Exhibit 10.3

 

Execution Version

 

EXCHANGE AGREEMENT

 

This EXCHANGE AGREEMENT (“Agreement”) is made and entered into as of this 24th
day of February, 2014 (the “Effective Date”), by and among John E. Hearn, Jr.
(“Founder”), Lara Energy, Inc. (“Founder Holdco” and, together with Founder, the
“Note Holders”) and ZaZa Energy Corporation (“ZaZa” or the “Company”). The Note
Holders and the Company are sometimes collectively referred to in this Agreement
as the “Parties,” and each of them is sometimes individually referred to as a
“Party.”

 

W I T N E S S E T H

 

WHEREAS, Founder owns a subordinated note issued by the Company dated
February 21, 2012 in the original principal amount of $3,026,666 (the “Founder
Note”), and the entire original principal amount of such note remains
outstanding on the date hereof;

 

WHEREAS, Founder Holdco owns a subordinated note issued by the Company dated
February 21, 2012 in the original principal amount of $12,750,000 (the “Founder
Holdco Note” and, together with the Founder Note, the “Subordinated Notes”), and
entire original principal amount of such note remains outstanding on the date
hereof;

 

WHEREAS, the Subordinated Notes are subordinate to the Company’s “Senior
Indebtedness” (as defined in the Subordinated Notes) in accordance with the
subordination provisions set forth in the Subordinated Notes;

 

WHEREAS, the Company’s 8.00% Senior Secured Notes due 2017 (the “Senior Secured
Notes”) and the Company’s 9.00% Convertible Senior Notes due 2017 (the
“Convertible Notes”) of the Company are “Senior Debt” within the meaning of the
Subordinated Notes;

 

WHEREAS, the Subordinated Notes are also subordinate to the Senior Secured Notes
in accordance with the provisions of that certain Amended and Restated
Subordination Agreement dated as of June 8, 2012 (the “Subordination
Agreement”);

 

WHEREAS, in order to optimize the balance sheet and capital structure of the
Company, the Company and the Note Holders have discussed the terms on which the
Note Holders would exchange the Subordinated Notes into a combination of shares
of common stock of the Company (“Common Stock”) and shares of preferred stock of
the Company with the rights determined in the manner set forth in
Section 1(g) (“Preferred Stock”);

 

WHEREAS, Founder owns a significant equity interest in the Company and is a
director of the Company;

 

WHEREAS, on November 7, 2013, the Board of Directors of the Company established
a Conflicts Committee (the “Conflicts Committee”) for the purposes of
negotiating the terms of exchange of the Subordinated Notes by the Note Holders,
as well as similar subordinated notes owned by Todd A. Brooks, Gaston L. Kearby,
Blackstone Oil & Gas, LLC and Omega Energy Corp. (collectively, the “Founders
Subordinated Note Exchange”);

 

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WHEREAS, the Conflicts Committee has unanimously recommended to the Board of
Directors that the Board approve the execution of this Agreement and the
consummation of the transactions contemplated by this Agreement; and

 

WHEREAS, the Board of Directors has unanimously approved the execution of this
Agreement and, subject to the conditions set forth herein, the consummation of
the transactions contemplated by this Agreement.

 

AGREEMENTS

 

NOW, THEREFORE, in consideration of the foregoing and the mutual promises and
covenants set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, each Party hereby
agrees as follows:

 

1.                              The Exchange.

 

(a)                                 The Company agrees, promptly upon the
satisfaction of the conditions set forth in Section 2 below, to repay the
Subordinated Notes by delivering to the Note Holders the following (the
“Exchange Consideration”):

 

(i)                                     a number of shares of Preferred Stock
having an aggregate liquidation preference equal to $12.8 million (the “Exchange
Preferred Shares”); and

 

(ii)                                  a number of shares of Common Stock having
a Fair Market Value (as defined below), rounded to the nearest whole number of
shares, equal to (x) the outstanding principal amount of the Subordinated Notes
on the date of closing of the transactions contemplated by this Agreement (the
“Closing Date”), plus (y) all accrued and unpaid interest on the Subordinated
Notes on the Closing Date, minus (z) $12.8 million (the “Exchange Common Shares”
and, together with the Exchange Preferred Shares, the “Exchange Shares”).

