Exhibit 10.5
 
FORM OF INDEMNIFICATION AGREEMENT

This Indemnification Agreement (this “Agreement”) is made and entered into as of
__________, by and between Earthstone Energy, Inc., a Delaware corporation (the
“Company”), and ______________ (“Indemnitee”).

WHEREAS, highly competent persons have become more reluctant to serve
corporations as directors or officers or in other capacities unless they are
provided with adequate protection through insurance or adequate indemnification
against inordinate risks of claims and actions against them arising out of their
service to and activities on behalf of the corporation;

WHEREAS, the Board of Directors (the “Board”) of the Company has determined
that, in order to attract and retain qualified individuals, the Company will,
unless certain conditions described below are met, maintain on an ongoing basis,
at its sole expense, liability insurance to protect certain persons serving the
Company and its subsidiaries from certain liabilities. Although the furnishing
of such insurance has been a customary and widespread practice among United
States-based corporations and other business enterprises, the Company believes
that, given current market conditions and trends, such insurance may be
available to it in the future only at higher premiums and with more exclusions;

WHEREAS, directors, officers, and other persons in service to corporations or
business enterprises are being increasingly subjected to expensive and
time-consuming litigation relating to, among other things, matters that
traditionally would have been brought only against the Company or business
enterprise itself;

WHEREAS, the Amended and Restated Certificate of Incorporation of the Company
(as may be amended, the “Certificate of Incorporation”) requires indemnification
of the officers and directors of the Company to the full extent permissible
under applicable law. Indemnitee may also be entitled to indemnification
pursuant to the General Corporation Law of the State of Delaware (“DGCL”). The
Certificate of Incorporation and the DGCL expressly provide that the
indemnification provisions set forth therein are not exclusive, and thereby
contemplate that contracts may be entered into between the Company and members
of the Board, officers, and other persons with respect to indemnification;

WHEREAS, the uncertainties relating to insurance and to indemnification have
increased the difficulty of attracting and retaining persons to serve as
officers and directors of United States-based companies;

WHEREAS, the Board has determined that the increased difficulty in attracting
and retaining such persons is detrimental to the best interests of the Company’s
stockholders and that the Company should act to assure such persons that there
will be increased certainty of such protection in the future;

WHEREAS, it is reasonable, prudent, and necessary for the Company contractually
to obligate itself to indemnify, and to advance expenses on behalf of, such
persons to the fullest extent permitted by applicable law so that they will
serve or continue to serve the Company free from undue concern that they will
not be so indemnified;

WHEREAS, this Agreement is a supplement to and in furtherance of the Certificate
of Incorporation and the Amended and Restated Bylaws of the Company (as may be
amended, the “Bylaws”) and any resolutions adopted by the Board, and will not be
deemed a substitute therefor, nor to diminish or abrogate any rights of
Indemnitee thereunder; and

WHEREAS, Indemnitee does not regard the protection available under the
Certificate of Incorporation and insurance as adequate in the present
circumstances; may not be willing to serve as an officer or director without
adequate protection; and the Company desires Indemnitee to serve in such
capacity. Indemnitee is willing to serve, continue to serve, and to take on
additional service for or on behalf of the Company on the condition that he or
she be so indemnified.

NOW, THEREFORE, in consideration of the foregoing and of Indemnitee’s agreement
to serve as an officer or director or both after the date of this Agreement, the
parties to this Agreement agree as follows:
 
 
 
1

--------------------------------------------------------------------------------

 

1.           Indemnification of Indemnitee. The Company hereby agrees to defend,
hold harmless, and indemnify Indemnitee to the fullest extent permitted by law,
as such may be amended from time to time. In furtherance of the foregoing
indemnification, and without limiting the generality thereof:

(a)           Proceedings Other Than Proceedings by or in the Right of the
Company. Indemnitee shall be entitled to the rights of indemnification provided
in this Section 1(a) if, by reason of his or her Corporate Status (as defined
below), the Indemnitee is, or is threatened to be made, a party to or
participant in any Proceeding (as defined below) other than a Proceeding by or
in the right of the Company. Pursuant to this Section 1(a), the Company shall
indemnify, defend, and hold Indemnitee harmless to the fullest extent permitted
by applicable law, as such may be amended from time to time (but in the case of
any such amendment, only to the extent that such amendment permits the Company
to provide broader indemnification rights than permitted prior to such
amendment), against all Expenses (as defined below), judgments, penalties
(including, but not limited to, excise and similar taxes), fines, and amounts
paid in settlement actually and reasonably incurred by him or her, or on his or
her behalf, in connection with such Proceeding or any claim, issue, or matter in
any such Proceeding if the Indemnitee acted in good faith and in a manner the
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the Indemnitee’s conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the Indemnitee did not act in good faith and
in a manner which the Indemnitee reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the Indemnitee’s conduct was
unlawful.

(b)           Proceedings by or in the Right of the Company. Indemnitee will be
entitled to the rights of indemnification provided in this Section 1(b) if, by
reason of his or her Corporate Status, Indemnitee is, or is threatened to be
made, a party to or participant in any Proceeding brought by or in the right of
the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified
against all Expenses actually and reasonably incurred by the Indemnitee, or on
the Indemnitee’s behalf, in connection with such Proceeding if the Indemnitee
acted in good faith and in a manner the Indemnitee reasonably believed to be in
or not opposed to the best interests of the Company; provided, however, that if
applicable law so provides, no indemnification against such Expenses will be
made in respect of any claim, issue or matter in such Proceeding as to which
Indemnitee has been finally adjudged to be liable to the Company by a court of
competent jurisdiction from which there is no further right of appeal unless and
to the extent that the court in which such action or suit was brought determines
that such indemnification may be made.

