Exhibit 10.7
PARALLEL PETROLEUM CORPORATION
INCENTIVE AND RETENTION PLAN
(as amended on August 23, 2005 and February 27, 2007)
Purpose
     The purpose of the Parallel Petroleum Corporation Incentive and Retention
Plan (the “Plan”) is to advance the interests of Parallel Petroleum Corporation,
a Delaware corporation, and its stockholders by providing certain officers,
employees and consultants to Parallel with incentive bonus compensation which is
linked to the sale of the Company (as defined in Article I hereof) or all or
substantially all of the assets of the Company, a merger or business combination
or other transaction. In addition, recognizing the possibility of a proposed or
threatened transaction, the aggregate effect of which may be a Corporate
Transaction or a Change of Control (both as defined in Article I hereof), the
Board of Directors of the Company and the Compensation Committee of the Board
have determined that it is imperative that the Company be able to rely upon
participating officers, employees and consultants to continue in their
employment by or service to the Company or its Subsidiaries (as defined in
Article I hereof), and that the Company be able to receive and rely upon their
advice as to the best interests of the Company and its stockholders without
concern that they might be distracted by the personal uncertainties and risks
created by any such transaction.
ARTICLE I
DEFINITIONS
     In addition to the terms defined in the preamble and elsewhere in this
Plan, the following definitions are applicable throughout this Plan:
     “Additional Base Price” means $8.62 per share of common stock.
     “Additional Base Shares” means 400,000 shares of common stock of the
Company.
     “Affiliate” means with respect to any Person, any other Person who is, or
would be deemed to be, an “affiliate” or an “associate” of such Person within
the respective meanings given to such terms in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended (the “1934 Act”), as in effect on the date of
this Agreement.
     “Base Price” means the volume weighted average closing price of the
Company’s common stock for the fiscal quarter ended December 31, 2003, or $3.73
per share.
     “Base Shares” means the weighted average shares of common stock (basic) of
the Company outstanding for the fiscal quarter ended December 31, 2003, or
1,080,362 shares.
     A person will be deemed the “Beneficial Owner” of any securities which such
Person or any of such Person’s Affiliates would be deemed to beneficially own,
directly or indirectly, within the meaning given to such term in Rule 13d-3
under the 1934 Act as in effect on the date of this Agreement.

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     “Board” means the Board of Directors of the Company.
     “Change of Control” means the occurrence of either one or both of the
following events:
     (a) the acquisition of beneficial ownership (within the meaning of
Rule 13d-3 under the 1934 Act) of an aggregate of 60% or more of the Voting
Power of the Company’s outstanding Voting Securities by any person or group (as
such term is used in Rule 13d-5 under the 1934 Act) who beneficially owned less
than 50% of the Voting Power of the Company’s outstanding Voting Securities on
the date of this Plan; provided, however, that notwithstanding the foregoing, an
acquisition shall not constitute a Change in Control hereunder if the acquiror
is (i) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company and acting in such capacity, or (ii) a Subsidiary of the
Company or a corporation owned, directly or indirectly, by the stockholders of
the Company in substantially the same proportions as their ownership of Voting
Securities of the Company; or
     (b) A change in the composition of the Board such that the individuals who,
as of the effective date of this Plan, constitute the Board (such Board shall be
hereinafter referred to as the “Incumbent Board”) cease for any reason (other
than by way of voluntary resignation) to constitute at least a majority of the
Board; provided, however, that for purposes of this definition, any individual
who becomes a member of the Board subsequent to the effective date of this Plan,
whose election, or nomination for election, by the Company’s stockholders was
approved by a vote of at least a majority of those individuals who are members
of the Board and who were also members of the Incumbent Board (or deemed to be
such pursuant to this proviso) shall be considered as though such individual
were a member of the Incumbent Board; and provided, further however, that any
such individual whose initial assumption of office occurs as a result of or in
connection with either an actual or threatened election contest or other actual
or threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board shall not be so considered as a member of the Incumbent
Board.