 

(b)                                 The Note Holders agree to accept the
Exchange Consideration as full repayment of all amounts outstanding on the
Subordinated Notes. Upon the payment of the Exchange Consideration, the Note
Holders will mark the Subordinated Notes “Paid in Full” and surrender the
Subordinated Notes to the Company. Furthermore, upon the payment of the Exchange
Consideration, any security interest held by the Note Holders to secure the
repayment of the Subordinated Notes will automatically be released, and the Note
Holders hereby irrevocably designate the Company as their attorney-in-fact for
the purpose of executing and filing any UCC-3 termination statements in
connection with such release.

 

(c)                                  Nothing in this Agreement will be deemed to
modify or amend the terms of the Subordinated Notes, and, until the Subordinated
Notes have been repaid in full in accordance with Section 1(a), the Company
will, subject to any applicable subordination provisions, continue to comply
with its obligations under the Subordinated Notes in accordance with its terms.
Without limiting the generality of the foregoing, subject to any applicable

 

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subordination provisions, the Company will continue to pay interest on the
Subordinated Notes and will make any mandatory prepayments required to be made
under the terms of the Subordinated Notes.

 

(d)                                 The Exchange Consideration to be delivered
to the Note Holders will be allocated between the Note Holders in proportion to
the respective outstanding principal amounts of the Subordinated Notes held by
such Note Holders. At the Closing, the Company will deliver the Exchange
Consideration to the Note Holders, free and clear of any liens or security
interests.

 

(e)                                  For purposes of this Agreement, the “Fair
Market Value” of one share of Common Stock is equal to the volume weighted
average price per share of the Common Stock on the NASDAQ Capital Market during
the last ten trading days immediately preceding the Effective Date.

 

(f)                                   For the avoidance of doubt, neither of the
Note Holders will be entitled to receive any of the Exchange Shares or any
beneficial ownership thereof at any time until all of the conditions set forth
in Section 2 have been satisfied or waived by the applicable Party.

 

(g)                                  The Exchange Preferred Shares will have
rights and preferences substantially similar to the rights and preferences set
forth on Exhibit A attached hereto. The Company may, but is not required to,
issue additional shares of preferred stock of the same preferred stock series as
the Exchange Preferred Shares in one or more public offerings or private
placements. In connection with the first such offering for cash of the same
series of preferred stock as the Exchange Preferred Shares to occur after the
date hereof, the Company will modify (without being required to obtain the
consent of the holders of the Exchange Preferred Shares) the provisions of the
Exchange Preferred Shares to be appropriate for that type of offering, and the
holders of the Exchange Preferred Shares will be entitled to comparable and
proportionate rights, together with the subsequent purchasers of such new shares
in such offering. There is no assurance that any additional shares of preferred
stock (or any Public Preferred Stock, as defined below) will be issued or that a
trading market will develop for such shares. Furthermore, there is no assurance
that shares of preferred stock issued by the Company in a different series of
preferred stock will have rights and preferences similar to the Exchange
Preferred Shares. Depending upon market conditions and other factors at the time
that any shares of Public Preferred Stock are issued, the rights, designations
and preferences of shares of Public Preferred Stock may differ from the rights,
designations and preferences of the Exchange Preferred Shares.

 

2.                               Conditions of the Parties’ Obligations at the
Closing.

 

(a)                                 The obligation of the Note Holders to
consummate the transactions contemplated by Section 1 at the Closing is subject
to the fulfillment (or waiver by the Note Holders) on or before the Closing of
each of the following conditions:

 

(i)                                     Representations and Warranties. Each of
the representations and warranties of the Company contained in Section 3 shall
be true and correct on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing Date.

 

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(ii)                                  Closing Deliveries. The Company shall have
delivered to the Note Holders all of the documents and instruments required to
be delivered and made all payments, if any, required to be made by the Company
under Section 1.

 

(iii)                               Repayment in Full of Senior Secured Notes.
All of the Senior Secured Notes shall have been repaid in full, and no “Senior
Debt” (as defined in the Subordination Agreement) remains outstanding.

 

(iv)                              Convertible Notes. Either (A) none of the
Convertible Notes remains outstanding or (B) the terms of the Convertible Notes
have been modified, to the extent required, such that the consummation of the
Founders Subordinated Note Exchange would not result (with or without notice and
with or without the passage of time) in a default or event default under the
Convertible Notes.