(c)           Indemnification for Expenses of a Party Who is Wholly or Partly
Successful. Notwithstanding any other provision of this Agreement, to the extent
that Indemnitee is, by reason of his or her Corporate Status, a party to and is
wholly successful, on the merits or otherwise, in any Proceeding, he or she will
be indemnified by the Company to the fullest extent permitted by law, as such
may be amended from time to time (but in the case of any such amendment, only to
the extent that such amendment permits the Company to provide broader
indemnification rights than permitted prior to such amendment), against all
Expenses actually and reasonably incurred by him or her or on his or her behalf
in connection with such Proceeding. If Indemnitee is not wholly successful in
such Proceeding but is successful, on the merits or otherwise, as to one or more
but less than all claims, issues, or matters in such Proceeding, the Company
will indemnify Indemnitee against all Expenses actually and reasonably incurred
by him or her or on his or her behalf in connection with each successfully
resolved claim, issue, or matter. For purposes of this Section 1(c) and without
limitation, the termination of any claim, issue, or matter in such a Proceeding
by dismissal, with or without prejudice, will be deemed to be a successful
result as to such claim, issue, or matter.

2.           Additional Indemnity. In addition to, and without regard to any
limitations on, the indemnification provided for in Section 1 of this Agreement,
the Company shall and hereby does indemnify, defend, and hold harmless
Indemnitee against all Expenses, judgments, penalties (including, but not
limited to, excise and similar taxes), fines, and amounts paid in settlement
actually and reasonably incurred by him or her or on his or her behalf if, by
reason of his or her Corporate Status, he or she is, or is threatened to be
made, a party to or participant in any Proceeding (including a Proceeding by or
in the right of the Company), including, without limitation, all liability
arising out of the sole, contributory, comparative or other negligence, or
active or passive wrongdoing of Indemnitee. Except as provided in this Section 2
or in Section 9, the only limitation that will exist upon the Company’s
obligations pursuant to this Agreement will be that the Company will not be
obligated to make any payment to Indemnitee that is finally determined (under
the procedures, and subject to the presumptions, set forth in Sections 6 and 7)
to be prohibited by applicable law.
 
 
 
2

--------------------------------------------------------------------------------

 

3.           Contribution.

(a)           Regardless of whether the indemnification provided in Sections 1
and 2 is available, in respect of any threatened, pending, or completed
Proceeding in which the Company is jointly liable with Indemnitee (or would be
if joined in such Proceeding), the Company shall pay, in the first instance, the
entire amount of any judgment or settlement of such Proceeding without requiring
Indemnitee to contribute to such payment, and the Company hereby waives and
relinquishes any right of contribution it may have against Indemnitee. The
Company shall not, without prior written consent of Indemnitee, enter into any
settlement of any Proceeding in which the Company is jointly liable with
Indemnitee (or would be if joined in such Proceeding) unless such settlement
solely involves the payment of money and includes a full, unconditional and
final release of all claims that are or were asserted against Indemnitee in such
Proceeding. In addition, the Company will not, without prior written consent of
Indemnitee, seek or agree to a bar order that extinguishes Indemnitee’s rights
to indemnification or advancement of Expenses, whether under this Agreement or
otherwise.

(b)           Without diminishing or impairing the obligations of the Company
set forth in Section 3(a), if, for any reason, Indemnitee elects or is required
to pay all or any portion of any judgment or settlement in any Proceeding in
which the Company is jointly liable with Indemnitee (or would be if joined in
such Proceeding), the Company will contribute to the amount of Expenses,
judgments, penalties (including, but not limited to, excise and similar taxes),
fines, and amounts paid in settlement actually and reasonably incurred and paid
or payable by Indemnitee in proportion to the relative benefits received from
the transaction that gave rise to such Proceeding by (i) the Company and all
officers, directors, or employees of the Company, other than Indemnitee, who are
jointly liable with Indemnitee (or would be if joined in such Proceeding), on
the one hand; and (ii) Indemnitee, on the other hand; provided, however, that
the proportion determined on the basis of relative benefit may, to the extent
necessary to conform to law, be further adjusted by reference to the relative
fault of the Company and all officers, directors, or employees of the Company
other than Indemnitee who are jointly liable with Indemnitee (or would be if
joined in such Proceeding), on the one hand, and Indemnitee, on the other hand,
in connection with the events that resulted in such Expenses, judgments,
penalties (including, but not limited to, excise and similar taxes), fines, or
settlement amounts, as well as any other equitable considerations that
applicable law may require to be considered. The relative fault of the Company
and all officers, directors, or employees of the Company, other than Indemnitee,
who are jointly liable with Indemnitee (or would be if joined in such
Proceeding), on the one hand, and Indemnitee, on the other hand, will be
determined by reference to, among other things, the degree to which their
actions were motivated by intent to gain personal profit or advantage, the
degree to which their liability is primary or secondary, and the degree to which
their conduct is active or passive.

(c)           The Company hereby agrees to fully indemnify, defend, and hold
harmless Indemnitee from any claims of contribution that may be brought by
officers, directors, or employees of the Company, other than Indemnitee, who may
be jointly liable with Indemnitee.