     “Change of Control Date” means the date on which a Change of Control
occurs.
     “Committee” shall have the meaning given to such term in Section 2.1 of
this Plan.
     “Company” means Parallel Petroleum Corporation or any Successor.
     “Corporate Transaction” means the occurrence of any one or more of the
following events:
     (a) an acquisition of the Company by any Person or group of Persons (other
than the Participants) by way of purchase, merger, consolidation, reorganization
or other business combination, whether by way of tender offer or negotiated
transaction, as a result of which the outstanding securities of the Company are
exchanged or converted into cash, property and/or securities not issued by the
Company (other than a merger, consolidation or reorganization the sole purpose
of which is to change the Company’s domicile solely within the United States,
and other than a merger, consolidation or reorganization of the Company in which
the holders of the securities of the Company immediately prior to such
transaction have the same proportionate ownership of the securities of the
surviving corporation immediately after such transaction);

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     (b) a sale, lease, exchange or other disposition by the Company (excluding
disposition by way of pledge, hypothecation or foreclosure) to any Person or
group of Persons (other than the Participants) in one transaction or a series of
related transactions, of all or substantially all of the assets of the Company;
     (c) the stockholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company; or
     (d) any combination of any of the foregoing.
     “Executive Group” means all executive officers of the Company and any other
officer employee of the Company or its Subsidiaries selected by the Compensation
Committee in its sole discretion for participation in the Plan.
     “Market Value” means, as of any specified date, an amount equal to the per
share closing price of the Company’s common stock on the Nasdaq Stock Market at
the close of business on the day immediately preceding the Change of Control
Date. If the common stock is not publicly traded on the Nasdaq Stock Market at
the time a determination of its value is required to be made, the market value
of the common stock shall be the per share closing price reported on the stock
exchange composite tape of the exchange on which the common stock is then
publicly traded, or if the common stock is not publicly traded on any such other
exchange, the determination of fair market value of the common stock shall be
made by the Committee in such manner as it deems appropriate.
     “Participant” means a member of the Executive Group and any other employee
of or consultant to the Company or its Subsidiaries selected by the Compensation
Committee in its sole discretion for participation in the Plan.
     “Performance Bonus” means a positive amount determined in accordance with
the following formula:
[(Transaction Proceeds — Base Price) x Base Shares], plus
[(Transaction Proceeds — Additional Base Price) x Additional Base Shares]
     “Person” means any natural person, corporation, trust, company,
organization, association, partnership or other entity of any kind, and any
successors or assigns thereof, and shall also include any group of Persons
acting jointly or in concert.
     “Proportionate Share” means the amount of the Performance Bonus or
Retention Payment allocated to each Participant upon the occurrence of a
Corporate Transaction or Change of Control, as the case may be, as provided for
in Section 4.1 and Section 4.2 of this Plan.
     “Retention Payment” means a positive amount determined in accordance with
the following formula:
[(Market Value — Base Price) x Base Shares], plus
[(Market Value — Additional Base Price) x Additional Base Shares]

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     “Subsidiary” means any corporation or other entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at the
time directly or indirectly owned by the Company or another Subsidiary.
     “Successor” means any Person into or with which Parallel shall be merged,
consolidated or otherwise combined, or any Person which acquires all or
substantially all the assets of Parallel and in connection therewith assumes all
or substantially all of Parallel’s obligations and liabilities, including
Parallel’s obligations under this Agreement.
     “Transaction Date” means the date on which a Corporate Transaction is
consummated. If a Corporate Transaction occurs in a manner providing for
multiple closings or steps, the Transaction Date will be deemed to be the date
on which the first closing or step is consummated and the Corporate Transaction
will be deemed to have been consummated in its entirety on such Transaction
Date.