 

(b)                                 The obligation of the Company to consummate
the transactions contemplated by Section 1 at the Closing is subject to the
fulfillment (or waiver by the Company) on or before the closing of each of the
following conditions:

 

(i)                                     Representations and Warranties. Each of
the representations and warranties of the Note Holders contained in Section 4
shall be true and correct on and as of the Closing with the same effect as
though such representations and warranties had been made on and as of the
Closing Date; and

 

(ii)                                  Closing Documents. The Note Holders shall
all have delivered to the Company all documents and instruments required to be
delivered by the Investors under Section 1.

 

(iii)                               Repayment in Full of Senior Secured Notes.
All of the Senior Secured Notes shall have been repaid in full.

 

3.                                      Representations and Warranties of the
Company. In connection with the transactions provided for herein, the Company
hereby represents and warrants to the Note Holders as follows:

 

(a)                                 Due Incorporation and Organization. The
Company has been duly incorporated, is validly existing, and is in good standing
under the laws of the State of Delaware, and has all requisite corporate power
and authority to carry on its business as now conducted and as proposed to be
conducted.

 

(b)                                 Capital Stock Matters. Upon issuance in
accordance with this Agreement, the Exchange Shares will be duly authorized and
validly issued, are fully paid and nonassessable and will not be issued in
violation of, and will not be subject to, any preemptive or similar rights.

 

(c)                                  Authorization. All corporate action has
been taken on the part of the Company necessary for the authorization,
execution, delivery and performance of this Agreement.

 

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(d)                                 Compliance with Other Instruments. Neither
the authorization, execution and delivery of this Agreement nor any of the
documents or instruments contemplated to be delivered hereby, will constitute or
result in a material default or violation of any law or regulation applicable to
the Company or any subsidiary of the Company or any term or provision of the
organizational documents of the Company or any subsidiary of the Company, or any
material agreement or instrument by which the Company or any subsidiary of the
Company is bound or to which any of their respective properties or assets are
subject.

 

4.                                      Representations and Warranties of the
Note Holders. In connection with the transactions provided for herein, the Note
Holders hereby represent and warrant to the Company as follows:

 

(a)                                 Authorization. This Agreement constitutes
the Note Holders’ valid and legally binding obligation, enforceable in
accordance with its terms, except as may be limited by (i) applicable
bankruptcy, insolvency, reorganization, or similar laws relating to or affecting
the enforcement of creditors’ rights and (ii) laws relating to the availability
of specific performance, injunctive relief or other equitable remedies. Founder
represents that he has full capacity to enter into this Agreement. Founder
Holdco has been duly incorporated or formed, is validly existing, and is in good
standing under the laws of the State of Texas, and has all requisite corporate
or company power and authority to carry on its business as now conducted and as
proposed to be conducted. Founder Holdco represents that all corporate or
company action has been taken on the part of the Founder Holdco necessary for
the authorization, execution, delivery and performance of this Agreement.

 

(b)                                 Purchase Entirely for Own Account. The Note
Holders acknowledge that this Agreement is made in reliance upon the Note
Holders’ representation to the Company that the Exchange Consideration will be
acquired for investment for the Note Holders’ own account, not as a nominee or
agent, and not a “statutory underwriter” within the meaning of the Securities
Act of 1933, as amended (the “Securities Act”).

 

(c)                                  Disclosure of Information. The Note Holders
acknowledge that they have received all the information they consider necessary
or appropriate for deciding whether to acquire the Exchange Consideration. The
Note Holders further represent that they have had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering of the Exchange Consideration.

 

(d)                                 Investment Experience. The Note Holders are
experienced investors and acknowledge that they are able to fend for themselves,
can bear the economic risk of their investment and have such knowledge and
experience in financial or business matters that they are capable of evaluating
the merits and risks of the investment in the Exchange Consideration. The Note
Holders acknowledge that the Company has not yet issued any shares of preferred
stock comparable to the Exchange Preferred Shares, and there can be no assurance
that any such shares will be issued by the Company in an offering or that a
liquid market will develop for the Exchange Preferred Shares.

 

(e)                                  Accredited Investor. The Note Holders are
each an “accredited investor” within the meaning of Regulation D promulgated
under the Securities Act.

 

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(f)                                   Restricted Securities. The Note Holders
understand that the elements comprising the Exchange Common Stock and the
Exchange Preferred Stock are characterized as “restricted securities” under the
federal securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act only in certain limited circumstances. The Note Holders
represent that they are familiar with SEC Rule 144, as presently in effect, and
understand the resale limitations imposed thereby and by the Securities Act.