(d)           To the fullest extent permissible under applicable law, if the
indemnification provided for in this Agreement is unavailable to Indemnitee for
any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall
contribute to the amount incurred by Indemnitee, whether for judgments, fines,
penalties, excise and similar taxes, and amounts paid or to be paid in
settlement or for Expenses, in connection with any claim relating to an
indemnifiable event under this Agreement, in such proportion as is deemed fair
and reasonable in light of all of the circumstances of such Proceeding in order
to reflect (i) the relative benefits received by the Company and Indemnitee as a
result of the event(s) or transaction(s) giving cause to such Proceeding; and
(ii) the relative fault of the Company (and its directors, officers, employees,
and agents) and Indemnitee in connection with such event(s) or transaction(s).

4.           Indemnification for Expenses of a Witness. Notwithstanding any
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his or her Corporate Status, a witness or otherwise involved in any
Proceeding to which Indemnitee is not a party, the Company shall indemnify,
defend, and hold harmless the Indemnitee against all Expenses actually and
reasonably incurred by him or her or on his or her behalf in connection
therewith.

5.           Advancement of Expenses. To the fullest extent permitted by law, as
such may be amended from time to time (but in the case of any such amendment,
only to the extent that such amendment permits the Company to provide broader
advancement rights than permitted prior to such amendment), the Company shall
advance all Expenses incurred by or on behalf of Indemnitee in connection with
any Proceeding by reason of Indemnitee’s Corporate Status within 10 days after
the receipt by the Company of a statement or statements from Indemnitee
requesting such advance or advances from time to time, whether prior to or after
final disposition of such Proceeding. Such statement or statements shall
reasonably evidence the Expenses incurred by Indemnitee and shall include or be
preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay
any Expenses advanced if it is ultimately determined that Indemnitee is not
entitled to be indemnified against such Expenses. Any advances and undertakings
to repay pursuant to this Section 5 shall be unsecured and interest-free and any
advances shall be made without regard to Indemnitee’s ability to repay the
Expenses. Indemnitee will qualify for and be entitled to receive such advances
solely upon execution and delivery to the Company of the statement or statements
and the undertaking referred to in this Section 5.
 
 
 
3

--------------------------------------------------------------------------------

 

6.           Procedures and Presumptions for Determination of Entitlement to
Indemnification. It is the intent of this Agreement to secure for Indemnitee
rights of indemnification that are as favorable as may be permitted under the
DGCL and public policy of the State of Delaware. Accordingly, the parties agree
that the following procedures and presumptions will apply in the event of any
question as to whether Indemnitee is entitled to indemnification under this
Agreement:

(a)           To obtain indemnification under this Agreement, Indemnitee shall
submit to the Company a written request, including such documentation and
information as is reasonably available to Indemnitee and is reasonably necessary
to determine whether and to what extent Indemnitee is entitled to
indemnification. The Secretary of the Company shall, promptly upon receipt of
such a request for indemnification, advise the Board that Indemnitee has
requested indemnification. Notwithstanding the foregoing, any failure by
Indemnitee to provide such a request to the Company, or to provide such a
request in a timely fashion, shall not relieve the Company of any liability that
it may have to Indemnitee unless, and to the extent that, such failure actually
prejudices the interests of the Company. Any Expenses incurred by, or in the
case of retainers, to be incurred by, the Indemnitee in connection with the
Indemnitee’s request for indemnification hereunder shall be borne by the
Company.

(b)           If the Company shall be obligated to pay the Expenses of any
Proceeding against Indemnitee, the Company shall be entitled to assume and
control the defense of such Proceeding (with counsel consented to by Indemnitee,
which consent shall not be unreasonably withheld), upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, consent to such counsel by Indemnitee and the retention of such counsel
by the Company, the Company shall not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same Proceeding; provided, however, that if (i) the employment of
separate counsel by Indemnitee has been previously authorized by the Company,
(ii) Indemnitee or counsel selected by the Company shall have concluded that
there may be a conflict of interest between the Company and Indemnitee or among
Indemnitees jointly represented in the conduct of any such defense; or (iii) the
Company shall not, in fact, have employed counsel, to which Indemnitee has
consented as aforesaid, to assume the defense of such Proceeding, then the
reasonable fees and expenses of Indemnitee’s counsel shall be at the expense of
the Company. Notwithstanding the foregoing, Indemnitee shall have the right to
employ counsel in any such Proceeding at Indemnitee’s expense.

(c)           The Company shall be entitled to participate in the Proceeding at
its own expense. The Company shall not, without prior written consent of
Indemnitee, effect any settlement of a claim against Indemnitee in any
threatened or pending Proceeding unless such settlement solely involves the
payment of money by any Person (as defined below) other than Indemnitee and
includes a full, unconditional and final release of all claims that are or were
asserted against Indemnitee in such Proceeding. In addition, the Company shall
not, without prior written consent of Indemnitee, seek or agree to a bar order
that extinguishes Indemnitee’s rights to indemnification or advancement of
Expenses, whether under this Agreement or otherwise.

(d)           Upon written request by Indemnitee for indemnification pursuant to
the first sentence of Section 6(a), a determination, if required by applicable
law, with respect to Indemnitee’s entitlement to indemnification shall be made
in the specific case: (i) if a Change in Control (as defined below) shall have
occurred, by Independent Counsel (as defined below) in a written opinion to the
Board, a copy of which shall be delivered to Indemnitee; or (ii) if a Change in
Control shall not have occurred, (A) by a majority vote of the Disinterested
Directors (as defined below), even though less than a quorum of the Board,
(B) by a committee of Disinterested Directors designated by a majority vote of
the Disinterested Directors, even though less than a quorum of the Board, (C) if
there are no such Disinterested Directors or, if such Disinterested Directors so
direct, by Independent Counsel in a written opinion to the Board, a copy of
which shall be delivered to Indemnitee, or (D) if so directed by the Board, by
the stockholders of the Company.

