for each Group Company to take out such insurance as is approved by the board. Spektr is the only Group Company which trades. You do not have equal voting rights on the Spektr board. This means the insurance cover which Spektr takes out will be the insurance cover which the Founders’ directors consider appropriate. 5.5.4 The frequency of board meetings is no greater than quarterly and then only if you request them. Monthly meetings would be fairly standard. You have agreed to less frequent meetings to enable Group operations to be flexible. 7.2 The obligation for the Founders to get planning permission is at the expense of the Group. Although the loan funding (see point 5.1/5.2 above) is described to be for certain purposes there is no obligation to achieve the buy out o f any shareholders at a known price. You are relying on RF to complete the buyouts and obtain planning permission without having a firm budget for this. There must be a risk that these activities could cost a lot more than the indicative budget. You have a put option for your shares at US$16.5million if planning permission is not obtained within 2 years, unless the failure is due to a force majeure event. The inclusion of the force majeure events means that if any of these events prevent planning pe rmission being obtained, the put option will not operate, you will have no recourse against the Founders and your investment may be worthless. You will have further exposure to the extent that you have borrowed to fund the share purchase or you have lent funds to the Group. There is no certainty that Russia will not be the subject of further dramatic political change. 7.3 The matters which a Group Company cannot do without your consent have been reduced to the major decisions, e.g. issue of new shares, sale of the Property, sale of shares, cap ex over $250k. Other matters e.g. entering into a partnership/joint venture s, contracts except for cap ex over $250k, borrowing, dividends , payments to directors etc all of which we would expect to see as reasonable investment protection have all been deleted on the basis that there is to be flexibility. The matters where your consent is required cannot however be entrenched into the Charter Documents of Resurs or Spektr so if one of these companies does one of the se transactions without your consent you will be relying on a contractual right against the Founders to claim compensation and you will not be able to claim against Resurs or Spektr to set aside the transaction. I should point out, however, that even wher e the consent items are included in the Articles, as they have been with Parasol, this does not guarantee that you will be able to set aside a transaction if it is entered into by Parasol without your consent. 9.1 Where a consent matter is submitted to y ou for your consent, you will have only 7 days within which to decide whether or not to consent. If you do not reply within this period you will be deemed to have consented. It is a requirement under the Agreement that any notice is also sent by fax to Fox Williams, so that we can alert you to this time constraint. L.DGP.clw.Y10.141_25 Mr Scot Young 03 June 2005 Page 4 of 6 10.2 You have a window of 6 weeks from Completion in which to transfer up to 49% of your B shares to another investor or investors . You may only do this with the Founders ’ consent (unless named transferees are agreed before closing). 12.2 You cannot mortgage or charge your B shares without the consent of the Founders . Likewise the Founders cannot mortgage or charge the A Shares without your consent. Consent will be given in either case if charging is required to raise finance for the Project. 18 The warranty period is 18 months; the warranty threshold which must be reached before you can claim for breach of the warranties is $350,000 and the individual claim limit for warranty claims whic h do not count towards the threshold is $35,000, are all more generous to the Warrantors than I would expect to see on a purchase for US$16.5million . The benefit of the Warranties is not assignable, so any co investor you may wish to bring on board within 6 weeks of Completion will not benefit from the Warranties. The Warrantors have chosen not to prepare a Disclosure Letter, which is highly unusual but in part reflects the fact that the Warranties are limited in scope. 19 This is a general force majeure clause which applies to all the obligations in the Agreement , other than your obligation to provide loan funding and the Founders ’ obligation to obtain planning permissions (for which there are specific force majeure provisions). It is unusual to have a force majeure clause in a share purchase or a shareholders agreement but the scope of the force majeure events is limited. If an event of force majeure occurs, any party to the Agreement will have no liability for any breach of an obligation if the failur e is due to the force majeure event. Performance of the obligation will be suspended while the force majeure event exists. Given the nature of the force majeure events e.g. change in law and change of political system, it is likely that if one of these e vents occurs the Agreement, to the extent it remains to be performed might be seen to be frustrated and therefore come to an end by operation of law. 20.2 There is no fax number for service of notices on the Founders and the Founders have not appointed an agent for service for them in the United Kingdom. Although FR currently has a UK address, any notice will need to be served on VP in Russia. It is highly unusual and unreasonable that there is no address for service in the UK. If, however, proceed ings are taken against the Founders they may need to be taken in Russia. This is part of the larger issue of dealing with Russian citizens (see point 2 below). Schedule 1 Your Cypriot lawyers have prepared t he New Articles of Parasol a s standard form Articles for a joint venture. They provide for equal A and B shares and equal direc tor appointment rights. There is a pre emption right on the transfer of shares . Shares to be sold are offered first to members