Exhibit 10.1

EXECUTION VERSION

 

 

SEPARATION AGREEMENT

by and between

NABORS INDUSTRIES LTD.,

and

NABORS RED LION LIMITED

dated as of

June 25, 2014

 

 

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TABLE OF CONTENTS

 

          Page  

ARTICLE I

 

THE RED LION RESTRUCTURING

  

  

Section 1.1

  

Transfer of Red Lion Assets; Assumption of Red Lion Liabilities

     2   

Section 1.2

  

Transfer of Excluded Assets; Assumption of Excluded Liabilities

     3   

Section 1.3

  

Misallocated Transfers

     3   

Section 1.4

  

Red Lion Assets; Excluded Assets

     3   

Section 1.5

  

Red Lion Liabilities; Excluded Liabilities

     6   

Section 1.6

  

Termination of Intercompany Agreements; Settlement of Intercompany Accounts

     9   

Section 1.7

  

Governmental Approvals and Third-Party Consents

     10   

Section 1.8

  

No Representation or Warranty

     12   

Section 1.9

  

Waiver of Bulk-Sales Laws

     13   

Section 1.10

  

Real Property Leases; Guarantees

     13   

Section 1.11

  

Exemption Certificates

     14   

Section 1.12

  

Note Repayment

     14    ARTICLE II   

CLOSING OF THE RED LION RESTRUCTURING;

POST-CLOSING WORKING CAPITAL ADJUSTMENT

  

  

Section 2.1

  

Separation Time

     14   

Section 2.2

  

Conditions to the Red Lion Restructuring

     15   

Section 2.3

  

Recapitalization of Red Lion

     15   

Section 2.4

  

Transfer of the Red Lion Business

     16   

Section 2.5

  

Transfer of Red Lion Assets and Assumption of Red Lion Liabilities

     17   

Section 2.6

  

Transfer of Excluded Assets; Assumption of Excluded Liabilities

     18   

Section 2.7

  

Working Capital Adjustment

     18    ARTICLE III    MUTUAL RELEASES; INDEMNIFICATION   

Section 3.1

  

Release of Pre-Separation Time Claims

     20   

Section 3.2

  

Indemnification By the Red Lion Group

     21   

Section 3.3

  

Indemnification By Navy

     22   

Section 3.4

  

Payments; Reductions for Insurance Proceeds and Other Recoveries

     22   

Section 3.5

  

Procedures for Defense, Settlement and Indemnification of Third-Party Claims

     23   

Section 3.6

  

Additional Matters

     24   

Section 3.7

  

Exclusive Remedy

     26   

Section 3.8

  

Survival of Indemnities

     26   

 

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ARTICLE IV    ADDITIONAL AGREEMENTS   

Section 4.1

  

Further Assurances

     27   

Section 4.2

  

Agreement For Exchange of Information

     27   

Section 4.3

  

Privileged Matters

     31   

Section 4.4

  

Intellectual Property Assignment/Recordation

     33   

Section 4.5

  

Use of Names of the Navy Group by Red Lion

     33   

Section 4.6

  

Removal of Tangible Assets

     33   

Section 4.7

  

Insurance

     34    ARTICLE V    MISCELLANEOUS   

Section 5.1

  

Expenses

     36   

Section 5.2

  

Entire Agreement

     36   

Section 5.3

  

Governing Law

     36   

Section 5.4

  

Notices

     36   

Section 5.5

  

Priority of Agreements

     37   

Section 5.6

  

Amendments and Waivers

     38   

Section 5.7

  

Termination

     38   

Section 5.8

  

Parties in Interest

     38   

Section 5.9

  

Assignability

     38   

Section 5.10

  

Construction

     38   

Section 5.11

  

Severability

     39   

Section 5.12

  

Counterparts

     39   

Section 5.13

  

Survival of Covenants

     40   

Section 5.14

  

Jurisdiction; Consent to Jurisdiction

     40   

Section 5.15

  

Specific Performance

     41   

Section 5.16

  

Limitations of Liability

     41    ARTICLE VI    DEFINITIONS   

 

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SCHEDULES

 

Schedule 1.1      -      Planned Structure Schedule 1.4(a)(i)      -     
Schedule of Red Lion Facilities Schedule 1.4(a)(ii)      -      Schedule of Red
Lion Entity Interests Schedule 1.4(a)(ix)      -      Schedule of Actions
Schedule 1.4(a)(xi)      -      Schedule of Tangible Personal Property
Schedule 1.4(a)(xiii)      -      Schedule of Approvals Schedule 1.4(a)(xiv)
     -      Schedule of Other Red Lion Assets Schedule 1.4(b)(vii)      -     
Schedule of Excluded Assets Schedule 1.5(a)(i)      -      Schedule of Red Lion
Liabilities Schedule 1.5(a)(ii)      -      Schedule of Contracts Schedule
1.5(b)(ii)      -      Schedule of Excluded Liabilities Schedule 1.5(b)(iii)
     -      Schedule of Excluded Actions Schedule 1.6(b)(i)      -      Schedule
of Intercompany Agreements Not To be Terminated Schedule 1.7      -     
Schedule of Consents or Governmental Approvals Schedule 2.3      -      Penny
Base Share Number Schedule 2.4(a)(vii)      -      Schedule of Resigning
Officers and Directors of the Red Lion Group Schedule 2.7(a)      -     
Accounting Exhibit Schedule 2.7(b)      -      Working Capital Schedule 3.3(e)
     -      Indemnification by Navy EXHIBITS Exhibit A      -      Form of
Employee Benefits Agreement Exhibit B      -      Form of Red Lion Transition
Services Agreement Exhibit C      -      Form of Navy Transition Services
Agreement Exhibit D      -      Form of Tax Matters Agreement Exhibit E      -
     Form of Global Alliance Agreement Exhibit F      -      Form of
Registration Rights Agreement

 

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SEPARATION AGREEMENT

This Separation Agreement (this “Agreement”) is dated as of June 25, 2014, by
and between Nabors Industries Ltd., a Bermuda exempted company (“Navy”) and
Nabors Red Lion Limited, a Bermuda exempted company and currently a wholly owned
Subsidiary of Navy (“Red Lion”). Capitalized terms used in this Agreement and
not otherwise defined have the meanings ascribed to such terms in Article VI.

RECITALS

1. Navy is engaged, directly and indirectly, in the Red Lion Business;

2. As a condition to the execution of the Agreement and Plan of Merger, dated as
of the date hereof, among Navy, Red Lion and C&J Energy Services, Inc., a
Delaware corporation (“Penny”) (the “Merger Agreement”), Navy is required to
separate the Red Lion Business from the other businesses of Navy;

3. The Board of Directors of Navy has determined that it would be in the best
interests of Navy and its shareholders to separate the Red Lion Business from
the other businesses of Navy and enter into the Merger Agreement;

4. Navy currently owns all of the issued and outstanding common shares, par
value $1.00 per share, of Red Lion (the “Red Lion Common Shares”);

5. Navy and Red Lion have each determined that it would be appropriate and
desirable for Navy, Red Lion and Red Lion’s Subsidiaries to undergo a
restructuring (the “Red Lion Restructuring” which, for the avoidance of doubt,
does not include the incurrence of the Red Lion Financing or the entry into the
Debt Financing Agreements, the Note Repayment, the consummation of the Merger or
any events occurring following the Effective Time), which will include certain
distributions that are intended to qualify as a series of distributions subject
to Sections 332, 351, 355 and 368 of the Code or, in the case of restructuring
Red Lion Assets located in Canada, a sale subject to Section 1001 of the Code,
as a result of which the Red Lion Group will, directly or indirectly, own solely
Navy’s well services and completion business in Canada (the “Canada Completion
Business”) and well services and completion business in the United States (the
“U.S. Completion Business,” and together with the Canada Completion Business,
the “Red Lion Business”), and the distribution to Navy certain entities not
engaged in the Red Lion Business, such that following the Red Lion
Restructuring, Red Lion’s remaining assets and liabilities will consist solely
of the Red Lion Business, and Navy will be issued additional Red Lion Common
Shares;

6. Navy and Red Lion contemplate that, concurrently with or immediately
following the Red Lion Restructuring as further described herein, USHC will
incur indebtedness (as defined in the Merger Agreement, the “Red Lion
Financing”), and will enter into definitive agreements with respect thereto (the
“Debt Financing Agreements”), to be used to fund the repayment of certain
intercompany notes (collectively, the “Notes”) with an aggregate face amount of
$829,820,225 to be issued to Nabors Industries Inc., a Delaware corporation
(“Indigo”) and/or one or more other Navy Subsidiaries, and $108,250,000 to be
issued to Nabors Drilling Canada Limited, an Alberta Corporation (“Alberta”),
(the “Note Repayment,” and the Red Lion Financing, and the entry into the Debt
Financing Agreements, together with the Red Lion Share Issuance, collectively,
the “Recapitalization”);

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7. This Agreement is intended to be a “plan of reorganization” within the
meaning of Treasury Regulation Section 1.368-2(g) with respect to the
Recapitalization;

8. Pursuant to the Merger Agreement, at the Effective Time, a corporation to be
organized under the laws of the State of Delaware that will be a direct wholly
owned Subsidiary of Red Lion (“Merger Sub”) will merge with and into Penny (the
“Merger”), with Penny surviving the Merger as a direct wholly owned Subsidiary
of Red Lion and each common share, par value $0.01 per share, of Penny (“Penny
Common Stock”) issued and outstanding immediately prior to the Effective Time
will be converted into the right to receive one Red Lion Common Share on the
terms and subject to the conditions of the Merger Agreement;

9. Immediately after the Merger, Red Lion will transfer Penny to a limited
liability company to be organized under the laws of Luxembourg and wholly owned
by Red Lion (“LuxCo”), thereafter LuxCo will transfer Penny to a corporation to
be organized under the laws of the State of Delaware as a direct wholly owned
Subsidiary of LuxCo (“USHC”); and

10. The Parties intend in this Agreement to set forth the principal arrangements
between them regarding the Red Lion Restructuring and the Recapitalization, and
certain other agreements that will govern certain matters relating to the Red
Lion Restructuring and the Recapitalization and the relationship of Navy, Red
Lion and their respective Subsidiaries.