(e)           In the event the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 6(d), the Independent
Counsel shall be selected as provided in this Section 6(e). If a Change in
Control has not occurred, the Independent Counsel shall be selected by the
Board, and the Company will give written notice to Indemnitee advising him or
her of the identity of the Independent Counsel so selected. If a Change in
Control has occurred, the Independent Counsel shall be selected by Indemnitee
(unless Indemnitee requests that such selection be made by the Board, in which
event the preceding sentence will apply), and Indemnitee shall give written
notice to the Company advising it of the identity of the Independent Counsel so
selected. In either event, Indemnitee or the Company, as the case may be, may,
within 10 days after such written notice of such selection has been received,
deliver to the Company or to Indemnitee, as the case may be, a written objection
to such selection; provided, however, that such objection may be asserted only
on the ground that the Independent Counsel so selected does not meet the
requirements of “Independent Counsel” as defined in this Agreement, and the
objection shall set forth with particularity the factual basis of such
assertion. Absent a proper and timely objection, the person so selected will act
as Independent Counsel. If a written objection is made and substantiated, the
Independent Counsel so selected may not serve as Independent Counsel unless and
until such objection is withdrawn or a court of competent jurisdiction has
determined that such objection is without merit. The Company agrees to pay the
reasonable fees and expenses of the Independent Counsel and to fully indemnify
such Independent Counsel against any and all Expenses, claims, liabilities, and
damages arising out of or relating to this Agreement or its engagement pursuant
to this Agreement.
 
 
 
4

--------------------------------------------------------------------------------

 

(f)           In making a determination with respect to entitlement to
indemnification under this Agreement, the Person making such determination shall
presume that Indemnitee is entitled to indemnification under this Agreement.
Anyone seeking to overcome this presumption will have the burden of proof and
the burden of persuasion by clear and convincing evidence. Neither the failure
of the Company (including the Board, Independent Counsel or the stockholders of
the Company) to have made a determination prior to the commencement of any
action pursuant to this Agreement that indemnification of Indemnitee is proper
in the circumstances because Indemnitee has met the applicable standard of
conduct set forth in the DGCL, nor an actual determination by the Company
(including the Board, Independent Counsel or the stockholders of the Company)
that Indemnitee has not met such applicable standard of conduct, shall be a
defense to the action or create a presumption that Indemnitee has not met the
applicable standard of conduct.

(g)           Indemnitee shall be deemed to have acted in good faith if
Indemnitee’s action is based on the records or books of account of the
Enterprise (as defined below), including financial statements, or on information
supplied to Indemnitee by directors, officers, employees or agents of the
Enterprise in the course of their duties, or on the advice of legal counsel for
the Enterprise or on information or records given or reports made to the
Enterprise by an independent certified public accountant or by an appraiser or
other expert selected by the Enterprise. In addition, the knowledge or actions,
or failure to act, of any director, officer, agent, or employee of the
Enterprise shall not be imputed to Indemnitee for purposes of determining the
right to indemnification under this Agreement. Regardless of whether the
foregoing provisions of this Section 6(g) are satisfied, it shall in any event
be presumed that Indemnitee has at all times acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the Company. Anyone seeking to overcome this presumption shall have the burden
of proof and the burden of persuasion by clear and convincing evidence.

(h)           If the Person empowered or selected under Section 6(d) to
determine whether Indemnitee is entitled to indemnification has not made a
determination within 60 days after receipt by the Company of the request
therefor, the requisite determination of entitlement to indemnification shall,
to the fullest extent not prohibited by law, be deemed to have been made and
Indemnitee will be entitled to such indemnification absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee’s statement not materially misleading, in connection with the
request for indemnification or (ii) a prohibition of such indemnification under
applicable law; provided, however, that such 60-day period may be extended for a
reasonable time, not to exceed an additional 30 days, if (A) the determination
is to be made by Independent Counsel and the Company objects to Indemnitee’s
selection of Independent Counsel and (B) the Independent Counsel ultimately
selected requires such additional time for the obtaining or evaluating of
documentation or information relating thereto; provided further, however, that
such 60-day period may also be extended for a reasonable time, not to exceed an
additional 30 days, if the determination of entitlement to indemnification is to
be made by the stockholders of the Company.

(i)           Indemnitee shall cooperate with the Person making such
determination with respect to Indemnitee’s entitlement to indemnification,
including providing to such Person upon reasonable advance request any
documentation or information that is not privileged or otherwise protected from
disclosure and that is reasonably available to Indemnitee and reasonably
necessary to such determination. Any Independent Counsel, member of the Board,
or stockholder of the Company will act reasonably and in good faith in making a
determination regarding the Indemnitee’s entitlement to indemnification under
this Agreement. Any Expenses actually and reasonably incurred by Indemnitee in
so cooperating with the Person making such determination shall be borne by the
Company (irrespective of the determination as to Indemnitee’s entitlement to
indemnification) and the Company hereby indemnifies, defends, and agrees to hold
Indemnitee harmless from any such costs and Expenses. If it is determined that
Indemnitee is entitled to indemnification requested by Indemnitee in a written
application submitted to the Company pursuant to Section 6, payment to
Indemnitee shall be made within 60 days after the written request for
indemnification submitted by Indemnitee.

(j)           The Company acknowledges that a settlement or other disposition
short of final judgment may be successful if it permits a party to avoid
expense, delay, distraction, disruption, or uncertainty. In the event that any
Proceeding to which Indemnitee is a party is resolved in any manner other than
by adverse judgment against Indemnitee (including, without limitation,
settlement of such Proceeding with or without payment of money or other
consideration), it shall be presumed that Indemnitee has been successful on the
merits or otherwise in such Proceeding. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion by clear
and convincing evidence.