     “Transaction Proceeds” means the amount determined in clause (i), (ii) or
(iii), whichever is applicable, as follows: (i) the price per share of common
stock offered to stockholders of the Company in any merger, consolidation, share
exchange, reorganization, combination, sale of assets, liquidation or
dissolution transaction, (ii) the price per share of common stock offered to
stockholders of the Company in any tender offer or exchange offer, or (iii) if a
transaction occurs other than as described in clause (i) or (ii), the per share
price determined in good faith by the Committee. If the consideration offered to
holders of common stock of the Company in any transaction consists of anything
other than cash, the Committee shall determine in good faith the fair cash
equivalent of the portion of the consideration offered which is other than cash.
     “Voting Securities” means all securities of a company entitling the holders
thereof to vote in an annual election of directors (without consideration of the
rights of any class of stock other than the common stock to elect directors by a
separate class vote); and a specified percentage of the “Voting Power” of a
company means such number of the Voting Securities as will enable the holders
thereof to cast such percentage of all the votes which could be cast in an
annual election of directors (without consideration of the rights of any class
of stock other than the common stock to elect directors by a separate class
vote).
ARTICLE II
ADMINISTRATION
     2.1 Administration by Compensation Committee. Subject to the terms of this
Article II, this Plan shall be administered by the Compensation Committee (the
“Committee”) of the Board of Directors of the Company.
     2.2 Committee Action. A majority of the Committee shall constitute a
quorum, and the act of a majority of the members of the Committee present at a
meeting at which a quorum is present shall be the act of the Committee. Any
action taken by the Committee may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by all of the members of the Committee.

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     2.3 Committee’s Powers. The Committee shall have the power, in its sole
discretion, to take such actions as may be necessary to carry out the provisions
and purposes of this Plan and shall have the authority to control and manage the
operation and administration of this Plan. In order to effectuate the purposes
of this Plan, the Committee shall have the discretionary power and authority to
construe and interpret this Plan, to supply any omissions therein, to reconcile
and correct any errors or inconsistencies, to decide any questions in the
administration and application of this Plan, and to make equitable adjustments
for any mistakes or errors made in the administration of the Plan. All such
actions or determinations made by the Committee, in good faith, shall not be
subject to review by anyone, but shall be final, binding and conclusive on all
persons ever interested hereunder.
     In construing this Plan and in exercising its powers, the Committee will
attempt to ascertain the purpose of any provision in question, and when the
purpose is known or reasonably ascertainable, the purpose will be given effect
to the extent feasible. Likewise, the Committee is authorized to determine all
questions with respect to the individual rights of all Participants under this
Plan (which need not be identical), including, but not limited to, all issues
with respect to eligibility. The Committee shall have all powers necessary or
appropriate to accomplish its duties under this Plan including, but not limited
to, the power and duty to:
          (a) designate the officers and employees of the Company and its
Subsidiaries, and consultants to the Company and its Subsidiaries, who shall
participate in this Plan, in addition to the “Executive Group”;
          (b) maintain complete and accurate records and data in the manner
necessary for proper administration of this Plan;
          (c) adopt rules of procedure and regulations necessary for the proper
and efficient administration of this Plan, provided the rules and regulations
are not inconsistent with the terms of this Plan as set out herein. The
Committee shall exercise its discretion hereunder in a nondiscriminatory manner;
          (d) enforce the terms of this Plan and the rules and regulations it
adopts;
          (e) employ agents, attorneys, accountants or other Persons (who also
may be employed by or represent the Company) for such purposes as the Committee
considers necessary or desirable in connection with its duties hereunder; and
          (f) perform any and all other acts necessary or appropriate for the
proper management and administration of this Plan.
ARTICLE III
PARTICIPATION
     All members of the Executive Group are Participants in this Plan and are
eligible to receive a Proportionate Share of the Performance Bonus or Retention
Payment upon the occurrence of a Corporate Transaction or a Change of Control as
provided in this Plan. The Committee may from time to time select and designate
(with the advice and assistance of the Executive Group, if requested by the
Committee) other non-officer employees of, and consultants to, the Company and
its Subsidiaries as Participants in the Plan who shall also be eligible

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to receive a Proportionate Share of the Performance Bonus or Retention Payment.
