Exhibit 10.1

 

CONSULTING AGREEMENT

 

THIS CONSULTING AGREEMENT (this “Agreement”) is made and entered into as of
October 1, 2008 (the “Effective Date”) by and between Cano Petroleum, Inc., a
Delaware corporation (the “Company”), and Morris B. Smith (“Consultant”).  The
Company and Consultant are referred to in this Agreement as the “Parties.”

 

RECITALS

 

WHEREAS, Consultant has agreed to undertake certain duties and responsibilities
and to perform certain consulting services for the period beginning on the
Effective Date and ending September 30, 2009, all as more fully described in
this Agreement; and

 

WHEREAS, the Company desires to engage Consultant to undertake certain duties
and responsibilities and to perform certain consulting services, all as more
fully described in this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, for and in consideration of the foregoing premises and the
provisions hereof and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties agree as follows:

 

1.                                      Position and Services.

 

a.             Consulting Services.  During the period commencing on the
Effective Date and ending on September 30, 2009 (the “Consulting Period”),
subject to the terms of this Agreement (including the extension and early
termination provisions set for in Section 3.a. below), the Company agrees to
retain Consultant and Consultant agrees to serve, as a consultant to the Company
for the purpose of providing advice and offering other assistance to the
Company’s Chief Executive Officer (“CEO”), consistent with the resources of
Consultant, on matters as the CEO reasonably requests (the “Consulting
Services”).  The Company has agreed to retain Consultant as a consultant in
reliance on the special and unique abilities of Consultant in rendering the
Consulting Services and Consultant will use Consultant’s reasonable efforts,
skills, judgment and abilities in rendering the Consulting Services.  Consultant
shall perform the Consulting Services in a diligent, trustworthy, and
businesslike manner, with the purpose of advancing the business of the Company. 
Consultant’s duties during the Consulting Period shall require Consultant to
perform Consulting Services for the Company at least fifteen (15) hours per
month.  Consultant shall not perform non-Company related tasks on the Company’s
property.

 

b.             Nature of Relationship Between Parties.  During the Consulting
Period, Consultant shall render the Consulting Services in this Agreement as an
independent contractor.  Except as otherwise agreed by the Company, Consultant
will have no authority or power to bind the Company regarding third parties or
to represent to third parties that Consultant has authority or power to bind the
Company.  It is not the intention of the Parties to create, by virtue of this
Agreement, any employment relationship, trust, partnership or joint venture
between Consultant and the Company or any of its affiliates or, except as
specifically provided herein, to make them legal representatives or agents of
each other or to create any fiduciary relationship or additional contractual
relationship among them for the duration of the Consulting Period.  As an
independent contractor, Consultant will not be eligible for any Company-provided
benefits, including, without limitation, medical, retirement, short term
disability and long term disability.

 

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2.                                      Consideration.

 

a.                                       Consulting Fee.  During the Consulting
Period, the Company shall pay Consultant a monthly consulting fee of: (a) three
thousand dollars ($3,000) for up to the first fifteen (15) hours of service
rendered by Consultant during such month; and (b) two hundred dollars ($200) for
each hour of service above fifteen (15) hours of service provided by Consultant
during such month (the “Consulting Fees”), which shall be payable in accordance
with the following schedule:

 

i.              For the period beginning on the Effective Date and ending on
March 15, 2009, the Consulting Fees shall be payable in bi-weekly installment
payments in accordance with the Company’s payroll practices;

 

ii.             For the period beginning on March 16, 2009 and ending on
April 1, 2009, the Consulting Fees shall be payable in one lump sum payment on
April 2, 2009; and

 

iii.            For all periods during the Consulting Period after April 1,
2009, the Consulting Fees shall be payable in bi-weekly installment payments in
accordance with the Company’s payroll practices.

 

Each payment made pursuant to this Section 2.a. shall be treated as a separate
payment for purposes of Section 409A of the Internal Revenue Code of 1986, as
amended (the “Code”).  For purposes of clarity, any amounts earned during the
period beginning on March 16, 2009 and ending on the last day of the sixth month
following the Effective Date shall not be paid until the first day of the
seventh month following the Effective Date.

 

b.             Payments.  The consideration described in this Section 2 shall be
the sole compensation to which Consultant shall be entitled for performance of
the Consulting Services.

 

c.             Reimbursement of Expenses. Consultant shall be entitled to
receive reimbursement for all reasonable expenses incurred by Consultant in
performing his duties and responsibilities under this Agreement, consistent with
the Company’s policies or practices for reimbursement of expenses incurred by
its independent contractors.