Accordingly, the Parties agree as follows:

ARTICLE I

THE RED LION RESTRUCTURING

Section 1.1 Transfer of Red Lion Assets; Assumption of Red Lion Liabilities.
Except as provided in Section 1.7(b), effective as of the Separation Time, to
the extent not previously effected by restructuring the Red Lion Group to the
structure set forth on Schedule 1.1 prior to the Separation Time (including the
steps set forth on Schedule 1.1 pertaining to the Canada Completion Business):

(a) Navy will assign, transfer, convey and deliver (“Convey”) (or will cause any
applicable Subsidiary to Convey) to Red Lion, or a Red Lion Entity, and Red Lion
will accept from Navy (or the applicable Subsidiary of Navy) (or will cause any
applicable Red Lion Entity to accept) all of Navy’s and its applicable
Subsidiaries’ respective direct or indirect right, title and interest in and to
all Red Lion Assets (other than any Red Lion Assets that are already held as of
the Separation Time by Red Lion or a Red Lion Entity, which Red Lion Asset will
continue to be held by Red Lion or such Red Lion Entity); and

(b) Navy will Convey (or will cause any applicable Subsidiary to Convey) to Red
Lion or a Red Lion Entity, and Red Lion will assume, perform, discharge and
fulfill when due and, to the extent applicable, comply with (or will cause any
applicable Red

 

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Lion Entity to assume, perform, discharge and fulfill when due and, to the
extent applicable, comply with) all of the Red Lion Liabilities, in accordance
with their respective terms (other than any Red Lion Liabilities that as of the
Separation Time is already a Liability of Red Lion or a Red Lion Entity, which
Red Lion Liability will continue to be a Liability of Red Lion or such Red Lion
Entity). As between members of the Navy Group, on the one hand, and members of
the Red Lion Group, on the other hand, following the Separation Time, the
members of the Red Lion Group will be solely responsible for all Red Lion
Liabilities, on a joint and several basis.

Section 1.2 Transfer of Excluded Assets; Assumption of Excluded Liabilities.
Except as provided in Section 1.7(b), prior to the Separation Time, to the
extent not previously effected:

(a) Navy will cause any applicable member or members of the Red Lion Group to
Convey to Navy or a Subsidiary of Navy, and Navy will accept from such
applicable member or members of the Red Lion Group (or will cause any applicable
Subsidiary of Navy to accept) all of such member’s or members’ direct or
indirect right, title and interest in and to all Excluded Assets; and

(b) Navy will cause any applicable member or members of the Red Lion Group to
Convey to Navy or a Subsidiary of Navy, and Navy will assume, perform, discharge
and fulfill when due, and to the extent applicable, comply with (or will cause
the applicable Subsidiary of Navy to assume, perform, discharge and fulfill when
due, and to the extent applicable, comply with) all of the Excluded Liabilities,
in accordance with their respective terms. As between members of the Navy Group,
on the one hand, and members of the Red Lion Group, on the other hand, following
the Separation Time, the members of the Navy Group will be solely responsible
for all Excluded Liabilities, on a joint and several basis.

Section 1.3 Misallocated Transfers. In the event that at any time or from time
to time (whether prior to, at or after the Separation Time), either Party (or
any member of the Navy Group or the Red Lion Group, as applicable) is the owner
of, receives or otherwise comes to possess any Asset (including the receipt of
payments made pursuant to Contracts and proceeds from accounts receivable) or
Liability that is allocated to any Person that is a member of the other Group
pursuant to this Agreement (except in the case of any acquisition of Assets from
the other Party for value subsequent to the Separation Time), such Party will
promptly transfer, or cause to be transferred, such Asset or Liability to the
Person so entitled thereto. Prior to any such transfer, such Asset or Liability
will be held in accordance with Section 1.7(c).

Section 1.4 Red Lion Assets; Excluded Assets.

(a) For purposes of this Agreement, “Red Lion Assets” mean the following Assets:

(i) all Real Property Interests in the facilities that are used or held for use
primarily in the Red Lion Business, including those listed or described on
Schedule 1.4(a)(i) (the “Red Lion Facilities”);

(ii) all issued and outstanding capital stock of, or other equity interests in,
the Subsidiaries of Navy listed or described on Schedule 1.4(a)(ii) that are
owned by Navy or its Affiliates (such stock or other equity interests, the “Red
Lion Entity Interests,” and such Subsidiaries, the “Red Lion Entities”);

 

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(iii) all interests, rights, claims and benefits of Navy and any of its
Subsidiaries pursuant to and associated with all Contracts that are related
primarily to the Red Lion Business (collectively, the “Red Lion Contracts”);

(iv) (A) all business and employment records related primarily to the Red Lion
Business, including the minute and other record books and related stock and
equity interests records of the Red Lion Entities, and (B) all other books,
records, ledgers, files, documents, correspondence, lists, plats, drawings,
photographs, product literature (including historical), advertising and
promotional materials, distribution lists, customer lists, supplier lists,
studies, market and product share data (including historical), reports,
operating, production and other manuals, manufacturing and quality control
records and procedures, research and development files, and accounting and
business books, records, files, documentation and materials, in all cases
whether in paper, microfilm, microfiche, computer tape or disc, magnetic tape or
any other form, in each case that are related primarily to the Red Lion Business
(collectively, the “Red Lion Books and Records”); provided, that (1) Navy will
be entitled to retain a copy of the Red Lion Books and Records, which will be
subject to the provisions of Section 4.2(g) and will be retained in a
confidential manner by Navy; (2) neither clause (A) nor (B) will be deemed to
include any books, records or other items with respect to which it is not
reasonably practicable to identify and extract the portion thereof related
primarily to the Red Lion Business from the portions thereof that relate
primarily to businesses of Navy other than the Red Lion Business; (3) to the
extent required to satisfy Navy’s legal or other obligations, Navy will be
entitled to retain original copies of the Red Lion Books and Records, which will
be subject to the provisions of Section 4.2(g) and will be retained in a
confidential manner by Navy, and will provide Red Lion with a copy of all such
retained Red Lion Books and Records; and (4) the Red Lion TSA will govern the
delivery to Red Lion of any such books, records or other items that are
maintained in electronic form;

(v) all cash and cash equivalents in the Red Lion Accounts not withdrawn prior
to the Separation Time;

(vi) all trade accounts and notes receivable and other amounts receivable
arising from the sale or other disposition of goods, or the performance of
services, by the Red Lion Business;

(vii) all prepaid expenses, prepaid property taxes, security deposits, credits,
deferred charges, advanced payments that are, in each case, related primarily to
the Red Lion Business (other than prepaid insurance premiums, deposits, security
or other prepaid amounts in connection with workers’ compensation and other
Policies);

(viii) all rights with respect to third-party warranties and guaranties that
are, in each case, related primarily to the Red Lion Business and all related
claims, credits, rights of recovery and other similar rights as to such third
parties;

 

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(ix) all rights to causes of action, lawsuits, judgments, claims and demands
that are, in each case, related primarily to the Red Lion Business, including
those listed or described on Schedule 1.4(a)(ix) and including those arising
under this Agreement or any Ancillary Agreement against any Navy Group member;

(x) all Intellectual Property owned by Navy that is primarily used or held for
use in the Red Lion Business, including all causes of action for past, present,
and future infringement and misappropriation of such Intellectual Property,
including the right to sue for injunctive relief and damages for such past,
present, and future infringements and misappropriations and to retain all
damages collected in connection therewith and seek and obtain injunctive relief;

(xi) all motor vehicles and other transportation equipment, computers and other
electronic data processing equipment, fixtures, machinery, equipment, furniture,
office equipment, special and general tangible tools, prototypes, models, and
other tangible personal property that are, in each case, used or held for use
primarily in the Red Lion Business, including those listed or described in
Schedule 1.4(a)(xi);

(xii) all inventories of materials, parts, raw materials, packaging materials,
stores, supplies, work-in-process, goods in transit, and finished goods and
products that are, in each case, used or held for use primarily in the Red Lion
Business (the “Red Lion Inventory”);

(xiii) all approvals, consents, franchises, licenses, permits, registrations,
authorizations and certificates or other rights issued or granted by any
Governmental Authority and all pending applications therefor that are, in each
case, used primarily in, or held primarily for the benefit of, the Red Lion
Business, including those listed or described on Schedule 1.4(a)(xiii);

(xiv) the Assets set forth on Schedule 1.4(a)(xiv) and any and all Assets that
are expressly contemplated by this Agreement or any Ancillary Agreement as
Assets that have been or that are to be Conveyed to Red Lion or any other member
of the Red Lion Group; and

(xv) any and all other Assets (other than Excluded Assets) owned that are used
or held for use primarily in, or related primarily to, the Red Lion Business.
The intention of this clause (xv) is only to rectify any inadvertent omission of
Conveyance of any Assets that, had the Parties given specific consideration to
such Asset as of the date of this Agreement, would have otherwise been
classified as a Red Lion Asset. No Asset will be deemed a Red Lion Asset solely
as a result of this clause (xv) unless a claim with respect thereto is made by
Red Lion on or prior to the one-year anniversary of the Separation Time.

A single Asset may fall within more than one of clauses (i) through (xv) in this
Section 1.4(a); such fact does not imply that (x) such Asset must be Conveyed
more than once or (y) any duplication of such Asset is required. The fact that
an Asset may be excluded under one clause does not imply that it is not intended
to be included under another.

(b) Notwithstanding the foregoing clause (a), the Red Lion Assets will not in
any event include any of the following Assets (the “Excluded Assets”):

(i) any cash or cash equivalents withdrawn from any Red Lion Accounts prior to
the Separation Time;

 

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(ii) except to the extent provided in Section 4.7, all insurance policies,
binders and claims and rights thereunder and all prepaid insurance premiums;

(iii) all Red Lion Employee Benefit Plans (whether or not listed in
Section 4.2(j)(i) of the Navy Disclosure Letter to the Merger Agreement) or any
other compensation or benefit plans, agreements or arrangements of the Navy
Group, all trusts, trust assets, trust accounts, reserves, insurance policies
and other assets held in connection therewith, and all data and records required
to administer the benefits under any of the foregoing;

(iv) the Assets of any member of the Navy Group not included in any of the
clauses in Section 1.4(a) above;

(v) all rights to causes of action, lawsuits, judgments, claims and demands to
the extent related to an Excluded Action or to any Divested Business;

(vi) any Contracts not related primarily to the Red Lion Business (including
such contracts to which, prior to the closing, both members of the Navy Group
and members of the Red Lion Group are a party); and

(vii) the Assets listed or described on Schedule 1.4(b)(vii), and any and all
other Assets that are expressly contemplated by this Agreement or any Ancillary
Agreement as Assets to be retained by Navy or any other member of the Navy
Group.

The Parties acknowledge and agree that neither Red Lion nor any of its
Subsidiaries will acquire or be permitted to retain any direct or indirect
right, title and interest in any Excluded Assets through the Conveyance of the
Red Lion Entity Interests, and that if any of the Red Lion Entities owns, leases
or has the right to use any such Excluded Assets, such Excluded Assets must be
Conveyed to Navy as contemplated by Section 1.2(a).

Section 1.5 Red Lion Liabilities; Excluded Liabilities.