(k)           The termination of any Proceeding or of any claim, issue, or
matter therein, by judgment, order, settlement, or conviction, or upon a plea of
nolo contendere or its equivalent, shall not (except as otherwise expressly
provided in this Agreement) of itself adversely affect the right of Indemnitee
to indemnification or create a presumption that Indemnitee did not act in good
faith and in a manner that he or she reasonably believed to be in or not opposed
to the best interests of the Company or, with respect to any criminal
Proceeding, that Indemnitee had reasonable cause to believe that his or her
conduct was unlawful.
 
 
 
5

--------------------------------------------------------------------------------

 

7.           Remedies of Indemnitee.

(a)           In the event that (i) a determination is made pursuant to
Section 6 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement, (ii) advancement of Expenses is not timely made pursuant
to Section 5 of this Agreement, (iii) no determination of entitlement to
indemnification is made pursuant to Section 6(d) of this Agreement within 30
days after receipt by the Company of the request for indemnification, or
(iv) payment of indemnification is not made pursuant to this Agreement within 60
days after receipt by the Company of a written request therefor, Indemnitee may
at any time thereafter bring suit against the Company to enforce Indemnitee’s
claim to such indemnification or payment. The Company will not oppose
Indemnitee’s right to bring such suit.

(b)           In the event that a determination has been made pursuant to
Section 6(d) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding commenced pursuant to this Section 7
shall be conducted in all respects as a de novo trial on the merits, and
Indemnitee will not be prejudiced by reason of the adverse determination under
Section 6(d).

(c)           If a determination has been made pursuant to Section 6(d) of this
Agreement that Indemnitee is entitled to indemnification, the Company shall be
bound by such determination in any judicial proceeding commenced pursuant to
this Section 7, absent (i) a misstatement by Indemnitee of a material fact, or
an omission of a material fact necessary to make Indemnitee’s misstatement not
materially misleading in connection with the application for indemnification, or
(ii) a prohibition of such indemnification under applicable law.

(d)           The Company shall indemnify, defend, and hold harmless Indemnitee
against any and all Expenses and, if requested by Indemnitee, will (within 30
days after receipt by the Company of a written request therefor) advance, to the
extent not prohibited by law, such Expenses to Indemnitee, that are actually and
reasonably incurred by Indemnitee in connection with any action brought by
Indemnitee (i) for indemnification or advancement of Expenses from the Company
under this Agreement, (ii) to recover damages for breach of this Agreement or
(iii) related to any directors’ and officers’ liability insurance policies
maintained by the Company, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, advancement of Expenses, or
insurance recovery, as the case may be.

(e)           The Company shall be precluded from asserting in any proceeding
commenced pursuant to this Section 7 that the procedures and presumptions of
this Agreement are not valid, binding, and enforceable and will stipulate in any
court of competent jurisdiction that the Company is bound by all the provisions
of this Agreement.

(f)           Notwithstanding anything in this Agreement to the contrary, no
determination as to entitlement to indemnification under this Agreement shall be
required to be made prior to the final disposition of the Proceeding.

8.           Non-Exclusivity; Survival of Rights; Insurance; Subrogation.

(a)           The rights of indemnification as provided by this Agreement shall
not be deemed exclusive of any other rights to which Indemnitee may at any time
be entitled under applicable law, the Certificate of Incorporation, the Bylaws,
any agreement, a vote of stockholders, a resolution of directors, or otherwise.
No amendment, alteration, or repeal of this Agreement or of any provision of
this Agreement shall limit or restrict any right of Indemnitee under this
Agreement in respect of any action taken or omitted by such Indemnitee in his or
her Corporate Status prior to such amendment, alteration, or repeal. To the
extent that a change in the DGCL, whether by statute or judicial decision,
permits greater indemnification than would be afforded at the time of such
change under the Certificate of Incorporation, the Bylaws, or this Agreement, it
is the intent of the parties to this Agreement that Indemnitee shall enjoy by
this Agreement the greater benefits so afforded by such change. No right or
remedy conferred by this Agreement is intended to be exclusive of any other
right or remedy, and every other right and remedy shall be cumulative and in
addition to every other right and remedy given under this Agreement or now or
hereafter existing at law or in equity or otherwise. The assertion or employment
of any right or remedy under this Agreement, or otherwise, shall not prevent the
concurrent assertion or employment of any other right or remedy.

(b)           The Company hereby covenants and agrees that, so long as
Indemnitee serves in a Corporate Status and thereafter so long as Indemnitee may
be subject to any possible Proceeding by reason of the fact that Indemnitee
served in a Corporate Status, the Company, subject to Section 8(d), shall
maintain in full force and effect liability insurance to protect Indemnitee from
personal liabilities incurred by reason of the fact that Indemnitee is or was
serving in such capacity (“Liability Insurance”) in reasonable amounts from
established and reputable insurers.

(c)           In all applicable policies of Liability Insurance, Indemnitee
shall be named as an insured, to the extent practicable, and will be covered by
such policies in accordance with their terms to the maximum extent of the
coverage available for any director, officer, employee, or agent or fiduciary
under such policy or policies.

(d)           Notwithstanding the foregoing, the Company shall have no
obligation to maintain Liability Insurance if the Company determines in good
faith that such insurance is not reasonably available, the premium costs for
such insurance are disproportionate to the amount of coverage provided, the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or Indemnitee is covered by similar insurance maintained
by a subsidiary of the Company or by another Person pursuant to a contractual
obligation owed to the Company. The Company shall provide at least 30 days’
notice to Indemnitee prior to ceasing the maintenance of Liability Insurance.
The Company’s decision whether or not to adopt and maintain such insurance shall
not affect in any way its obligations to indemnify the Indemnitee under this
Agreement or otherwise.
 