 

d.             Payment of Taxes.  With respect to the Consulting Services,
Consultant agrees to be solely responsible for withholding taxes or necessary
payments to any taxing authority based on the Company’s payment of the
consideration for the Consulting Services under this Agreement.  Consultant
further agrees not to seek or make any claim against the Company, its
subsidiaries or any of their directors or employees for compensation, damages,
costs, interest, fees, assessments, withholdings, penalties or other losses,
should a claim or determination be made that Consultant has failed to withhold
or make the payments contemplated by the preceding sentence.  The withholdings
referenced in this Section 2.d. include, without limitation, Federal and State
income taxes, FICA, and Medicare.

 

e.             Facilities.  During the Consulting Period, the Company will
furnish Consultant with office space, equipment, supplies, and such other
facilities and personnel as the Company deems necessary or appropriate for the
performance of the Consulting Services.

 

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f.              2005 LTIP Benefits.  Exhibit A, attached hereto and incorporated
herein, sets forth as of September 30, 2008, all outstanding and unvested awards
of restricted stock (the “Restricted Stock Awards”) previously granted to
Consultant under the Cano Petroleum, Inc. 2005 Long-Term Incentive Plan (the
“2005 LTIP”).  The Parties both acknowledge and agree that, other than the
Restricted Stock Awards, as of the Effective Date, there are no other
outstanding and unvested awards that were previously granted to Consultant.  As
additional consideration for Consultant’s agreement to perform the Consulting
Services, on September 30, 2008, the Company’s Compensation Committee vested
certain shares subject to the Restricted Stock Awards, as shown on Exhibit A. 
With respect to Restricted Stock Awards, the Parties further agree and
acknowledge that Consultant’s performance of the Consulting Services shall not
be sufficient to prevent a “Termination of Service” (as defined in the 2005
LTIP) for purposes of such awards, and, except to the extent otherwise provided
in this Section 2.f., the Parties agree that all unvested shares subject to the
Restricted Stock Awards terminated and were forfeited as of the date Consultant
ceased providing services to the Company as an employee.

 

3.                                      Termination.

 

a.             Termination.  Except as otherwise provided in this Section 3.a.,
this Agreement shall be effective for the Consulting Period described in
Section 1.a. above, provided, however, that the Consulting Period shall be
automatically extended for successive one-year terms unless and until terminated
(upon the earliest of the following): (a) by the death or Disability (defined
below) of Consultant, in which case the Consulting Period and this Agreement
shall terminate immediately; or (b) by any party hereto for any reason, pursuant
to a written notice provided by such party to the other party at least thirty
(30) days prior to the date of termination, in which case this Agreement, and
the Consulting Period shall terminate as of the date of termination provided in
such written notice.  Upon termination of the Consulting Period, the Company
will have no obligation whatsoever to Consultant, except for the payment of
accrued but unpaid Consulting Fees for Consulting Services rendered prior to the
termination date.  For purposes hereof, “Disability” shall mean the inability,
as determined in good faith by the Company, of Consultant to provide the
Consulting Services as a result of any illness or physical, mental, or emotional
incapacity or limitation that continues for at least thirty (30) consecutive
days or exists for at least thirty (30) aggregate days during any consecutive
twelve (12) month period.

 

b.             Survival.  The provisions of Section 4 and Section 5 of this
Agreement shall survive termination or expiration of this Agreement.  In
addition, all provisions of this Agreement that expressly continue to operate
after the Agreement’s termination shall survive the Agreement’s termination or
expiration in accordance with the terms of such provisions.

 

4.                                      Confidentiality.  Consultant shall not,
during the Consulting Period or at any time thereafter, disclose to anyone, or
publish, use for any purpose, exploit, nor solicit, allow or assist another
person to use, disclose or exploit, except for the benefit of the Company,
without prior written authorization of the Company, any information regarding
the business affairs of the Company, strategies and plans, business information,
financial information, personnel information or any other confidential or
non-public information regarding the Company, except as:  (1) required for
Consultant’s work for the Company; (2) required by law; or (3) directed and
authorized in writing by the Company.  Consultant agrees to keep the terms of
the Consulting Agreement confidential.

 

5.                                      Non-disparagement.  During the
Consulting Period and any time thereafter, in consideration for the obligations
of the Company to Consultant hereunder, neither Consultant nor any affiliate,
associate, partner, or agent of Consultant shall orally or in writing disparage,
denigrate, or comment negatively upon the Company (including any subsidiary of
the Company) or any director,

 