(a) For the purposes of this Agreement, “Red Lion Liabilities” means (regardless
of (1) whether the facts on which such Liabilities are based occurred prior to,
at or subsequent to the Separation Time, (2) whether or not such Liabilities are
asserted or determined prior to, at or subsequent to the Separation Time,
(3) where or against whom such Liabilities are asserted or determined, and
(4) whether or not such Liabilities arise from or are alleged to arise from
negligence by any member of the Navy Group or the Red Lion Group (including any
of their respective directors, officers, employees, agents, Subsidiaries or
Affiliates)) the following Liabilities (unless such Liability is an Excluded
Liability, in which case it shall not be a Red Lion Liability):

(i) any and all Liabilities that are (A) expressly contemplated by this
Agreement or any Ancillary Agreement (or the Schedules hereto or thereto) to be
assumed by any member of the Red Lion Group, (B) expressly assumed by any member
of the Red Lion Group under this Agreement or any Ancillary Agreements, or
(C) set forth on Schedule 1.5(a)(i);

 

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(ii) any Liabilities to the extent arising from any of the Contracts set forth
in Schedule 1.5(a)(ii);

(iii) all Liabilities to the extent relating to, arising out of or resulting
from any Red Lion Assets;

(iv) all trade and other accounts payable related primarily to the Red Lion
Business;

(v) all operating expenses and other current Liabilities (including Liabilities
for services and goods for which an invoice has not been received prior to the
Separation Time) related primarily to the Red Lion Business;

(vi) subject to the limitations set forth in Section 1.7, all Liabilities under
the Red Lion Contracts;

(vii) all Liabilities with respect to any return, rebate, discount, credit,
recall warranty, customer program, or similar Liabilities relating primarily to
products of the Red Lion Business;

(viii) all Liabilities for death, personal injury, advertising injury, other
injury to persons or property damage relating to, resulting from, caused by or
arising out of, directly or indirectly, use of or exposure to any of the
products (or any part or component) designed, manufactured, serviced or sold, or
services performed, by, or on behalf of, the Red Lion Business, including any
such Liabilities for negligence, strict liability, design or manufacturing
defect, failure to warn, or breach of express or implied warranties of
merchantability or fitness for any purpose or use;

(ix) all Liabilities under the Notes, the Red Lion Financing and Debt Financing
Agreements;

(x) all Liabilities, other than Excluded Liabilities, to the extent arising out
of or resulting from:

(A) the operation of the Red Lion Business or the ownership or use of the Red
Lion Assets at any time before, at or after the Separation Time by any member of
the Red Lion Group, Penny Group or any of their respective predecessors or,
prior to the Separation Time, any member of the Navy Group or any of their
predecessors; or

(B) the operation of any other business conducted by any member of the Red Lion
Group or the Penny Group at any time after the Separation Time (including any
Liability relating to, arising out of or resulting from any act or failure to
act by any director, officer, employee, agent or representative of any member of
the Red Lion Group (whether or not such act or failure to act is or was within
such Person’s authority));

 

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(xi) all Liabilities, other than Excluded Liabilities, arising pursuant to
Environmental Law to the extent arising out of or resulting from the Red Lion
Business;

(xii) all Liabilities that are expressly provided by this Agreement or any
Ancillary Agreement as Liabilities to be assumed or retained by, or allocated
to, any member of the Red Lion Group; and

(xiii) all Liabilities of any member of the Red Lion Group or Penny Group under
this Agreement or any of the Ancillary Agreements.

A single Liability may fall within more than one of clauses (i) through
(xiii) in this Section 1.5(a); such fact does not imply that (x) such Liability
must be Conveyed more than once or (y) any duplication of such Liability is
required. The fact that a Liability may be excluded under one clause does not
imply that it is not intended to be included under another.

(b) Notwithstanding the foregoing clause (a), the Red Lion Liabilities will not
in any event include any of the following Liabilities (the “Excluded
Liabilities”):

(i) all Liabilities to the extent relating to, arising out of or resulting from
any Excluded Assets;

(ii) the Liabilities listed on Schedule 1.5(b)(ii) and any and all other
Liabilities that are expressly contemplated by this Agreement or any Ancillary
Agreement to be retained or assumed by Navy or any other member of the Navy
Group (including, for the avoidance of doubt, all Liabilities for pre-Closing
Taxes to the extent such Taxes are not accrued and reflected in the Working
Capital adjustment pursuant to Section 2.7, except as expressly contemplated by
the Tax Matters Agreement), and all agreements and obligations of any member of
the Navy Group under this Agreement or any of the Ancillary Agreements;

(iii) all Liabilities arising out of any Action pending or asserted in writing
as of the Separation Time other than those Actions set forth on Schedule
1.5(a)(i) (the “Excluded Actions”);

(iv) all Liabilities arising out of claims made by the respective directors,
officers, shareholders, stockholders, employees, agents, Subsidiaries or
Affiliates of either Group against any member of either Group to the extent
relating to, arising out of or resulting from the Non-Red Lion Business or the
other businesses, operations, activities or Liabilities referred to in clause
(i) above;

(v) any Liabilities relating to or arising out of any Divested Business
(including all Liabilities with respect to any Asset included in the sale of the
Divested Business, any products designed, manufactured, serviced or sold by, or
services performed by, the Divested Business);

 

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(vi) all Liabilities arising out of any Action pending or asserted in writing as
of the Separation Time with respect to any Environmental Condition at any
property owned or leased by Navy or any of its Affiliates at or prior to the
Separation Time (the “Excluded Environmental Liabilities”);

(vii) all Liabilities that would be classified as indebtedness under United
States generally accepted accounting principles other than the Notes, the Red
Lion Financing and Debt Financing Agreements; and

(viii) any and all Liabilities of any member of the Navy Group not included in
any of the clauses in Section 1.5(a).

The Parties acknowledge and agree that neither Red Lion nor any other member of
the Red Lion Group will be required to assume or retain any Excluded Liabilities
as a result of the Conveyance of the Red Lion Entity Interests, and that if any
of the Red Lion Entities is liable for any Excluded Liabilities, such Excluded
Liabilities will be assumed by Navy as contemplated by Section 1.2(b).

Section 1.6 Termination of Intercompany Agreements; Settlement of Intercompany
Accounts.

(a) Termination of Intercompany Agreements. Except as set forth in
Section 1.6(b) and Section 1.6(c), Red Lion, on behalf of itself and each other
member of the Red Lion Group, on the one hand, and Navy, on behalf of itself and
each other member of the Navy Group, on the other hand, will terminate,
effective as of the Separation Time, any and all Contracts between or among Red
Lion or any member of the Red Lion Group, on the one hand, and Navy or any
member of the Navy Group, on the other hand. No such Contract (including any
provision thereof which purports to survive termination) will be of any further
force or effect after the Separation Time and all parties will be released from
all Liabilities thereunder. Each Party will, at the reasonable request of any
other Party, take, or cause to be taken, such other actions as may be necessary
to effect the foregoing.

(b) Exceptions to Termination of Intercompany Agreements. The provisions of
Section 1.6(a) will not apply to any of the following Contracts (or to any of
the provisions thereof):

(i) any Contracts listed or described on Schedule 1.6(b)(i);

(ii) this Agreement, the Merger Agreement and the Ancillary Agreements (and each
other Contract expressly contemplated by this Agreement, the Merger Agreement or
any Ancillary Agreement to be entered into by any of the Parties or any of the
members of their respective Groups);

(iii) the Notes;

(iv) any Contracts to which any Person other than the Parties and their
respective Affiliates is a party (it being understood that to the extent that
the rights and Liabilities of the Parties and the members of their respective
Groups under any such Contracts constitute Red Lion Assets or Red Lion
Liabilities, they will be Conveyed pursuant to Section 1.1(a) or Section 1.1(b),
or allocated pursuant to Section 1.7(c)); and

 

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(v) any Contracts to which any non-wholly owned Subsidiary of Navy or Red Lion,
as the case may be, is a party (it being understood that (x) directors’
qualifying shares or similar interests will be disregarded for purposes of
determining whether a Subsidiary is wholly owned and (y) to the extent that the
rights and Liabilities of the Parties and the members of their respective Groups
under any such Contracts constitute Red Lion Assets or Red Lion Liabilities,
they will be Conveyed pursuant to Section 1.1(a) or Section 1.1(b), or allocated
pursuant to Section 1.7(c)).

(c) Settlement of Intercompany Accounts. Except as provided in Section 1.12, all
of the intercompany receivables, payables, loans and other accounts between Red
Lion or any member of the Red Lion Group, on the one hand, and Navy or any
member of the Navy Group, on the other hand, in existence as of immediately
prior to the Separation Time (collectively, the “Intercompany Accounts”) will be
settled at or prior to the Separation Time.

Section 1.7 Governmental Approvals and Third-Party Consents.

(a) Obtaining Consents. To the extent that the consummation of the Red Lion
Restructuring requires any third-party Consents or Governmental Approvals,
subject to the next two sentences, the Parties will use their respective
commercially reasonable efforts to obtain such Consents or Governmental
Approvals, as soon as reasonably practicable, subject to the limitations set
forth in Section 1.7(b). However, unless required to do so in accordance with
the terms and provisions of the Merger Agreement, Navy will under no
circumstance be required to make any payments or offer or grant any
accommodation (financial or otherwise, regardless of any provision to the
contrary in the underlying Contract, including any requirements for the securing
or posting of any bonds, letters of credit or similar instruments, or the
furnishing of any guarantees) to any third party to obtain any Consent or
Governmental Approvals unless and to the extent that Red Lion or Penny agrees to
reimburse and make whole Navy to Navy’s reasonable satisfaction for any payment
or other accommodation made by Navy at Red Lion’s request. Red Lion hereby
agrees to reimburse and make whole Navy to Navy’s reasonable satisfaction any
payment or other accommodation made by Navy in respect of the third-party
Consents or Governmental Approvals specifically identified as a “Required
Consent” on Schedule 1.7 in an aggregate amount not exceeding that amount set
forth in Schedule 1.7. Red Lion agrees that in the event that any third party or
Governmental Authority requests that Navy make a payment or offer or grant an
accommodation to obtain a third-party Consents or Governmental Approvals and Red
Lion does not agree to reimburse or make whole Navy in connection therewith, Red
Lion shall not be entitled to the benefits of the provision in, Navy will not be
obligated to take any efforts under, Section 1.7(c) in respect of any Red Lion
Asset, Red Lion Liability, Excluded Asset or Excluded Liability which Conveyance
is subject to such third-party Consents or Governmental Approvals. For the
avoidance of doubt, the required efforts and responsibilities of the Parties
(i) to seek the Consents necessary to provide the Services (as defined in the
Red Lion TSA) will be governed by Article III of the Red Lion TSA and (ii) to
seek the Requisite Regulatory Approvals (as defined in the Merger Agreement) and
the Required Penny Vote (as defined in the Merger Agreement) will be governed by
the Merger Agreement. The obligations set forth in this

 

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Section 1.7(a) will terminate on the one-year anniversary of the Separation Time
(except for any such Consent or Governmental Approvals as are in the process of
being obtained on such date, as to which such obligations will continue).