Participants in the Plan may also participate in other incentive or benefit
plans of the Company or any Subsidiary, subject to the terms and conditions of
such plans.
ARTICLE IV
BONUS AND RETENTION PAYMENTS
     4.1 Performance Bonus. Subject to the terms and conditions of Article VIII
of this Plan, on the Transaction Date, or as soon as practicable thereafter, the
Company shall set aside an amount equal to the Performance Bonus. The Committee,
with the assistance and non-binding recommendations of one designee appointed by
the Executive Group, shall then allocate for payment to and among each member of
the Executive Group such portion of the Performance Bonus as the Committee shall
determine in its sole discretion. After making such allocations, and if and to
the extent any part of the Performance Bonus remains unallocated, the Committee,
with the assistance and non-binding recommendations of the designee appointed by
the Executive Group, shall next allocate any such remaining portion of the
Performance Bonus among all other Participants in the Plan. After all
allocations of the Performance Bonus have been made, each Participant’s
Proportionate Share of the Performance Bonus shall be paid in a cash lump sum on
the Transaction Date or as soon as practicable thereafter.
     4.2 Retention Payment. Subject to the terms and conditions of Article VIII
of this Plan, on the Change of Control Date, or as soon as practicable
thereafter, the Company shall set aside an amount equal to the Retention
Payment. The Committee, with the assistance and non-binding recommendations of
one designee appointed by the Executive Group, shall then allocate for payment
to and among each member of the Executive Group such portion of the Retention
Payment as the Committee shall determine in its sole discretion. After making
such allocations, and if and to the extent any part of the Retention Payment
remains unallocated, the Committee, with the assistance and non-binding
recommendations of the designee appointed by the Executive Group, shall next
allocate any such remaining portion of the Retention Payment among all other
Participants in the Plan. After all allocations of the Retention Payment have
been made, each Participant’s Proportionate Share of the Retention Payment shall
be paid in a cash lump sum on the Change of Control Date or as soon as
practicable thereafter.
ARTICLE V
NONALIENATION
     A Participant may not alienate, assign, pledge, encumber, transfer, sell or
otherwise dispose of any rights or benefits awarded hereunder prior to the
actual receipt thereof; and any attempt by any Participant to alienate, assign,
pledge, encumber, transfer, sell or otherwise dispose of any rights or benefits
prior to such receipt, or any levy, attachment, execution or similar process
upon any rights or benefits conferred hereunder will immediately be null and
void.
ARTICLE VI
UNFUNDED OBLIGATION
     The Plan shall at all times be entirely unfunded and no provision shall at
any time be made with respect to segregating assets of the Company for payment
of any amounts hereunder.

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This Plan and any setting aside of amounts by the Company with which to
discharge its obligations hereunder shall not be deemed to create a trust of any
kind or a fiduciary relationship between the Company and a Participant or any
other Person. The benefits provided under this Plan shall be a general,
unsecured obligation of the Company payable solely from the general assets of
the Company, and neither any Participant nor any Participant’s beneficiaries or
estate shall have any interest in any particular assets of the Company or any
Subsidiary by virtue of this Plan. Participants and beneficiaries shall have
only the rights of a general unsecured creditor of the Company.