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officer, employee, agent, or representatives of the Company to or in the
presence of any Person, except as required by a valid subpoena or other Order
(as defined below) (but only as and to the extent actually required as
determined in good faith by legal counsel to Consultant); provided, however,
that, if Consultant receives any subpoena or other Order, Consultant shall (if
possible) provide the Company with a copy of such subpoena or other Order at
least five (5) business days prior to the date on which Consultant shall be
required to make the disclosure(s).  Consultant acknowledges that in executing
this Agreement, Consultant has knowingly, voluntarily, and intelligently waived
any free speech, free association, free press or First Amendment to the United
States Constitution (including, without limitation, any counterpart or similar
provision or right under the Texas Constitution) rights to disclose,
communicate, or publish disparaging information concerning or related to the
Company.  Consultant also understands and agrees that he has had a reasonable
period of time to consider this non-disparagement clause, to review the
non-disparagement clause with his attorney, and to knowingly and voluntarily
consent to its terms. For purposes hereof, “Order” shall mean any order,
including, without limitation, any permanent or temporary restraining order,
award, decision, injunction, writ, judgment, settlement, ruling, subpoena,
decree, or verdict entered, issued, made, or rendered by any governmental
authority.

 

6.             Remedies.  Consultant acknowledges that the protections and
restrictions in this Agreement, in view of the nature of the Company’s business,
are reasonable and necessary to protect the Company’s legitimate business
interests and that any violation of this Agreement would result in irreparable
injury to the Company for which there is no adequate remedy at law.  In the
event of a breach or a threatened breach by Consultant of any provision in this
Agreement, the Company shall be entitled to a temporary restraining order and
injunctive relief restraining Consultant from the commission of any breach, and
to recover the Company’s attorneys’ fees, costs and expenses related to the
breach or threatened breach.  Nothing contained in this Agreement shall be
construed as prohibiting the Company from pursuing any other remedies available
to it for any breach or threatened breach, including, without limitation, the
recovery of money damages, equitable relief, attorneys’ fees, and costs.

 

7.             Consultant’s Representations.  Consultant represents and warrants
to the Company that the execution and delivery by Consultant of this Agreement
do not, and the performance by Consultant of Consultant’s obligations hereunder
will not, with or without the giving of notice or the passage of time, or both
(a) violate any judgment, writ, injunction, or order of any court, arbitrator,
or governmental authority applicable to Consultant, or (b) conflict with, result
in the breach of any provision of or the termination of, or constitute a default
under, any agreement to which Consultant is a party or by which Consultant is or
may be bound.

 

8.             Indemnity of Company.  Company hereby indemnifies and agrees to
hold harmless Consultant and his heirs and assigns (each an “Indemnified
Person”) from and against any and all liabilities, obligations, claims, losses,
damages, penalties, actions, judgments, suits, costs, expenses, or disbursements
of any kind or nature as a result of a Claim of a third party (collectively, the
“Third Party Claims”), which may be imposed on, incurred by or asserted against
any Indemnified Person arising in connection with the subject matter hereof
(including, without limitation, the defense of any Indemnified Person’s actions
and/or inactions in connection with the subject matter hereof), unless such
Third Party Claims were the result of the gross negligence or willful conduct of
the Consultant.

 

9.             Indemnity of Consultant.  Consultant hereby indemnifies and
agrees to hold harmless the Company and its officers, directors, employees,
agents and representatives (each an “Indemnified Person”) from and against all
Third Party Claims which may be imposed on, incurred by or asserted against any
Indemnified Person arising in connection with the subject matter hereof, which
is solely attributable to the gross negligence and/or willful conduct of the
Consultant.

 

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10.          Choice of Law.  This Agreement has been executed and delivered in
and shall be interpreted, construed and enforced pursuant to and in accordance
with the laws of the State of Texas, without giving effect to the conflicts of
law principles thereof.

 

11.          Waiver.  The forbearance or failure to pursue any legal or
equitable remedy or right available to any party hereto upon default under, or
upon a breach of, this Agreement shall not constitute waiver of such right, nor
shall any such forbearance, failure or actual waiver imply or constitute waiver
of a subsequent default or breach.

 

12.          Severability.  If any provision or provisions of this Agreement
shall be held to be invalid, illegal, or unenforceable for any reason
whatsoever, (a) the validity, legality and unenforceability of the remaining
provisions of this Agreement (including without limitation, all portions of any
sections containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable), shall
not in any way be affected or impaired thereby, and (b) such provision or
provisions held to be invalid, illegal or unenforceable shall be limited or
modified in its or their application to the minimum extent necessary to avoid
such invalidity, illegality or unenforceability, and, as so limited or modified,
such provision or provisions and the balance of this Agreement shall be
enforceable in accordance with their terms.

 

13.          Headings.  The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

 

14.          Counterparts.  This Agreement and amendments thereto shall be in
writing and may be executed in counterparts.  Each such counterpart shall be
deemed an original, but both counterparts together shall constitute one and the
same instrument.

 

15.          Further Assurances.  Each party hereto shall execute and deliver
such documents, and take all such other actions, as may be reasonably required
or reasonably requested by any other party hereto to effect this Agreement and
each transaction contemplated hereby.