(b) Transfer in Violation of Laws or Requiring Consent or Governmental Approval.
If and to the extent that the valid, complete and perfected Conveyance to the
Red Lion Group of any Red Lion Asset or Red Lion Liability, or to the Navy Group
of any Excluded Asset or Excluded Liability, would be a violation of applicable
Laws or require any Consent or Governmental Approval in connection with the Red
Lion Restructuring or the Recapitalization, then notwithstanding any other
provision hereof, the Conveyance to the Red Lion Group of any such Red Lion
Asset or Red Lion Liability, or to the Navy Group of any such Excluded Asset or
Excluded Liability, will automatically be deferred, and no Conveyance will occur
until all legal or contractual impediments are removed or such Consents or
Governmental Approvals have been obtained. Any Asset or Liability which
Conveyance has been so deferred will still be considered a Red Lion Asset, a Red
Lion Liability, an Excluded Asset, or an Excluded Liability, as applicable, and
will be subject to Section 1.7(c). Notwithstanding the foregoing, Navy or Red
Lion may elect to require the immediate Conveyance of any Red Lion Asset, Red
Lion Liability, Excluded Asset or Excluded Liability notwithstanding any
requirement that an immaterial Consent or immaterial Governmental Approval be
obtained; provided that (i) if Red Lion so elects to require the immediate
Conveyance of any such Asset or Liability, any Liabilities arising from such
Conveyance will be deemed to be Red Lion Liabilities, (ii) if Navy so elects to
require the immediate Conveyance of any such Asset or Liability, any Liabilities
arising from such Conveyance will be deemed to be Excluded Liabilities, and
(iii) if Red Lion and Navy jointly agree to immediately Convey such Asset or
Liability, any Liabilities arising from such Conveyance will be shared evenly
between Red Lion and Navy and, notwithstanding any provision in Section 3.5(b)
to the contrary, the defense of any Third-Party Claim relating thereto will be
jointly managed by Red Lion and Navy. The Parties will use their commercially
reasonable efforts promptly to obtain any Consents or Governmental Approvals as
required by Section 1.7(a) and to take the actions required by Section 1.7(c)
pending removal of legal or contractual impediments or receipt of Consents or
Governmental Approvals. If and when the legal or contractual impediments the
presence of which caused the deferral of transfer of any Asset or Liability
pursuant to this Section 1.7(b) are removed or any Consents and/or Governmental
Approvals the absence of which caused the deferral of transfer of any Asset or
Liability pursuant to this Section 1.7(b) are obtained, the transfer of the
applicable Asset or Liability will be effected promptly in accordance with the
terms of this Agreement and/or the applicable Ancillary Agreement(s). The
obligations set forth in this Section 1.7(b) will terminate on the one-year
anniversary of the Separation Time (except to the extent of any Conveyance for
which impediments are being removed or Consents or Governmental Approvals as are
in the process of being obtained on such date, as to which such obligations will
continue).

(c) Conveyances Not Consummated Prior To or At the Separation Time. Subject to
the third sentence of Section 1.7(a), if the Conveyance of any Asset or
Liability intended to be Conveyed is not consummated prior to or at the
Separation Time, whether as a result of the provisions of Section 1.7(b) or for
any other reason (including any misallocated transfers subject to Section 1.3),
then, insofar as reasonably possible (taking into account any applicable
restrictions or considerations relating to the contemplated Tax treatment of the
Transactions) and to the extent permitted by applicable Law, the Person
retaining such Asset or Liability, as the

 

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case may be, (i) will thereafter hold such Asset or Liability, as the case may
be, in trust for the use and benefit and burden of the Person entitled thereto
(and at such Person’s sole expense) until the consummation of the Conveyance
thereof (or as otherwise determined by Navy and Red Lion, as applicable, in
accordance with Section 1.7(b)), and (ii) use commercially reasonable efforts to
take such other actions as may be reasonably requested by the Person to whom
such Asset or Liability is to be Conveyed (at the expense of the Person holding
such Asset or Liability, as the case may be) in order to place such Person in
substantially the same position as if such Asset or Liability had been Conveyed
as contemplated hereby and so that all the benefits and burdens relating to such
Asset or Liability, as the case may be, including possession, use, risk of loss,
potential for gain, any Tax liabilities in respect thereof and dominion, control
and command over such Asset or Liability, as the case may be, are to inure from
and after the Separation Time to the Person to whom such Asset or Liability is
to be Conveyed. Any Person retaining an Asset or a Liability due to the deferral
of the Conveyance of such Asset or Liability, as the case may be, will not be
required, in connection with the foregoing, to make any payments or offer or
grant any accommodation (financial or otherwise, regardless of any provision to
the contrary in the underlying Contract, including any requirements for the
securing or posting of any bonds, letters of credit or similar instruments, or
the furnishing of any guarantees) to any third party, except to the extent that
the Person entitled to the Asset or responsible for the Liability, as
applicable, agrees to reimburse and make whole the Person retaining an Asset or
a Liability, to such Person’s reasonable satisfaction, for any payment or other
accommodation made by the Person retaining an Asset or a Liability at the
request of the Person entitled to the Asset or responsible for the Liability.
The obligations set forth in this Section 1.7(c) will terminate on the one-year
anniversary of the Separation Time (except of any such Conveyances as are in the
process of being consummated on such date, as to which such obligations will
continue).

Section 1.8 No Representation or Warranty. EXCEPT TO THE EXTENT OTHERWISE
PROVIDED FOR IN THIS AGREEMENT OR IN THE MERGER AGREEMENT, RED LION (ON BEHALF
OF ITSELF AND MEMBERS OF THE RED LION GROUP) ACKNOWLEDGES THAT NONE OF NAVY NOR
ANY MEMBER OF THE NAVY GROUP MAKES ANY EXPRESS OR IMPLIED REPRESENTATION OR
WARRANTY HEREIN AS TO ANY MATTER WHATSOEVER, INCLUDING ANY REPRESENTATION OR
WARRANTY WITH RESPECT TO: (A) THE CONDITION OR THE VALUE OF ANY RED LION ASSET
OR THE AMOUNT OF ANY RED LION LIABILITY; (B) THE FREEDOM FROM ANY SECURITY
INTEREST OF ANY RED LION ASSET; (C) THE ABSENCE OF DEFENSES OR FREEDOM FROM
COUNTERCLAIMS WITH RESPECT TO ANY CLAIM TO BE CONVEYED TO RED LION OR HELD BY A
MEMBER OF THE RED LION GROUP; OR (D) ANY IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE OR TITLE. EXCEPT TO THE EXTENT OTHERWISE
PROVIDED FOR IN THIS AGREEMENT OR IN THE MERGER AGREEMENT, RED LION (ON BEHALF
OF ITSELF AND MEMBERS OF THE RED LION GROUP) FURTHER ACKNOWLEDGES THAT ALL OTHER
WARRANTIES THAT NAVY OR ANY MEMBER OF THE NAVY GROUP GAVE OR MIGHT HAVE GIVEN,
OR WHICH MIGHT BE PROVIDED OR IMPLIED BY APPLICABLE LAW OR COMMERCIAL PRACTICE,
ARE HEREBY EXPRESSLY EXCLUDED. EXCEPT TO THE EXTENT OTHERWISE PROVIDED FOR IN
THIS AGREEMENT OR IN THE MERGER

 

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AGREEMENT, ALL ASSETS TO BE TRANSFERRED TO RED LION (AND ALL OF THE RED LION
ASSETS HELD BY THE RED LION ENTITIES) WILL BE TRANSFERRED WITHOUT ANY COVENANT,
REPRESENTATION OR WARRANTY (WHETHER EXPRESS OR IMPLIED) AND ARE HELD “AS IS,
WHERE IS” AND FROM AND AFTER THE CLOSING RED LION WILL BEAR THE ECONOMIC AND
LEGAL RISK THAT ANY CONVEYANCE WILL PROVE TO BE INSUFFICIENT TO VEST IN RED LION
GOOD AND MARKETABLE TITLE, FREE AND CLEAR OF ANY SECURITY INTEREST OR ANY
NECESSARY CONSENTS OR GOVERNMENTAL APPROVALS THAT ARE NOT OBTAINED OR THAT ANY
REQUIREMENTS OF LAWS ARE NOT COMPLIED WITH.

Section 1.9 Waiver of Bulk-Sales Laws. Each Party hereby waives compliance by
each member of their respective Group with the requirements and provisions of
the “bulk-sale” or “bulk-transfer” Laws of any jurisdiction that may otherwise
be applicable with respect to the transfer or sale of any or all of the Assets
to any member of the Navy Group or Red Lion Group, as applicable.

Section 1.10 Real Property Leases; Guarantees.

(a) On or prior to the Separation Time or as soon as practicable thereafter, Red
Lion will, at the direction and expense of Navy, use its reasonable best efforts
to have any member(s) of the Navy Group removed as guarantor of or obligor for
any Red Lion Liability to the extent that they relate to Red Lion Liabilities
(with the reasonable cooperation of the applicable member(s) of the Navy Group).

(b) On or prior to the Separation Time, to the extent required to obtain a
release from an agreement (including any lease of a Real Property Interest) or a
guarantee (each, a “Guarantee Release”) of any member of the Navy Group, Red
Lion will use its reasonable best efforts to execute a guarantee agreement in
the form of the existing agreement or guarantee or such other form as is agreed
to by the relevant parties to such agreement or guarantee.

(c) If the Parties are unable to obtain, or to cause to be obtained, any such
required removal as set forth in clauses (a) and (b) of this Section 1.10,
(i) Red Lion will, and will cause the other members of the Red Lion Group
(including after the Effective Time, the Penny Group) to, indemnify, defend and
hold harmless each of the Navy Indemnitees for any Liability arising from or
relating to such agreement or guarantee and will, as agent or subcontractor for
the applicable Navy Group guarantor or obligor, pay, perform and discharge fully
all the obligations or other Liabilities of such guarantor or obligor thereunder
when due, and (ii) Red Lion will not, and will cause the other members of the
Red Lion Group not to, agree to renew or extend the term of, increase any
obligations under, or transfer to a third Person, any loan, guarantee, lease,
contract or other obligation for which a member of the Navy Group is or may be
liable unless all obligations of the members of the Navy Group with respect
thereto are thereupon terminated by documentation satisfactory in form and
substance to Navy in its sole discretion.

(d) On or prior to the Separation Time or as soon as practicable thereafter,
Navy will, at its expense, use its reasonable best efforts to have any member(s)
of the Red Lion Group removed as guarantor of or obligor for any Excluded
Liability to the extent that they relate to Excluded Liabilities (with the
reasonable cooperation of the applicable member(s) of the Red Lion Group or
Penny Group).