ARTICLE VII
REIMBURSEMENT OF EXPENSES
     If, after the occurrence of a Corporate Transaction or a Change of Control,
a Participant brings any action, whether at law or in equity, to obtain or
enforce any payment, benefit or right provided by this Plan, such Participant
shall be entitled to recover reasonable attorneys’ fees and related expenses
upon issuance by a court of competent jurisdiction of a final non-appealable
order to the effect that such Participant is the prevailing party.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE COMPANY
     The Company will have no obligation to pay or cause to be paid to any
Participant the Performance Bonus or Retention Payment described herein if
(a) the payment of the Performance Bonus or Retention Payment would, in the sole
determination of the Committee, cause the Company to be in violation or breach
of any law, statute, rule or regulation or any determination of an arbitrator or
a court or other governmental authority, or any covenant, limitation,
prohibition or restriction of any nature contained in any agreement to which the
Company is a party or by which it is bound, or (b) Participant dies, retires,
resigns or is terminated or removed by the Company as an officer or employee of,
or consultant to, the Company or any of its Subsidiaries prior to the date on
which a Corporate Transaction or Change of Control occurs, as applicable, except
that if a Corporate Transaction or Change of Control occurs at any time during
the period of one year following the date a Participant ceases to be an employee
or officer of, or consultant to, the Company for any reason (other than by
reason of such Participant’s termination of employment or service or removal
from office by the Company, whether with or without cause), such former
Participant (or such former Participant’s estate) may, but shall not be entitled
to, be designated by the Committee in its sole discretion as a Participant
eligible to receive the Performance Bonus or Retention Payment, as applicable.
ARTICLE IX
PAYMENT OF OBLIGATION ABSOLUTE
     Subject to the terms and conditions of Article VIII of this Plan, the
obligations of the Company to pay the Performance Bonus or Retention Payment
described in Article IV of this Plan shall be absolute and unconditional and
will not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right that the Company may
have against a Participant. In no event will a Participant be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to Participants under any of the provisions of this Plan, nor will the
amount of any payment

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hereunder be reduced by any compensation earned by Participants as a result of
employment by another employer.
ARTICLE X
NO RIGHT TO CONTINUED EMPLOYMENT
     This Plan does not, and shall not be construed to, give any Participant any
right to remain in the employ of the Company or any Subsidiary. The Company and
its Subsidiaries reserve the right to terminate any employee or other
Participant at any time, with or without cause.
ARTICLE XI
TERM OF PLAN
     Unless earlier terminated in accordance with Section 12.5 of this Plan,
this Plan shall automatically terminate and expire upon the date on which all
Participants have received their respective Proportionate Share of the
Performance Bonus or their respective Retention Payment following the occurrence
of a Corporate Transaction or Change of Control, as the case may be. Upon
termination of this Plan, Participants shall have no rights, benefits or claims
under or pursuant to this Plan.
ARTICLE XII
MISCELLANEOUS
     12.1 No Adverse Actions. Upon the occurrence of a Corporate Transaction or
a Change of Control, no action, including, but not by way of limitation, the
amendment, suspension or termination of this Plan, shall be taken which would
adversely affect the rights of Participants or the operation of this Plan with
respect to the Performance Bonus or Retention Payment to which Participants may
have become entitled hereunder as a result of a Corporate Transaction or Change
of Control.
     12.2 Simultaneous Transactions. If a transaction or event or series of
related transactions or events constitutes both a Corporate Transaction and a
Change of Control, then for purposes of this Plan, a Corporate Transaction shall
be deemed to have occurred.
     12.3 Recapitalization or Reorganization.
     (a) The existence of the Plan shall not affect in any way the right or
power of the Board or the stockholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the Company’s
capital structure or its business, any merger or consolidation of the Company,
any issue of debt or equity securities, the dissolution or liquidation of the
Company or any sale, lease, exchange or other disposition of all or any part of
its assets or business or any other corporate act or proceeding.
     (b) If the Company shall effect a subdivision or consolidation of shares of
common stock or the payment of a stock dividend on common stock without receipt
of consideration by the Company, the number of Base Shares and Additional Base
Shares (i) in the event of an increase of the number of outstanding shares of
common stock shall be proportionately increased, and the Base Price and
Additional Base Price shall be proportionately reduced, and (ii) in the event of
a reduction in the number of outstanding shares of common stock

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shall be proportionately reduced, and the Base Price and Additional Base Price
shall be proportionately increased.
     (c) If the Company after the date hereof recapitalizes or otherwise changes
its capital structure, and such recapitalization or change in corporate
structure would in the opinion of the Committee materially affect the rights of
Participants, the Base Price and Additional Base Price and the number of Base
Shares and Additional Base Shares shall be adjusted in such manner, if any, and
at such time as the Committee, in good faith, may determine to be equitable in
the circumstances.