 
 
6

--------------------------------------------------------------------------------

 

(e)           Following the receipt of a notice of a claim pursuant to the terms
of this Agreement, the Company shall give prompt notice of the commencement of
such Proceeding to its insurers in accordance with the procedures set forth in
the respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such Proceeding in accordance with the terms of
such policies.

(f)           Except as set forth in Section 8(g) below, in the event of any
payment under this Agreement, the Company shall be subrogated to the extent of
such payment to all of the rights of recovery of Indemnitee, who shall execute
all papers required and take all action reasonably necessary to secure such
rights, including execution of such documents as are necessary to enable the
Company to bring suit to enforce such rights.

(g)           The Company hereby acknowledges that Indemnitee may have rights to
indemnification or advancement of Expenses or insurance provided by one or more
Persons with whom or which the Indemnitee may be associated (collectively, the
“Third Party Indemnitors”). The Company hereby agrees that (i) it is the
indemnitor of first resort and that the obligations of the Company to Indemnitee
are primary and any obligation of the Third Party Indemnitors to provide
indemnification for or advancement of Expenses incurred by Indemnitee are
secondary, (ii) the Indemnitee’s right to indemnification under this Agreement,
and the Certificate of Incorporation, including the right to advancement of
Expenses, indemnification, and contribution, shall not be diminished, modified,
qualified, or otherwise affected by any right of Indemnitee against any Third
Party Indemnitor, and (iii) it irrevocably waives, relinquishes, and releases
the Third Party Indemnitors from any and all claims against the Third Party
Indemnitors for contribution, subrogation, or any other recovery of any kind in
respect thereof. The Company further agrees that no advancement or payment by
the Third Party Indemnitors on behalf of the Indemnitee with respect to any
claim for which Indemnitee has sought indemnification from the Company shall
affect the foregoing and the Third Party Indemnitors shall have the right of
contribution and be subrogated to the extent of such advancement or payment to
all of the rights of recovery of Indemnitee against the Company. The Company and
Indemnitee agree that the Third Party Indemnitors are third party beneficiaries
of the terms of this Section 8(g).

9.           Exception to Right of Indemnification. Notwithstanding any
provision in this Agreement, the Company shall not be obligated under this
Agreement to make any indemnification in connection with:

(a)           any claim made against Indemnitee for which payment has actually
been made to or on behalf of Indemnitee under any insurance policy held by the
Company or other indemnity provision, except with respect to any excess beyond
the amount paid under any insurance policy or other indemnity provision;
provided, however, that the foregoing shall not affect the rights of Indemnitee
or the Third Party Indemnitors set forth in Section 8(g) above;

(b)           any claim made against Indemnitee for an accounting of profits
made from the purchase and sale (or sale and purchase) by Indemnitee of
securities of the Company within the meaning of Section 16(b) of the Exchange
Act (as defined below) or similar provisions of state law; or

(c)           except as otherwise provided in Section 7, any Proceeding (or any
part of any Proceeding) initiated by Indemnitee, including any Proceeding (or
any part of any Proceeding) initiated by Indemnitee against the Company or its
directors, officers, employees, or other indemnitees, unless (i) the Board
authorized the Proceeding (or such part of any Proceeding) prior to its
initiation, (ii) such indemnification is expressly required to be made by
applicable law or (iii) the Company provides the indemnification, in its sole
discretion, pursuant to the powers vested in the Company under applicable law.

10.           Duration of Agreement. All agreements and obligations of the
Company contained in this Agreement shall continue during the period Indemnitee
is an officer or director of the Company (or is or was serving at the request of
the Company as a director, officer, employee or agent of another Person) and
shall continue thereafter so long as Indemnitee is, or may be made, the subject
to any Proceeding (or any proceeding commenced under Section 7) by reason of his
or her Corporate Status, regardless of whether he or she is acting or serving in
any such capacity at the time any liability or Expense is incurred for which
indemnification can be provided under this Agreement. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties and
their respective successors (including any direct or indirect successor by
purchase, merger, consolidation, reorganization, or otherwise to all or a
majority of the business, assets or income or revenue generating capacity of the
Company), assigns, spouses, heirs, executors, and personal and legal
representatives.

11.           Successors and Binding Agreement. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization, or otherwise) to all or a majority of the business, assets, or
income or revenue generating capacity of the Company, by agreement in form and
substance reasonably satisfactory to Indemnitee, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent the Company
would be required to perform if no such succession had taken place. This
Agreement shall be binding upon and inure to the benefit of the Company and any
successor to the Company by operation of law or otherwise.
 
 
 
7

--------------------------------------------------------------------------------

 

12.           Enforcement.

(a)           The Company expressly confirms and agrees that it has entered into
this Agreement and assumes the obligations imposed on it by this Agreement in
order to induce Indemnitee to serve as an officer or director of the Company,
and the Company acknowledges that Indemnitee is relying upon this Agreement in
serving as an officer or director of the Company.

(b)           Subject to Section 8(a), this Agreement constitutes the entire
agreement between the parties hereto with respect to the matter hereof and
supersedes all prior written and oral, and contemporaneous oral, agreements,
negotiations, and understandings, express or implied, between the parties with
respect to the subject matter hereof. This Section 12(b) shall not be construed
to limit any other rights Indemnitee may have under the Certificate of
Incorporation, the Bylaws, applicable law or otherwise.