 

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(e) On or prior to the Separation Time, to the extent required to obtain a
Guarantee Release of any member of the Red Lion Group, Navy will use its
reasonable best efforts to execute a guarantee agreement in the form of the
existing agreement or guarantee or such other form as is agreed to by the
relevant parties to such agreement or guarantee.

(f) If the Parties are unable to obtain, or to cause to be obtained, any such
required removal as set forth in clauses (d) and (e) of this Section 1.10,
(i) Navy will, and will cause the other members of the Navy Group to, indemnify,
defend and hold harmless each of the Red Lion Indemnitees for any Liability
arising from or relating to such agreement or guarantee and will, as agent or
subcontractor for the applicable Red Lion Group guarantor or obligor, pay,
perform and discharge fully all the obligations or other Liabilities of such
guarantor or obligor thereunder when due, and (ii) Navy will not, and will cause
the other members of the Navy Group not to, agree to renew or extend the term
of, increase any obligations under, or transfer to a third Person, any loan,
guarantee, lease, contract or other obligation for which a member of the Red
Lion Group is or may be liable unless all obligations of the members of the Red
Lion Group with respect thereto are thereupon terminated by documentation
satisfactory in form and substance to Red Lion in its sole discretion.

Section 1.11 Exemption Certificates. Navy will cause Red Lion or a Subsidiary of
Red Lion, as applicable, to use commercially reasonable efforts to deliver to
Navy on or before the Separation Date properly executed resale exemption
certificates and requisite tax registration numbers for the Red Lion Inventory
(and, where relevant in accordance with applicable local Law, for any tangible
personal property and any other Red Lion Assets), and such other certificates
and documentation as may be required to reasonably evidence any exemption from
transfer Taxes. For the avoidance of doubt, the Parties, as applicable, are and
remain responsible for all transfer Taxes in accordance with the Tax Matters
Agreement.

Section 1.12 Note Repayment. Notwithstanding anything herein to the contrary,
the Notes will survive the Separation Time. At the Closing, if the full proceeds
of the Red Lion Financing are available to USHC, USHC will make the Note
Repayment to Indigo and Alberta, as applicable.

ARTICLE II

CLOSING OF THE RED LION RESTRUCTURING;

POST-CLOSING WORKING CAPITAL ADJUSTMENT

Section 2.1 Separation Time. Unless otherwise provided in this Agreement or in
any Ancillary Agreement, and subject to the satisfaction and waiver of the
conditions set forth in Section 2.2, the effective time and date of each
Conveyance and assumption of any Asset or Liability in accordance with Article I
in connection with the Red Lion Restructuring will be no later than 12:01 a.m.,
Eastern Time, on the Business Day anticipated to precede the Closing Date (such
time, the “Separation Time,” and such date, the “Separation Date”).

 

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Section 2.2 Conditions to the Red Lion Restructuring. The obligations of Navy
pursuant to this Agreement to effect the Red Lion Restructuring are subject to
the fulfillment (or waiver by Navy) at or prior to the Separation Time of the
condition that each of the parties to the Merger Agreement has irrevocably
confirmed to each other that each condition in Article VII of the Merger
Agreement (other than Sections 7.1(f) and 7.2(f) thereto) to such party’s
respective obligations to effect the Merger (i) has been fulfilled, (ii) will be
fulfilled at the Effective Time, or (iii) is or has been waived by such party in
accordance with the terms of the Merger Agreement, as the case may be; provided,
however, that unless the Merger Agreement shall have been terminated in
accordance with its terms, any such waiver shall be subject to the written
consent of Penny.

Section 2.3 Recapitalization of Red Lion. In connection with the Conveyance of
Assets contemplated by Section 1.1, immediately prior to the Effective Time, Red
Lion will issue to Navy or one of its wholly owned Subsidiaries a number of Red
Lion Common Shares such that the total number of Red Lion Common Shares owned by
Navy and its Subsidiaries immediately thereafter (the “Red Lion Share Issuance”)
will equal (a) the Penny Base Share Number, divided by (b) .4975, multiplied by
(c) .5025. Subject to the last sentence of this Section 2.3, the “Penny Base
Share Number” shall equal 61,920,092, which, as calculated on Schedule 2.3,
represents the sum of:

(i) the total number of shares of Penny Common Stock (including Restricted Penny
Shares, whether or not vested) outstanding as of the date hereof multiplied by
the Exchange Ratio;

(ii) the total number of shares of Penny Common Stock subject to issuance upon
the exercise or payment of any Penny Stock Options (whether vested or unvested)
outstanding as of the date hereof multiplied by the Exchange Ratio;

(iii) the total number of shares of Penny Common Stock that would be issued
(including Restricted Penny Shares, whether or not vested) or would be subject
to issuance upon the exercise or payment of Penny Stock Options (whether vested
or unvested) if Penny issued all of the Penny Stock Options and/or Restricted
Penny Shares that it is permitted to issue pursuant to Section 5.1(c)(ii) of the
Merger Agreement multiplied by the Exchange Ratio;

(iv) the total number of Red Lion Common Shares subject to issuance upon the
exercise or payment of options or other rights to acquire Red Lion Common Shares
expected to be issued to employees of Penny or Red Lion in connection with the
Merger, whether before, at or after the Effective Time (other than Adjusted
Options and Navy Adjusted Options);

(v) the total number of shares of Red Lion Common Shares that will be subject to
issuance upon the exercise or payment of any Navy Adjusted Options (whether
vested or unvested) at the Effective Time if all of the Navy Stock Options
outstanding as of the date hereof that are subject to conversion into Navy
Adjusted Options at the Effective Time pursuant to Section 2.4(a) of the Merger
Agreement are so converted; and

 

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(vi) the total number of Adjusted Navy Restricted Shares, whether vested or
unvested, that will be outstanding at the Effective Time if all of the
Restricted Navy Shares outstanding as of the date hereof and subject to
conversion into Adjusted Navy Restricted Shares at the Effective Time pursuant
to Section 2.4(b) of the Merger Agreement are so converted.

Notwithstanding the foregoing, (x) if the parties reasonably determine that the
calculation set forth on Schedule 2.3 is erroneous (whether because of a
computational error, an error in counting the correct number of shares or other
instruments, or any other reason) such that Navy has not been issued shares
equal the number of shares intended by this Section 2.3, then the parties shall
amend Schedule 2.3 to correct such error and the Penny Base Share Number shall
be modified accordingly, (y) if Penny issues any shares of Penny Common Stock
(including Restricted Penny Shares, whether or not vested), Penny Stock Options
or other capital stock or securities, or Red Lion issues (with Penny’s consent
if occurring prior to the Effective Time) any options or other rights to acquire
Red Lion Common Shares to employees of Penny or Red Lion in connection with the
Merger, in either case from and after the date hereof (other than (A) in an
issuance pursuant to Section 5.1(c)(ii) of the Merger Agreement that the Merger
Agreement expressly provides does not require the prior consent of Navy or
(B) for shares already included in the calculation pursuant to clause
(iv) above), or (z) if Navy, with the consent of Penny, such consent not to be
unreasonably withheld, issues any Navy Stock Options or Restricted Navy Shares
that are subject to conversion into Navy Adjusted Options or Adjusted Navy
Restricted Shares, respectively, at the Effective Time pursuant to Section 2.4
of the Merger Agreement, then the Penny Base Share Number shall be increased by
the number of such shares issued or subject to issuance, as applicable, and if
necessary additional Red Lion Common Shares will be issued to Navy at or after
the Effective Time, with effect retroactive to the Effective Time (including
with respect to distributions paid on such Red Lion Common Shares from and after
the Effective Time), in each case so that Navy has been issued shares equal to
(a) the Penny Base Share Number as so revised, divided by (b) .4975, multiplied
by (c) .5025.

Section 2.4 Transfer of the Red Lion Business.

(a) Agreements to be Delivered by Navy. On the Separation Date, Navy will
deliver, or will cause its appropriate Subsidiaries to deliver, to Red Lion all
of the following instruments:

(i) an Employee Benefits Agreement in the form attached hereto as Exhibit A in
all material respects (the “Employee Benefits Agreement”), duly executed by the
members of the Navy Group party thereto;

(ii) a Transition Services Agreement in the form attached hereto as Exhibit B in
all material respects (the “Red Lion TSA”), duly executed by the members of the
Navy Group party thereto;

(iii) a Transition Services Agreement in the form attached hereto as Exhibit C
in all material respects (the “Navy TSA” and, together with the Red Lion TSA,
the “TSAs”), duly executed by the members of the Navy Group party thereto;

 

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(iv) a Tax Matters Agreement in the form attached hereto as Exhibit D in all
material respects (the “Tax Matters Agreement”), duly executed by the members of
the Navy Group party thereto;

(v) a Global Alliance Agreement in the form attached hereto as Exhibit E in all
material respects (the “Alliance Agreement”), duly executed by the members of
the Navy Group party thereto;

(vi) a Registration Rights Agreement in the form attached hereto as Exhibit F in
all material respects (the “Registration Rights Agreement”), duly executed by
the members of the Navy Group party thereto;

(vii) resignations of each of the individuals who serve as an officer or
director of any member of the Red Lion Group including those as set forth on
Schedule 2.4(a)(vii) in their capacity as such and the resignations of any other
Persons that will be employees of any member of the Navy Group after the
Separation Time and that are directors or officers of any member of the Red Lion
Group, to the extent requested by Red Lion; and

(viii) all necessary Transfer Documents as described in Section 2.5 and
Section 2.6.

(b) Agreements to be Delivered by Red Lion. On the Separation Date, Red Lion
will deliver, or will cause its Subsidiaries to deliver, as appropriate, to Navy
all of the following instruments:

(i) in each case where any member of the Red Lion Group is a party to any
Ancillary Agreement, a counterpart of such Ancillary Agreement duly executed by
the member of the Red Lion Group party thereto; and

(ii) all necessary Transfer Documents as described in Section 2.5 and
Section 2.6.