     (d) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefore, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
Base Shares and Additional Base Shares or the Base Price and Additional Base
Price.
     12.4 Construction of Agreement. Nothing in this Plan shall be construed to
amend any provision of any other plan or policy of the Company. This Plan is not
and nothing herein shall be deemed to create, a commitment of continued service
by any Participant as an officer or employee of, or consultant to, the Company
or its Subsidiaries, or in any other capacity. The benefits provided under this
Plan are in addition to any other compensation agreements or arrangements that
the Company may have with the Participants.
     12.5 Amendment or Discontinuance. At any time and from time to time, by
action of the Board, subject to the limitations hereinafter provided, any or all
provisions of the Plan may be amended. Each amendment of the Plan shall be in
writing and shall become effective on the date specified therein. No amendment
of the Plan may be made which shall deprive any Participant of amounts that may
become payable with respect to events occurring after the date of this Plan;
provided, however, and notwithstanding the foregoing, the Plan may be amended
from time to time by the Board if, in the sole discretion of the Board, any such
amendment is necessary, advisable or required in order to comply with any law,
statute, rule or regulation or any determination of an arbitrator or a court or
other governmental entity.
     The Plan may not be discontinued or terminated by the Board, but shall
continue until terminated as provided in Article XI; provided, however, and
notwithstanding the foregoing, the Plan may be discontinued or terminated by the
Board if, in the sole discretion of the Board, such discontinuation or
termination is necessary, advisable or required in order to comply with any law,
statute, rule or regulation or any determination of an arbitrator or a court or
other governmental entity.
     12.6 Successors.
          (a) This Plan is binding upon any Successor to the Company, and any
Person that acquires substantially all of the Company’s assets or substantially
all its business (whether direct or indirect, by purchase, merger, consolidation
or otherwise), in the same manner and to the same extent that the Company would
be obligated under this Plan if no succession had taken place.

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          (b) This Plan inures to the benefit of, and is enforceable by, a
Participant’s personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If a Participant dies
after the occurrence of a Corporate Transaction or Change of Control, as the
case may be, but before the receipt of the Performance Bonus or Retention
Payment payable hereunder with respect to events occurring prior to death, such
Performance Bonus or Retention Payment shall be paid in accordance with the last
beneficiary designation executed by the Participant and filed with the Company.
If no beneficiary form has been filed with the Company, any payment due to a
Participant hereunder shall be paid to the deceased Participant’s estate.
     12.7 Taxes. The Company will withhold from all payments due to a
Participant (or such Participant’s beneficiary or estate) hereunder all taxes
which, by applicable federal, state, local or other law, the Company is required
to withhold therefrom.
     12.8 Indemnification of Committee. No member of the Committee nor any
director, officer or employee, or consultant to, of the Company or any
Subsidiary acting on behalf of the Committee, shall be personally liable for any
action, determination or interpretation taken or made in good faith with respect
to the Plan, and all members of the Committee and each director, officer or
employee, or consultant to, of the Company or any Subsidiary acting on its
behalf shall, to the extent permitted by law, be fully indemnified and protected
by the Company with respect to any such action, determination or interpretation.
     12.9 Governing Law. This Plan will be governed by and construed in
accordance with the laws of the State of Texas.
     12.10 Headings. The headings of the Sections herein are included solely for
reference convenience, and will not in any way affect the meaning or
interpretation of this Agreement.
     12.11 Expenses of the Plan. All costs and expenses of the adoption and
administration of this Plan shall be borne by the Company and none of such
expenses shall be charged to any Participant.
     12.12 Date of Plan. The effective date of this Plan is September 23, 2004,
the date of adoption by the Board, except with respect to amendments to this
Plan adopted on August 23, 2005, which are effective as of such date, and except
with respect to amendments to this Plan adopted on February 27, 2007, which are
effective as of such date.

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