 

16.          Entire Agreement; Modification.  This Agreement constitutes the
entire agreement and understanding of the Parties hereto with respect to the
subject matter hereof and supersede all other prior agreements, arrangements,
and understandings with respect to the subject matter hereof.  No understanding,
promise, inducement, statement of intention, representation, warranty, covenant,
or condition, written or oral, express or implied, whether by statute or
otherwise, has been made by any party hereto with respect to the subject matter
hereof which is not embodied in this Agreement and no party hereto shall be
bound by or liable for any such alleged understanding, promise, inducement,
statement, representation, warranty, covenant, or condition not set forth herein
with respect to the subject matter hereof.  This Agreement may only be amended
or otherwise modified by written instrument duly executed by each party hereto.

 

17.          Binding Effect; Assignment; No Third Party Beneficiary.  This
Agreement shall inure to the benefit of, and be binding upon, each party hereto
and each heir, executor, administrator, legal representative, and permitted
assignee of such party.  Except as otherwise provided hereby, this Agreement,
and the rights and obligations created hereunder, may not be transferred or
assigned by any party hereto without the prior consent of each other party
hereto.  The Company may assign this Agreement upon written notice to
Consultant, provided that the assignee assumes all of the obligations of the
Company under this Agreement.  Except as otherwise expressly provided hereby,
there shall be no

 

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third party beneficiary of this Agreement and this Agreement shall not inure to
the benefit of, be enforceable by, or create any right or cause of action in any
Person other than the parties hereto and their heirs, executors, administrators,
legal representatives, successors, and permitted assigns.  Neither the
availability of, nor any limit on, any remedy hereunder shall limit the remedies
of any party hereto against third parties.

 

18.          Code Section 409A; Delay of Payments.  The terms of this Agreement
have been designed to comply with the requirements of Section 409A of the Code,
where applicable, and shall be interpreted and administered in a manner
consistent with such intent.  If deferral of any amounts payable under this
Agreement is necessary in order to prevent any accelerated or additional tax
under Section 409A of the Code, then (a) the Company will defer the payment of
any such amounts hereunder until the date that is six (6) months and one (1) day
following the Effective Date at which time any such delayed amounts will be paid
to Consultant in a single lump sum, and (b) if any other payments of money or
other benefits due to Consultant hereunder could cause the application of an
accelerated or additional tax under Section 409A of the Code, such payments or
other benefits shall be deferred if deferral will make such payment or other
benefits compliant under Section 409A of the Code.

 

19.          Notice.  Any notice required or permitted to be delivered hereunder
shall be deemed to be delivered only when actually received by the Company or
Consultant, as the case may be, at the addresses set forth below, or at such
other addresses as they have theretofore specified by written notice delivered
in accordance herewith:

 

a.

 

Notice to the Company shall be addressed and delivered as follows:

 

 

 

 

 

Cano Petroleum, Inc.

 

 

801 Cherry Street

 

 

Unit 25, Suite 3200

 

 

Fort Worth, TX 76102

 

 

Attn: General Counsel

 

 

Facsimile: (817) 698-0796

 

 

 

b.

 

Notice to Consultant shall be addressed and delivered as set forth on the
signature page.

 

* * * * * * * * * * *

 

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IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed,
delivered, and effective as of the date first written above.

 

 

THE COMPANY:

 

 

 

CANO PETROLEUM, INC.

 

 

 

 

 

By:

/s/ S. Jeffrey Johnson

 

Name:

S. Jeffrey Johnson

 

Title:

Chairman and Chief Executive Officer

 

 

 

 

 

CONSULTANT:

 

 

 

 

 

By:

/s/ Morris B. Smith

 

Name:

Morris B. Smith

 

 

 

Address:

 

 

 

 

 

 

 

 

 

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EXHIBIT A

 

Grant
Date

 

Original
Grant
Vesting
Date

 

Number of
Shares
Unvested as of
9/29/2008

 

Vesting
Period
(Months)

 

Earned
Through
9/30/2008
(Months)

 

Total Shares Vested as of
9/30/2008

 

6/1/06

 

5/30/09

 

20,000

 

36

 

28

 

15,556

 

7/2/07

 

7/2/09

 

38,333

 

24

 

15

 

23,958

 

7/2/07

 

7/2/10

 

38,334

 

36

 

15

 

15,973

 

5/12/08

 

5/12/09

 

40,000

 

12

 

5

 

16,667

 

5/12/08

 

5/12/10

 

40,000

 

24

 

5

 

8,333

 

5/12/08

 

5/12/11

 

40,000

 

36

 

5

 

5,556

 

TOTAL

 

 

 

216,667

 

 

 

 

 

86,043

 

 

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