Section 2.5 Transfer of Red Lion Assets and Assumption of Red Lion Liabilities.
In furtherance of the Conveyance of Red Lion Assets and the assumption of Red
Lion Liabilities as provided in Section 1.1: (a) Navy will, and will cause its
Subsidiaries, to execute and deliver, such bills of sale, quitclaim deeds, stock
powers, certificates of title, assignments of contracts and other instruments of
transfer, Conveyance and assignment, as and to the extent reasonably necessary
to evidence the Conveyance of all of Navy’s and its Subsidiaries’ (other than
Red Lion and its Subsidiaries) right, title and interest in and to the Red Lion
Assets to Red Lion and its Subsidiaries and (b) Red Lion will execute and
deliver such assumptions of Contracts and other instruments of assumption as and
to the extent reasonably necessary to evidence the valid and effective
assumption of the Red Lion Liabilities by Red Lion. All of the foregoing
documents contemplated by this Section 2.5 will be referred to, collectively,
herein as the “Navy Transfer Documents.” For the avoidance of doubt, the
obligations with respect to the Conveyance of Red Lion Assets and the assumption
of Red Lion Liabilities provided in Section 1.1, and the execution and delivery
of documents provided in this Section 2.5, does not extend to the Conveyance of,
or execution or delivery of documents with respect to, any Red Lion Assets that
are already held as of the Separation Time by Red Lion or a Red Lion Entity
(which Red Lion

 

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Asset will continue to be held by Red Lion or such Red Lion Entity) or any Red
Lion Liabilities that as of the Separation Time is already a Liability of Red
Lion or a Red Lion Entity (which Red Lion Liability will continue to be a
Liability of Red Lion or such Red Lion Entity).

Section 2.6 Transfer of Excluded Assets; Assumption of Excluded Liabilities. In
furtherance of the Conveyance of Excluded Assets and the assumption of Excluded
Liabilities provided in Section 1.2: (a) Red Lion will execute and deliver, and
will cause its Subsidiaries to execute and deliver, such bills of sale,
quitclaim deeds, stock powers, certificates of title, assignments of contracts
and other instruments of transfer, Conveyance and assignment as and to the
extent reasonably necessary to evidence the Conveyance of all of Red Lion’s and
its Subsidiaries’ right, title and interest in and to the Excluded Assets to
Navy and its Subsidiaries and (b) Navy will execute and deliver such assumptions
of Contracts and other instruments of assumption as and to the extent reasonably
necessary to evidence the valid and effective assumption of the Excluded
Liabilities by Navy. All of the foregoing documents contemplated by this
Section 2.6 will be referred to, collectively, herein as the “Red Lion Transfer
Documents” and, together with the Navy Transfer Documents, the “Transfer
Documents.”

Section 2.7 Working Capital Adjustment.

(a) At least five days prior to the Separation Date, Red Lion will prepare and
deliver to Navy a statement setting forth a good-faith estimate of the
Adjustment Amount (such estimate, the “Estimated Closing Adjustment Statement”).
On the Separation Date, (i) if the Estimated Adjustment Payment, if any, is
positive, Red Lion shall pay to Navy the Estimated Adjustment Payment by wire
transfer of immediately available funds to a bank account designated by Navy and
(ii) if the Estimated Adjustment Payment, if any, is negative, Navy shall pay to
Red Lion the absolute value of the Estimated Adjustment Payment by wire transfer
of immediately available funds to a bank account designated by Red Lion. The
“Estimated Adjustment Payment” will be equal to the Adjustment Amount set forth
in the Estimated Closing Adjustment Statement.

(b) Within 60 days following the Separation Date, Red Lion will prepare and
deliver to Navy a statement setting forth the Adjustment Amount (the “Closing
Adjustment Statement”). Upon the reasonable request of Red Lion, Navy will
provide (or will cause a member of the Navy Group to provide) to Red Lion and
its accountants access to the books and records, any other information,
including working papers of its accountants, and to any employees of Navy or any
other member of the Navy Group necessary for Red Lion to prepare the Closing
Adjustment Statement, to respond to any Navy Objection and to prepare materials
for presentation to the Accounting Firm in connection with this Section 2.7 and
Navy will otherwise cooperate with and assist Red Lion as may be reasonably
necessary to carry out the purposes of this Section 2.7.

(c) For a period of 45 days after delivery of the Closing Adjustment Statement,
Red Lion will make available to Navy all books, records, work papers, personnel
(including their accountants and employees) and other materials and sources used
by Red Lion to prepare the Closing Adjustment Statement and not already in the
possession or under the control of Navy. The Closing Adjustment Statement will
be binding and conclusive upon, and deemed accepted by, Navy unless Navy has
notified Red Lion in writing within 45 days after delivery of the Closing
Adjustment Statement of any good faith objection thereto (the “Navy Objection”).
Any

 

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Navy Objection will set forth a description of the basis of the Navy Objection
and the adjustments to the line items reflected on the Closing Adjustment
Statement which Navy believes should be made. Any items not disputed during the
foregoing 45-day period will be deemed to have been accepted by Navy.

(d) If Navy and Red Lion are unable to resolve any of their disputes with
respect to the Closing Adjustment Statement within 30 days following Red Lion’s
receipt of the Navy Objection to such Closing Adjustment Statement pursuant to
Section 2.7(c), they will refer their remaining differences to a nationally
recognized firm of independent public accountants as to which Navy and Red Lion
mutually agree (the “Accounting Firm”) for a decision, which decision will be
final and binding on the Parties. The Accounting Firm will act as an expert and
not an arbitrator and will address only those items in dispute, in accordance
with any provisions or policies set forth herein and in the Accounting Exhibit,
and for each item may not assign a value greater than the greatest value for
such item claimed by either Party or smaller than the smallest value for such
item claimed by either Party. Any expenses relating to the engagement of the
Accounting Firm will be shared equally by Navy, on one hand, and Red Lion, on
the other hand.

(e) The Closing Adjustment Statement will become final and binding on the
Parties upon the earliest of (i) if no Navy Objection has been given, the
expiration of the period within which Navy must make its objection pursuant to
Section 2.7(e), (ii) agreement in writing by Navy and Red Lion that the Closing
Adjustment Statement, together with any modifications thereto agreed by Navy and
Red Lion, will be final and binding, and (iii) the date on which the Accounting
Firm issues its written determination with respect to any dispute relating to
such Closing Adjustment Statement. The Closing Adjustment Statement, as
submitted by Red Lion if no timely Navy Objection has been given, as adjusted
pursuant to any agreement between the Parties or as determined pursuant to the
decision of the Accounting Firm, when final and binding on all Parties and upon
which a judgment may be entered by a court of competent jurisdiction, is herein
referred to as the “Final Closing Adjustment Statement.”

(f) Within five Business Days following issuance of the Final Closing Adjustment
Statement, the adjustment payment payable pursuant to this Section 2.7(f) (the
“Adjustment Payment”) will be paid by wire transfer of immediately available
funds to a bank account designated by Navy or Red Lion, as the case may be. The
“Final Adjustment Payment” will be equal to the Adjustment Amount as reflected
on the Final Adjustment Statement. The Adjustment Payment will be equal to the
Final Adjustment Payment minus the Estimated Adjustment Payment. The Adjustment
Payment, if any, will be payable by Red Lion to Navy, if positive, and if the
Adjustment Payment is negative, an amount equal to the absolute value of such
Adjustment Payment will be payable by Navy to Red Lion. The Parties acknowledge
that the provisions of this Section 2.7 are intended to implement the agreement
of the Parties that cash generated by the Red Lion Group through the Separation
Time is for the benefit of Navy and its shareholders. The Parties further
acknowledge that prior to the Separation Time they may cause cash of the Red
Lion Group to be transferred to Navy.

 

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ARTICLE III

MUTUAL RELEASES; INDEMNIFICATION

Section 3.1 Release of Pre-Separation Time Claims.

(a) Red Lion Release. Except as provided in Section 3.1(c), effective as of the
Separation Time, Red Lion, for itself and each other member of the Red Lion
Group, and their respective successors and assigns, remises, releases and
forever discharges the Navy Indemnitees from any and all Liabilities whatsoever,
whether at Law or in equity (including any right of contribution), whether
arising under any Contract, by operation of Law or otherwise, existing or
arising from any acts or events occurring or failing to occur or alleged to have
occurred or to have failed to occur at or before the Separation Time or any
conditions existing or alleged to have existed at or before the Separation Time,
including in connection with the transactions and all other activities to
implement the Red Lion Restructuring and the Recapitalization.

(b) Navy Release. Except as provided in Section 3.1(c), effective as of the
Separation Time, Navy, for itself and each other member of the Navy Group, and
their respective successors and assigns, remises, releases and forever
discharges the Red Lion Indemnitees from any and all Liabilities whatsoever,
whether at Law or in equity (including any right of contribution), whether
arising under any Contract, by operation of Law or otherwise, existing or
arising from any acts or events occurring or failing to occur or alleged to have
occurred or to have failed to occur at or before the Separation Time or any
conditions existing or alleged to have existed at or before the Separation Time,
including in connection with the transactions and all other activities to
implement any of the Red Lion Restructuring and the Recapitalization.

(c) No Impairment. Nothing contained in Section 3.1(a) or Section 3.1(b)
releases or will release any Person from (nor impairs or will impair any right
of any Person to enforce the applicable agreements, arrangements, commitments or
understandings relating thereto):

(i) any Liability provided in or resulting from any agreement among any members
of the Navy Group or the Red Lion Group that is specified in Section 1.6(b) or
the applicable schedules thereto as not to terminate as of the Separation Time,
or any other Liability specified in such Section 1.6(b) as not to terminate as
of the Separation Time;

(ii) any Liability assumed, transferred, assigned or allocated to the Group of
which such Person is a member in accordance with this Agreement or any other
Ancillary Agreement, or any other Liability of any member of any Group under
this Agreement or any other Ancillary Agreement;

(iii) any Liability for the sale, lease, construction or receipt of goods,
property or services purchased, obtained or used in the ordinary course of
business by a member of one Group from a member of the other Group prior to the
Separation Time;

(iv) any Liability for unpaid amounts for products or services or refunds owing
on products or services due on a value-received basis for work done by a member
of one Group at the request or on behalf of a member of the other Group;

 

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(v) any Liability that the Parties may have with respect to indemnification or
contribution pursuant to this Agreement, which Liability is governed by the
provisions of this Article III, Section 4.2 and Section 4.3 and any applicable
provisions of the Ancillary Agreements (including, for the avoidance of doubt,
any Liability for pre-Closing Taxes governed by the Tax Matters Agreement) or
the Merger Agreement; or

(vi) any Liability the release of which would result in the release of any
Person other than a Person released pursuant to this Section 3.1.

(d) No Actions as to Released Pre-Separation Time Claims. Red Lion will not, and
will cause its Affiliates not to, make any claim or demand, or commence any
Action asserting any claim or demand, including any claim of contribution or any
indemnification, against Navy or any member of the Navy Group, or any other
Person released pursuant to Section 3.1(a), with respect to any Liabilities
released pursuant to Section 3.1(a). Navy will not, and will cause each other
member of the Navy Group not to, make any claim or demand, or commence any
Action asserting any claim or demand, including any claim of contribution or any
indemnification, against Red Lion or any member of the Red Lion Group, or any
other Person released pursuant to Section 3.1(b), with respect to any
Liabilities released pursuant to Section 3.1(b).