13.           Period of Limitations. No legal action may be brought and no cause
of action may be asserted by or in the right of the Company against Indemnitee,
Indemnitee’s estate, spouse, heirs, executors, or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released, unless asserted by the timely filing of a
legal action within such two year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action, such
shorter period will govern.

14.           Definitions. For purposes of this Agreement:

(a)           “Corporate Status” describes the status of a person who is or was
a director, officer, manager, partner, trustee, employee, agent, or fiduciary of
the Enterprise that such person is or was serving at the express request of the
Company and includes, without limitation, the status of such person as an
advisor to the Enterprise prior to the commencement of service in any other
Corporate Status.

(b)           “Change in Control” shall be deemed to occur upon the earliest to
occur after the date of this Agreement of any of the following events:

(i) any Acquiring Person (as defined below) is or becomes the Beneficial Owner
(as defined below), directly or indirectly, of securities of the Company
representing more than 50% of the combined voting power of the Company’s then
outstanding securities;

(ii) during any period of two consecutive years (not including any period prior
to the execution of this Agreement), individuals who at the beginning of such
period constitute the Board, and any new director (other than a director
designated by a Person who has entered into an agreement with the Company to
effect a transaction described in paragraphs (i), (iii) or (iv) of this
definition) whose election by the Board or nomination for election by the
Company’s stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute at least a majority of the members of the
Board;

(iii) the effective date of a merger or consolidation of the Company with any
other Person, other than a merger or consolidation that would result in the
voting securities of the Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than 50% of
the combined voting power of the voting securities of the surviving Person
outstanding immediately after such merger or consolidation and with the power to
elect at least a majority of the board of directors or other governing body of
such surviving Person;

(iv) the approval by the stockholders of the Company of a complete liquidation
of the Company or an agreement for the sale or disposition by the Company of all
or a majority of the Company’s assets or income or revenue-generating capacity;
or

(v) there occurs any other event of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a
response to any similar item on any similar schedule or form) promulgated under
the Exchange Act, whether or not the Company is then subject to such reporting
requirement.
 
 
 
8

--------------------------------------------------------------------------------

 

For purposes of the foregoing, the following terms shall have the following
meanings:

(A) “Acquiring Person” shall mean a “person” or “group” within the meaning of
Sections 13(d) and 14(d) of the Exchange Act; provided, however, that Acquiring
Person will exclude (i) the Company, (ii) any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, and (iii) any Person
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company.

(B) “Beneficial Owner” shall have the meaning given to such term in Rule 13d-3
under the Exchange Act; provided, however, that Beneficial Owner will exclude
any Person otherwise becoming a Beneficial Owner by reason of the stockholders
of the Company approving a merger of the Company with another Person.

(c)           “Disinterested Director” means a director of the Company who is
not and was not a party to the Proceeding in respect of which indemnification is
sought by Indemnitee.

(d)           “Enterprise” means the Company and any other Person that
Indemnitee is or was serving at the express request of the Company.

(e)           “Exchange Act” means the Securities Exchange Act of 1934, as
amended.

(f)           “Expenses” include all reasonable attorneys’ fees, accountants’
fees, retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, any federal, state, local or foreign
taxes imposed on Indemnitee as a result of the actual or deemed receipt of any
payment under this Agreement (including taxes that may be imposed upon the
actual or deemed receipt of payments under this Agreement with respect to the
imposition of federal, state, local or foreign taxes), and all other
disbursements or expenses of the types customarily incurred in connection with
prosecuting, defending, preparing to prosecute or defend, investigating,
participating, or being or preparing to be a witness in a Proceeding, including
reasonable compensation for time spent by Indemnitee in connection with the
prosecution, defense, preparation to prosecute or defend, investigation,
participation, preparation or involvement as a witness, or appeal of a
Proceeding or action for indemnification for which Indemnitee is not otherwise
compensated by the Company or any third party. “Expenses” also include expenses
incurred in connection with any appeal resulting from any Proceeding, including
without limitation the premium, security for, and other costs relating to any
cost bond, supersedeas bond, or other appeal bond or its equivalent. “Expenses,”
however, do not include amounts paid in settlement by Indemnitee or the amount
of judgments or fines against Indemnitee.

(g)           “Independent Counsel” means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is, nor
in the past five years has been, retained to represent: (i) the Company or
Indemnitee in any matter material to either such party (other than with respect
to matters concerning Indemnitee under this Agreement or of other indemnitees
under similar indemnification agreements), or (ii) any other party to the
Proceeding giving rise to a claim for indemnification under this Agreement.
Notwithstanding the foregoing, the term “Independent Counsel” will not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee’s rights under this
Agreement.

(h)           “Person” means any individual, corporation, partnership, limited
liability company, trust, benefit plan, governmental or quasi-governmental
agency, and any other entity, public or private.

(i)           “Proceeding” includes any threatened, pending, or completed
action, claim, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing, or any other actual, threatened,
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative, or investigative, in
which Indemnitee was, is or will be involved as a party or otherwise, by reason
of the fact that Indemnitee is or was acting in his or her Corporate Status, by
reason of any action taken by him or her or of any inaction on his or her part
while acting in his or her Corporate Status; in each case whether or not he or
she is acting or serving in any such capacity at the time any liability or
expense is incurred for which indemnification can be provided under this
Agreement; including any Proceeding pending on or before the date of this
Agreement, but excluding any Proceeding initiated by an Indemnitee pursuant to
Section 7 of this Agreement to enforce his or her rights under this Agreement.
 