 

(g)                                  No Solicitation. The Note Holders
acknowledge that at no time were the Note Holders presented with or solicited by
any publicly issued or circulated newspaper, mail, radio, television or other
form of general advertising or solicitation in connection with the offer, sale
and purchase of the Exchange Consideration.

 

(h)                                 Legends. It is understood that any
certificate for any of the Exchange Shares may bear the following legend:

 

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT,
UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THE SHARES REPRESENTED
BY THIS CERTIFICATE ARE ALSO SUBJECT TO RESTRICTIONS ON TRANSFER SET FORTH IN
THAT CERTAIN EXCHANGE AGREEMENT WITH ZAZA ENERGY CORPORATION DATED AS OF
FEBRUARY 24, 2014.”

 

5.                               Registration Rights.

 

(a)                                 Subject to the provisions of Section 5(b),
upon receipt of the Exchange Shares, the Note Holders will be entitled to
registration rights with respect to such shares, comparable to those granted to
Founder and Founder Holdco pursuant to that certain Stockholders’ Agreement
dated as of August 9, 2011 by and among the Company, Founder, Founder Holdco and
the other parties thereto. Under the terms of such registration rights, the
Company will file a resale shelf registration statement with the Securities and
Exchange Commission no later than April 30, 2014. As a condition to receiving
such registration rights, the Note Holders agree to grant customary lock-up
provisions reasonably requested by any underwriter or placement agent that is
selling the Company’s equity securities in an offering for the Company. The Note
Holders acknowledge no Note Holder shall be entitled to sell any shares of
Common Stock during any period that such Note Holder is aware of material,
non-public information concerning the Company or during any “Blackout Period”
(as defined in the Company’s then-current insider trading policy).

 

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(b)                                 Notwithstanding the provisions of
Section 5(a), the Note Holders will not have any right to cause the Company to
register the Exchange Preferred Shares themselves, but if the Company has
completed a registered public offering of Public Preferred Stock (as defined
below) will have the right to exchange all (but not less than all) of such Note
Holder’s Exchange Preferred Shares for a number of shares of Public Preferred
Stock (as defined below) with exactly the same accreted liquidation preference
as the Exchange Preferred Shares owned by such Note Holder. Upon the completion
of such exchange for shares of Public Preferred Stock, the Note Holders will
have the registration rights described in Section 5(a) with respect to such
shares of Public Preferred Stock. The term “Public Preferred Stock” means a
class or series of preferred stock of the Company that is sold by the Company in
a public offering registered under the Securities Act. For the avoidance of
doubt, the Note Holders are not obligated to exchange their Exchange Preferred
Shares for shares of Public Preferred Stock, but the Note Holders will not have
any registration rights with respect to the Exchange Preferred Shares (and will
have registration rights with respect to preferred stock only if the Note
Holders exchange all of their Exchange Preferred Shares for shares of Public
Preferred Stock).

 

6.                                      Further Assurances. Each of the Parties,
at another Party’s request and without further consideration, shall use all
reasonable efforts to take, or cause to be taken, all appropriate action, do or
cause to be done all things necessary, proper or advisable under applicable
laws, including obtaining any necessary consents or approvals from, or making
any necessary filings with, any domestic or foreign regulatory agencies, and
execute, acknowledge and deliver such documents and other papers, as may be
required to carry out the provisions of this Agreement and consummate and make
effective the transactions contemplated by this Agreement.

 

7.                                      Governing Law and Venue. THIS AGREEMENT
SHALL BE GOVERNED AND CONSTRUED BY AND IN ACCORDANCE WITH THE LAWS OF THE STATE
OF TEXAS. THE PARTIES HEREBY IRREVOCABLY SUBMIT TO AND ACKNOWLEDGE AND RECOGNIZE
THE JURISDICTION OF THE DISTRICT COURT OF HARRIS COUNTY, TEXAS OR, IF
APPROPRIATE, A FEDERAL COURT WITHIN THE SOUTHERN DISTRICT OF TEXAS (WHICH
COURTS, TOGETHER WITH ALL APPLICABLE APPELLATE COURTS, FOR PURPOSES OF THIS
AGREEMENT, ARE THE ONLY COURTS OF COMPETENT JURISDICTION), OVER ANY SUIT,
REQUEST FOR INJUNCTIVE RELIEF, ACTION OR OTHER PROCEEDING ARISING OUT OF, UNDER
OR IN CONNECTION WITH THIS AGREEMENT OR THE SUBJECT MATTER HEREOF.