(e) General Intent. It is the intent of each of Navy and Red Lion, by virtue of
the provisions of this Section 3.1, to provide for a full and complete release
and discharge of all Liabilities existing or arising from all acts and events
occurring or failing to occur or alleged to have occurred or to have failed to
occur and all conditions existing or alleged to have existed on or before the
Separation Time, between or among Red Lion or any member of the Red Lion Group,
on the one hand, and Navy or any member of the Navy Group, on the other hand
(including any contractual agreements or arrangements existing or alleged to
exist between or among any such members on or before the Separation Time),
except as expressly set forth in Section 3.1(c). At any time, at the request of
any other Party, each Party will cause each member of its respective Group to
execute and deliver releases reflecting the provisions hereof.

Section 3.2 Indemnification By the Red Lion Group. Without limiting or otherwise
affecting the indemnity provisions of the Ancillary Agreements, from and after
the Separation Time, Red Lion, and each member of the Red Lion Group, will, on a
joint and several basis, indemnify, defend (or, where applicable, pay the
defense costs for) and hold harmless the Navy Indemnitees from and against, and
will reimburse such Navy Indemnitees with respect to, any and all Losses that
result from, relate to or arise, whether prior to, at or following the
Separation Time, out of any of the following items (without duplication):

(a) the Red Lion Liabilities and the Liabilities of the Red Lion Group,
including the failure of Red Lion or any other member of the Red Lion Group or
any other Person to pay, perform, fulfill, discharge and, to the extent
applicable, comply with, in due course and in full, any such Liabilities;

(b) any guarantee, indemnification obligation, surety bond or other credit
support agreement, arrangement, commitment or understanding for the benefit of
any member of the Red Lion Group by Navy or any of its Subsidiaries (other than
any member of the Red Lion Group) that survives following the Separation Time;

 

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(c) any breach by Red Lion or any other member of the Red Lion Group of any
obligations to be performed by such Persons pursuant to this Agreement or the
Employee Benefits Agreement subsequent to the Separation Time; and

(d) the enforcement by the Navy Indemnitees of their rights to be indemnified,
defended and held harmless under this Section 3.2.

Section 3.3 Indemnification By Navy. Without limiting or otherwise affecting the
indemnity provisions of the Ancillary Agreements or the Merger Agreement, from
and after the Separation Time, Navy, and each member of the Navy Group, will, on
a joint and several basis, indemnify, defend (or, where applicable, pay the
defense costs for) and hold harmless the Red Lion Indemnitees from and against,
and will reimburse such Red Lion Indemnitee with respect to, any and all Losses
that result from, relate to or arise, whether prior to or following the
Separation Time, out of any of the following items (without duplication):

(a) the Excluded Liabilities and the Liabilities of the Navy Group, including
the failure of Navy or any other member of the Navy Group or any other Person to
pay, perform, fulfill, discharge and, to the extent applicable, comply with, in
due course and in full such Liabilities;

(b) any guarantee, indemnification obligation, surety bond or other credit
support agreement, arrangement, commitment or understanding for the benefit of
any member of the Navy Group by Red Lion or any of its Subsidiaries (other than
any member of the Navy Group) that survives following the Separation Time;

(c) any breach by Navy or any other member of the Navy Group of any obligations
to be performed by such Persons pursuant to this Agreement or the Employee
Benefits Agreement subsequent to the Separation Time;

(d) the enforcement by the Red Lion Indemnitees of their rights to be
indemnified, defended and held harmless under this Section 3.3; and

(e) the termination of, or failure to meet requirements under, the agreements
set forth in Schedule 3.3(e).

Section 3.4 Payments; Reductions for Insurance Proceeds and Other Recoveries.

(a) Payments. Indemnification payments in respect of any Liabilities for which
an Indemnitee is entitled to indemnification under this Article III will be paid
by the Indemnifying Party to the Indemnitee as such Liabilities are incurred
upon demand by the Indemnitee, including reasonably satisfactory documentation
setting forth the basis for the amount of such indemnification payment,
including documentation with respect to calculations made and consideration of
any Insurance Proceeds that actually reduce the amount of such Liabilities. The
indemnity agreements contained in this Article III will remain operative and in
full force and effect, regardless of (i) any investigation made by or on behalf
of any Indemnitee, (ii) the knowledge by the Indemnitee of Liabilities for which
it might be entitled to indemnification hereunder and (iii) any termination of
this Agreement.

 

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(b) Insurance Proceeds. The amount that any Indemnifying Party is or may be
required to provide indemnification to or on behalf of any Indemnitee pursuant
to Section 3.2 or Section 3.3, as applicable, will be reduced (retroactively or
prospectively) by any Insurance Proceeds or other amounts actually recovered
from third parties (including any captive insurance companies of the
Indemnifying Party or its Affiliates) by or on behalf of such Indemnitee in
respect of the related Loss (net of increased insurance premiums and charges
related directly and solely to the related indemnifiable Losses and costs and
expenses (including reasonable legal fees and expenses) incurred by such
Indemnitee in connection with seeking to collect and collecting such amounts).
The existence of a claim by an Indemnitee for monies from an insurer or against
a third party in respect of any indemnifiable Loss will not, however, delay any
payment pursuant to the indemnification provisions contained herein and
otherwise determined to be due and owing by an Indemnifying Party. Rather, the
Indemnifying Party will make payment in full of the amount determined to be due
and owing by it against an assignment by the Indemnitee to the Indemnifying
Party of the entire claim of the Indemnitee for Insurance Proceeds or against
such third party. Notwithstanding any other provisions of this Agreement, it is
the intention of the Parties that no insurer or any other third party will be
(i) entitled to a “windfall” or other benefit it would not be entitled to
receive in the absence of the foregoing indemnification provisions or otherwise
have any subrogation rights with respect thereto, or (ii) relieved of the
responsibility to pay any claims for which it is obligated.

(c) Tax Treatment of Payments. In the absence of a Final Determination to the
contrary, any amount payable by Red Lion to Navy under this Agreement will be
treated as occurring immediately prior to the Red Lion Restructuring, as an
inter-company distribution, and any amount payable by Navy to Red Lion under
this Agreement will be treated as occurring immediately prior to the Red Lion
Restructuring, as a contribution to capital.

Section 3.5 Procedures for Defense, Settlement and Indemnification of
Third-Party Claims.

(a) Direct Claims. Any claim on account of indemnifiable Losses that does not
involve a Third-Party Claim will be asserted by reasonably prompt written notice
given by the Indemnitee to the Indemnifying Party from whom such indemnification
is sought. The failure by any Indemnitee so to give notice as provided in this
Section 3.5(a) will not relieve the Indemnifying Party of its obligations under
this Article III, except to the extent that the Indemnifying Party has been
actually prejudiced by such failure to give notice.

(b) Third-Party Claims.

(i) Notice Of Claims. If an Indemnitee receives notice or otherwise learns of
the assertion by a Person (including any Governmental Authority) who is not a
member of the Navy Group or Red Lion Group or any of their respective Affiliates
of any claim or of the commencement by any such Person of any Action with
respect to which an Indemnifying Party may be obligated to provide
indemnification (collectively, a “Third-Party Claim”), such Indemnitee will give
such Indemnifying Party prompt written notice (a “Claims Notice”) thereof but in
any event within 15 calendar days after becoming aware of such Third-Party
Claim. Any such notice will describe the Third-Party Claim in reasonable detail
and include copies of all notices and documents (including court papers)
received by the Indemnitee

 

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relating to the Third-Party Claim. Notwithstanding the foregoing, the delay or
failure of any Indemnitee or other Person to give notice as provided in this
Section 3.5(b)(i) will not relieve the Indemnifying Party of its obligations
under this Article III, except to the extent that such Indemnifying Party is
actually prejudiced by such delay or failure to give notice.

(ii) Opportunity to Defend. The Indemnifying Party has the right, exercisable by
written notice to the Indemnitee within 30 days after receipt of a Claims Notice
from the Indemnitee of the commencement or assertion of any Third-Party Claim in
respect of which indemnity may be sought under this Article III, to assume and
conduct the defense of such Third-Party Claim in accordance with the limits set
forth in this Agreement with counsel selected by the Indemnifying Party and
reasonably acceptable to the Indemnitee; provided, however, that the (A) defense
of such Third-Party Claim by the Indemnifying Party will not, in the reasonable
judgment of the Indemnitee, (1) if Navy is the Indemnifying Party, affect Penny
or any of its Controlled Affiliates (including after the Merger, any member of
the Red Lion Group) in an adverse manner and (2) if Red Lion is the Indemnifying
Party, affect Navy or any of its Controlled Affiliates in an adverse manner; and
(B) the Third-Party Claim solely seeks (and continues to seek) monetary damages
(the conditions set forth in clauses (A) and (B) are, collectively, the
“Litigation Conditions”). If the Indemnifying Party does not assume the defense
of a Third-Party Claim in accordance with this Section 3.5(b), the Indemnitee
may continue to defend the Third-Party Claim. If the Indemnifying Party has
assumed the defense of a Third-Party Claim as provided in this Section 3.5(b),
the Indemnifying Party will not be liable for any legal expenses subsequently
incurred by the Indemnitee in connection with the defense of the Third-Party
Claim; provided, however, that if (x) either of the Litigation Conditions ceases
to be met or (y) the Indemnifying Party fails to take reasonable steps necessary
to defend diligently such Third-Party Claim, the Indemnitee may assume its own
defense, and the Indemnifying Party will be liable for all reasonable costs or
expenses paid or incurred in connection with such defense. The Indemnifying
Party or the Indemnitee, as the case may be, has the right to participate in
(but, subject to the prior sentence, not control), at its own expense, the
defense of any Third-Party Claim that the other is defending as provided in this
Agreement. The Indemnifying Party, if it has assumed the defense of any
Third-Party Claim as provided in this Agreement, may not, without the prior
written consent of the Indemnitee, consent to a settlement of, or the entry of
any judgment arising from, any such Third-Party Claim that (I) does not include
as an unconditional term thereof the giving by the claimant or the plaintiff to
the Indemnitee of a complete release from all liability in respect of such
Third-Party Claim, (II) provides for injunctive or other nonmonetary relief
affecting the Indemnitee or any of its Affiliates, or (III) in the reasonable
opinion of the Indemnitee, would otherwise adversely affect the Indemnitee or
any of its Affiliates. The Indemnitee may settle any Third-Party Claim, the
defense of which has not been assumed by the Indemnifying Party, only with the
prior written consent of the Indemnifying Party, not to be unreasonably
withheld.

Section 3.6 Additional Matters.

(a) Cooperation in Defense and Settlement. With respect to any Third-Party Claim
for which Red Lion, on the one hand, and Navy, on the other hand, may have
Liability under this Agreement or any of the Ancillary Agreements, the Parties
agree to cooperate fully and maintain a joint defense (in a manner that will
preserve the attorney-client privilege, joint defense or other privilege with
respect thereto) so as to minimize such Liabilities and defense costs associated

 

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therewith. The Party that is not responsible for managing the defense of such
Third-Party Claims will, upon reasonable request, be consulted with respect to
significant matters relating thereto and may retain counsel to monitor or assist
in the defense of such claims at its own cost.