 
 
9

--------------------------------------------------------------------------------

 

15.           Severability. The invalidity or unenforceability of any provision
of this Agreement shall in no way affect the validity or enforceability of any
other provision. Without limiting the generality of the foregoing, this
Agreement is intended to confer upon Indemnitee indemnification rights to the
fullest extent permitted by applicable law. In the event any provision of this
Agreement conflicts with any applicable law, such provision will be deemed
modified, consistent with the aforementioned intent, to the extent necessary to
resolve such conflict.

16.           Modification and Waiver. No supplement, modification, termination,
or amendment of this Agreement shall be binding unless executed in writing by
each of the parties. No waiver of any of the provisions of this Agreement shall
be deemed or will constitute a waiver of any other provisions of this Agreement
(whether or not similar) nor shall such waiver constitute a continuing waiver.
This Agreement cannot be modified or amended, or any provision of this Agreement
waived, by course of conduct.

17.           Notice by Indemnitee. Indemnitee agrees promptly to notify the
Company in writing upon being served with or otherwise receiving any summons,
citation, subpoena, complaint, indictment, information, or other document
relating to any Proceeding or matter that may be subject to indemnification
covered under this Agreement. The failure to so notify the Company shall not
relieve the Company of any obligation that it may have to Indemnitee under this
Agreement unless and only to the extent that such failure or delay materially
prejudices the Company.

18.           Notices. All notices and other communications given or made
pursuant to this Agreement shall be in writing and shall be deemed effectively
given: (a) upon personal delivery to the party to be notified, (b) when sent by
confirmed electronic mail or facsimile if sent during normal business hours of
the recipient, and if not so confirmed, then on the next business day, (c) five
days after having been sent by registered or certified mail, return receipt
requested, postage prepaid, or (d) one day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt. All communications will be sent:

(i) To Indemnitee at the address on file with the Company.

(ii) To the Company at:

Earthstone Energy, Inc.
1400 Woodloch Forest Drive, Suite 300
The Woodlands, Texas 77380
Attention: Corporate Secretary

or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.

19.           Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement. This Agreement may also be
executed and delivered by facsimile signature or other electronic means and in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
 
 
 
10

--------------------------------------------------------------------------------

 

20.           Rules of Construction.

(a)           The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or
to affect the construction of this Agreement.

(b)           Time is of the essence with respect to this Agreement.

(c)           Unless the context otherwise requires, references to “Sections” is
to Sections of this Agreement.

(d)           This Agreement shall be liberally construed in favor of
Indemnitee.

(e)           Use of the word “or” shall not be exclusive.

(f)           Use of defined terms in the singular shall include the plural, and
vice versa.

21.           Governing Law and Consent to Jurisdiction. This Agreement and the
legal relations among the parties shall be governed by, and construed and
enforced in accordance with, the Federal laws of the United States of America
and the laws of the State of Delaware, without regard to its conflict of laws
rules or any other principle that could result in the application of the laws of
any other jurisdiction. The Company and Indemnitee hereby irrevocably and
unconditionally (a) agree that any action or proceeding arising out of or in
connection with this Agreement will be brought only in the Court of Chancery of
the State of Delaware (the “Delaware Court”) and not in any other state or
Federal court in the United States of America or any court in any other country,
(b) consent to submit to the exclusive jurisdiction of the Delaware Court for
purposes of any action or proceeding arising out of or in connection with this
Agreement, (c) appoint, to the extent such party is not otherwise subject to
service of process in the State of Delaware, The Corporation Trust Company, as
such party’s agent in the State of Delaware for acceptance of legal process in
connection with any such action or proceeding against such party with the same
legal force and validity as if served upon such party personally within the
State of Delaware, (d) waive any objection to the laying of venue of any such
action or proceeding in the Delaware Court, and (e) waive, and agree not to
plead or to make, any claim that any such action or proceeding brought in the
Delaware Court has been brought in an improper or inconvenient forum.

22.           Section 409A. This Agreement shall be interpreted to comply with
or, to the extent possible, be exempt from Section 409A of the Internal Revenue
Code of 1986, as amended (the “Code”), and the regulations and guidance
promulgated thereunder to the extent applicable (collectively “Section 409A”),
and all provisions of this Agreement shall be construed in a manner consistent
with the requirements for avoiding taxes or penalties under Section 409A. Solely
to the extent that any otherwise required payment under this Agreement would not
be exempt from Section 409A (any such payment, a “Non-Exempt Payment”), such
Non-Exempt Payment shall comply with the following conditions: (a) the amount of
the Non-Exempt Payment payable to Indemnitee in one calendar year shall not
affect the amount of expenses eligible for payment or reimbursement in any other
calendar year, whether pursuant to this Agreement or any other agreement between
the Indemnitee and the Company; (b) the Non-Exempt Payment shall be made to
Indemnitee no later than the last day of the calendar year following the
calendar year in which Indemnitee incurs or is deemed to have incurred the costs
or Expenses giving rise to Indemnitee’s right to the Non-Exempt Payment; and
(c) Indemnitee’s right to the Non-Exempt Payment shall not be subject to
liquidation or exchange for another benefit. Notwithstanding the foregoing, in
the event of a bona fide dispute regarding Indemnitee’s entitlement to the
Non-Exempt Payment, payment of the Non-Exempt Payment may be delayed to a later
date to the extent permitted by the Treasury Regulations under Section 409A.
 
 
 
11

--------------------------------------------------------------------------------

 

[Signature Page Follows]
 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of
the day and year first above written.
 

           
EARTHSTONE ENERGY, INC.
                         
By:
       
Name:
       
Title:
                                       
INDEMNITEE
                         
By:
       
Name:
             

[Signature Page to Indemnification Agreement]