holding the same class of shares and then to the rest of the shareholders. T here are no drag or tag along provisions in the Articles or the Agreement. The Agreement provides that there will by no transfers of shares before planning permission is obtained. Either you or the Founders could agree a sale of shares, after planning permission has been obtained, without having to take the others with them. The pre-emption mechanism would operat e on a sale but this would not give a shareholder the right to join in a sale. A sale of 100% of the shares will need to be agreed with the Founders. You cannot force a sale at any particular price. Schedule 3 The warrant ies we have managed to extract from RF and VP are limited in scope. The principal areas covered by the warranties are the ownership of sha res in Resurs and Spektr L.DGP.clw.Y10.141_25 Mr Scot Young 03 June 2005 Page 5 of 6 and the liabilities position of Spektr. There is a title warranty in relation to the Property but it is limited. There is a general warranty that all information provided was accurate in all material respects. Your Russian lawye rs, PGP, have advised us that the combination of the Property warranty and the information supplied by Spektr, which will be subject to the general warranty as to information provided, should be sufficient for you to be satisfied that Spektr has title to the Property, subject to their comments in their Due Diligence Report. There are a number of general observations I would like to make in relation to this transaction. Taking these in turn:1 There are a number of obligations and Warranties in the Agreement given by Parasol. If there were any breach, this would mean pursuing Parasol in Cyprus. The sole asset of Parasol appears to be the shares in Resurs. The UK ha s a reciprocal enforcement of judgment arrangement with Cyprus, so any judgement in legal proceedings against Parasol taken in the UK could be enforced through the Cypriot Courts. 2 We understand that both the Founders are Russian citizens. We have no information on the financial standing of the Founders or their ability to meet a Warranty cla im or other claim for breach of the Agreement. VP has a Russian address and appears to be resident in Russia. The UK does not have a reciprocal enforcement of judgment arrangement with Russia, so any legal proceedings against VP would need to be taken in Russia. Although RF currently has a UK address, a UK court judgement could not be enforced against any assets RF may have in Russia. Separate proceedings would need to be commenced in Russia for this purpose. 3 Legal Due Diligence reports have been produced for you by the Russian and Cypriot lawyers. At present we have draft reports. Final reports will be available later this week and these may include changes to the draft reports. You have decided to go ahead with the transaction without final reports. The draft reports do not appear to disclose any material breaches of the Warranties but I would draw your attention to the limitations and qualifications in the Reports (pages 4 and 5 of PGP ’s report and page s 2 and 8 of the C hrysses Demetriades and Co ’s report). This transaction and the due diligence exercise has been completed in a short time frame. You have on a number of issues, particularly the question of the validity of the ownership of shares by Resurs and Spektr and liabilities of the Group , relied on the warranty protection offered by the Founders rather than continue with due diligence. 4 We have not been instructed to appoint any accountants to carry out financial due diligence in relation to this transaction. There are no specific warrant ies as to the financial position of the Group other than the warranties as to the liabilities of the Group. We have not been involved in appointing any surveyors, whether commercial or environmental, to carry out any surveys or real estate due diligence i n relation to this transaction. There are no warranties as to the state and condition of the Property nor in respect of the environmental condition of the Property. I appreciate that the intention is to demolish all the current buildings on the Property and you have been speaking to Knight Frank in relation to the Property . Knight Frank have inspected the Property and given you guidance on these issues. 5 In summary, the legal due diligence exercises and Knight Frank ’s involvement give a level of comfort that there is clearly substance behind thi s investment opportunity. The fact that there is substance is the reason why you should seek good contractual protection. Your ability to exploit this opportunity exists because (i) you are prepared to trust RF and have a relationship with him, and (ii) you are prepared to take a risk, which many others would not have be en prepared to take. The syndicated investment with Poyu Zabludowicz and others has only been possible because you have personally guaranteed the investment. You are placing a lot of trust in RF. Have you discussed what will happen if RF is not around? Can you rely on VP in these circumstances? Apart from accidents, Russia is still a dangerous place where people are kidnapped for ransom, are murdered or simply disappear. You are bearing the risk on this because your understandings with RF are worthless if he is not around. I would normally L.DGP.clw.Y10.141_25 Mr Scot Young caJune zoos I Pageaole consider and advise on (he avaiiabillty of lnsulance on a shale purchase (lansaction but in this transaction the ilkellhood 0' insurance being avallabie 0! at a plemlum is remote. We are only qualilied to advise on matters oi English law. We have relied on Cypriot and Russian lawyers to advise on matters relating to Russian and Cypriot law. ll you have any questions relating to Cypriot or Russian law. please let me know so that can raise any issues on your penallwitn the relevant lawyers or you can speak direct Witti them. Once you have na the opportunity to consider the contents oi this le tier, please call me or Doug ii there are any issues which you would like to discuss. witti kind regards Youls sincerely DGP ciw v10 141,25