 

8.                                      Headings. The descriptive headings of
the several Sections of this Agreement are inserted for convenience only and do
not constitute a part of this Agreement.

 

9.                                      Expenses. Except as otherwise specified
in this Agreement, each Party will be responsible for paying its own expenses in
connection with the matters that are the subject of this Agreement, as well as
the negotiation and documentation of this Agreement, including, without
limitation, such Party’s legal fees and expenses. Notwithstanding the foregoing
provisions of this Section 9, in the event of litigation relating to this
Agreement, if a court of competent jurisdiction determines in a final,
non-appealable order that a party has breached this Agreement, then such party
shall be liable and pay to the non-breaching party the reasonable legal fees
such non-breaching party has incurred in connection with such litigation,
including any appeal therefrom.

 

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10.                               Counterparts. This Agreement may be executed
in any number of counterparts, each of which when so executed shall be deemed an
original but all of which together shall constitute one and the same instrument.
A facsimile, .pdf or electronically transmitted counterpart of this Agreement
shall be sufficient to bind a Party to the same extent as an original.

 

[Signature Page Follows; Remainder of Page Left Blank]

 

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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement, effective
as of the date first written above.

 

 

 

/S/ John E. Hearn, Jr.

 

John E. Hearn, Jr.

 

 

 

 

 

Lara Energy, Inc.

 

 

 

 

 

By:

/S/ John E. Hearn, Jr.

 

 

John E. Hearn, Jr.

 

 

President

 

 

 

 

 

ZaZa Energy Corporation

 

 

 

 

 

By:

/S/ Ian H. Fay

 

 

Ian H. Fay

 

 

Chief Financial Officer

 

[SIGNATURE PAGE TO EXCHANGE AGREEMENT]

 

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Exhibit A to Exchange Agreement

 

13% SERIES A CUMULATIVE REDEEMABLE PREFERRED STOCK

OF

ZAZA ENERGY CORPORATION

PRELIMINARY INDICATIVE TERM SHEET

 

Issuer: ZaZa Energy Corporation (the “Company”)

 

Securities Offered: 13% Series A Cumulative Redeemable Preferred Stock (the
“Series A Preferred Stock”)

 

Dividend Rate: 13% per annum for cash payment, based on liquidation preference
of $25 per share

 

Penalty Rate: +2% per annum, based on liquidation preference of $25 per share

 

Liquidation Preference: $25.00 per share, plus accumulated and unpaid dividends

 

Dividend Payments: Quarterly, subject to prior payment in full of accumulated
but unpaid dividends on any other senior securities, if any, that may be issued
with dividend rights senior to the Series A Preferred Stock.

 

Dividend/Liquidation Preference: Senior to the common stock, but no less than
pari passu to other preferred securities, if any, that may be issued with
dividend rights.

 

Redemption: No mandatory redemption. Optional redemption by the Company upon a
change of control and will be callable by the Company in whole or in part in
five years at liquidation preference, plus accumulated but unpaid dividends to
the date of redemption, subject to rights of any senior securities.

 

Redemption Upon a Change of Control: Optional redemption by the Company upon a
change of control in whole or in part for $25 per share, plus accumulated but
unpaid dividends (the “Redemption Right”). The circumstances that will
constitute a “change of control” will be set forth in the documents governing
the Series A Preferred Stock.

 

Special Conversion Right Upon a Change of Control: Upon the occurrence of a
change of control, in the event the Company does not exercise the Redemption
Right, the Series A Preferred Stockholders will have the right to convert some
or all of the shares of Series A Preferred Stock held by such holder into a
number of common shares at a predetermined ratio (the “COC Conversion Right”).

 

Penalties for Failure to Pay Dividends: If quarterly dividends are not paid in
full for any quarterly period for a total of six quarterly periods (whether
consecutive or not consecutive) (“Dividend Default”): then, until all
accumulated but unpaid dividends have been paid in full and

 

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the Company has paid accrued dividends for all dividend periods during the two
most recently completed quarterly periods, the Dividend Rate will increase to
the Penalty Rate.

 

Voting Rights: No voting rights are required to be provided for the holders of
the Series A Preferred Stock.

 

Conversion Rights: The Series A Preferred Stock is not convertible except in
connection with the COC Conversion Right.

 

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