(b) Certain Actions. Notwithstanding anything to the contrary set forth in
Section 3.5, Navy may elect to have exclusive authority and control over the
investigation, prosecution, defense and appeal of all Actions pending at the
Separation Time which relate to or arise out of the Red Lion Business, the Red
Lion Assets or the Red Lion Liabilities if such Action also relates to the
Excluded Assets and Excluded Liabilities and a member of the Navy Group is also
named as a target or defendant thereunder (but excluding any such Actions which
solely relate to or solely arise in connection with the Red Lion Business, the
Red Lion Assets or the Red Lion Liabilities); provided that (i) Navy will
consult with Red Lion on a regular basis with respect to strategy and
developments with respect to any such Action, (ii) if Navy fails to take
reasonable steps necessary to defend diligently such Action, Red Lion may assume
such defense, and Navy will be liable for all reasonable costs or expenses paid
or incurred in connection with such defense, (iii) Red Lion has the right to
participate in (but, subject to clause (ii) above, not control) the defense of
such Action, and (iv) Navy must obtain the written consent of Red Lion, such
consent not to be unreasonably withheld or delayed, to settle or compromise or
consent to the entry of judgment with respect to such Action if such settlement,
consent or judgment would (A) provide for injunctive or other nonmonetary relief
affecting Red Lion or any of its Affiliates, or (B) in the reasonable opinion of
Red Lion, would otherwise adversely affect Red Lion or any of its Affiliates.
After any such compromise, settlement, consent to entry of judgment or entry of
judgment, Navy and Red Lion will agree upon a reasonable allocation to Red Lion
and Red Lion will be responsible for or receive, as the case may be, Red Lion’s
proportionate share of any such compromise, settlement, consent or judgment
attributable to the Red Lion Business, the Red Lion Assets or the Red Lion
Liabilities, including its proportionate share of the reasonable costs and
expenses associated with defending same.

(c) Substitution. In the event of an Action that involves solely matters that
are indemnifiable and in which the Indemnifying Party is not a named defendant,
if either the Indemnitee or the Indemnifying Party so requests, the Parties will
endeavor to substitute the Indemnifying Party for the named defendant. If such
substitution or addition cannot be achieved for any reason or is not requested,
the rights and obligations of the Parties regarding indemnification and the
management of the defense of claims as set forth in this Article III will not be
affected.

(d) Subrogation. In the event of payment by or on behalf of any Indemnifying
Party to or on behalf of any Indemnitee in connection with any Third-Party
Claim, such Indemnifying Party will be subrogated to and will stand in the place
of such Indemnitee, in whole or in part based upon whether the Indemnifying
Party has paid all or only part of the Indemnitee’s Liability, as to any events
or circumstances in respect of which such Indemnitee may have any right, defense
or claim relating to such Third-Party Claim against any claimant or plaintiff
asserting such Third-Party Claim or against any other Person. Such Indemnitee
will cooperate with such Indemnifying Party in a reasonable manner, and at the
cost and expense of such Indemnifying Party, in prosecuting any subrogated
right, defense or claim.

 

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(e) Not Applicable to Taxes. Except for Section 3.4(c) and as otherwise
specifically provided herein, this Agreement will not apply to Taxes (which are
covered by the Tax Matters Agreement). In the case of any conflict between this
Agreement and the Tax Matters Agreement in relation to any matters addressed by
the Tax Matters Agreement, the Tax Matters Agreement will prevail.

(f) Environmental Claims. In the event of any claim pursuant to Section 3.3 with
respect to the presence or release of any Hazardous Materials on any real
property owned or operated by Penny, Red Lion or any Affiliate thereof, (i) Navy
has the right, exercisable by written notice to the Red Lion Indemnitee, to
assume control of and conduct any investigation or remedial action with respect
thereto, (ii) Penny shall grant Navy reasonable access to such real property to
perform any such investigation or remedial action, (iii) such investigation or
remedial action shall be conducted in a manner that does not unreasonably
interfere with the use of such real property, and (iv) if Navy determines that
remedial action is required pursuant to Environmental Law, Penny hereby consents
to the use of any engineered barriers or institutional controls that would not
unreasonably interfere with Penny’s future use of such real property; provided
that (A) Navy will consult with the Red Lion Indemnitee on a regular basis with
respect to any material developments in such investigation or remedial action,
(B) in the event that Navy receives a written notice of violation from the
applicable Governmental Authority alleging a material failure by Navy to perform
any such investigation or remedial action and Navy fails to cure such alleged
violation within a reasonable period of time (which in no event shall be less
than 120 days after the receipt of such written notice), Red Lion has the right,
exercisable by reasonable written notice from the Red Lion Indemnitee to Navy,
to assume control of such investigation or remedial action to the extent related
to such notice of violation, and Navy will be liable for all reasonable costs or
expenses paid or incurred by Red Lion in connection with such investigation or
remedial, (C) Red Lion has the right to participate in (but, subject to clauses
(i) through (iv) above, not control) any such investigation or remedial action
at its cost and (D) Navy must obtain the written consent of Red Lion, such
consent not to be unreasonably withheld or delayed, with respect to the use of
any engineered barriers or institutional controls in any such investigation or
remedial action.

Section 3.7 Exclusive Remedy. Each of Red Lion and Navy intends and hereby
agrees that this Article III sets forth the exclusive remedy of the Parties
following the Separation Time for any Losses arising out of any breach of the
covenants or agreements of the Parties contained in this Agreement, except that
nothing contained in this Section 3.7 will impair any right of any Person (a) to
exercise all of their rights and seek all damages available to them under Law in
the event of claims or causes of action arising from fraud; (b) to specific
performance under this Agreement; and (c) to equitable relief as provided in
Section 5.15 or in any Ancillary Agreement. In furtherance of the foregoing,
each of the Parties hereto hereby waives, to the fullest extent permitted under
applicable Law, any and all rights, claims and causes of action it may have
against the other Party in connection herewith, arising under or based upon any
Law other than the right to seek indemnity pursuant to this Article III and the
right to seek the relief described in clauses (a), (b) and (c) of the preceding
sentence.

Section 3.8 Survival of Indemnities. The rights and obligations of each of Navy
and Red Lion and their respective Indemnitees under this Article III will
survive the sale or other transfer by any Party of any Assets or businesses or
the assignment by it of any Liabilities.

 

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ARTICLE IV

ADDITIONAL AGREEMENTS

Section 4.1 Further Assurances. Subject to the limitations of Section 1.7:

(a) In addition to the actions specifically provided for elsewhere in this
Agreement or in any Ancillary Agreement, each of the Parties hereto will
cooperate with each other and use (and will cause their respective Subsidiaries
and Affiliates to use) commercially reasonable efforts, prior to, at and after
the Separation Time, to take, or to cause to be taken, all actions, and to do,
or to cause to be done, all things reasonably necessary, proper or advisable on
its part under applicable Law or Contractual obligations to consummate and make
effective the transactions contemplated by this Agreement and the Ancillary
Agreements as promptly as reasonably practicable.

(b) Without limiting the generality of Section 4.1(a), where the cooperation of
third parties such as insurers or trustees would be necessary in order for a
Party to completely fulfill its obligations under this Agreement or the
Ancillary Agreements, such Party will use commercially reasonable efforts to
cause such third parties to provide such cooperation. If any Affiliate of Navy
or Red Lion is not a party to this Agreement or, as applicable, any Ancillary
Agreement, and it becomes necessary or desirable for such Affiliate to be a
party hereto or thereto to carry out the purpose hereof or thereof, then Navy or
Red Lion, as applicable, will cause such Affiliate to become a party hereto or
thereto or cause such Affiliate to undertake such actions as if such Affiliate
were such a party.

(c) Prior to the Separation Time, in the event that the Parties identify any
tangible Asset (which, for the avoidance of doubt, excludes any Assets that
constitute Intellectual Property) that (i) is owned by a member of the Navy
Group, (ii) is not included in the Red Lion Assets or will otherwise be made
available to the Red Lion Business pursuant to the Red Lion TSA or any of the
other Ancillary Agreements, (iii) is not used primarily in, or held primarily
for the benefit of, the Red Lion Business and (iv) is necessary to manufacture
products of the Red Lion Business in a manner consistent with the manner in
which they have manufactured as of the date hereof, the Parties will reasonably
cooperate and negotiate in good faith to identify a mutually acceptable,
commercially reasonable arrangement pursuant to which such Asset will be made
available to the Red Lion Business subsequent to the Separation Time for a
reasonable period of time.

Section 4.2 Agreement For Exchange of Information.

(a) Generally. Except as otherwise provided in the TSAs and except as provided
in the last sentence of this Section 4.2(a), each Party, on behalf of its
respective Group, will provide, or cause to be provided, to the other Party’s
Group, at any time after the Separation Time and until the later of (x) the
sixth anniversary of the Separation Time and (y) the expiration of the relevant
statute of limitations period, if applicable, as soon as reasonably practicable
after written request therefor, any Shared Information in its possession or
under its control. Each of

 

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Navy and Red Lion agree to make their respective personnel available during
regular business hours to discuss the Information exchanged pursuant to this
Section 4.2. The obligations set forth in this Section 4.2(a) with respect to
the data required for worker’s compensation claim handling and filings will
survive the sixth anniversary time period herein and will instead survive
indefinitely.

(b) Financial Information for Navy. Without limitation to Section 4.2(a), until
the end of the first full fiscal year occurring after the Closing Date (and for
a reasonable period of time afterwards as required by Law for Navy to prepare
consolidated financial statements or complete a financial statement audit for
any period during which the financial results of the Red Lion Group were
consolidated with those of Navy), Red Lion will use its reasonable best efforts
to enable Navy to meet its timetable for dissemination of its financial
statements and to enable Navy’s auditors to timely complete their annual audit
and quarterly reviews of financial statements. As part of such efforts, to the
extent reasonably necessary for the preparation of financial statements or
completing an audit or review of financial statements or an audit of internal
control over financial reporting, (i) Red Lion will authorize and direct its
auditors to make available to Navy’s auditors, within a reasonable time prior to
the date of Navy’s auditors’ opinion or review report, both (x) the personnel
who performed or will perform the annual audits and quarterly reviews of Red
Lion and (y) work papers related to such annual audits and quarterly reviews, to
enable Navy’s auditors to perform any procedures they consider reasonably
necessary to take responsibility for the work of Red Lion’s auditors as it
relates to Navy’s auditors’ opinion or report and (ii) until all governmental
audits are complete, Red Lion will provide reasonable access during normal
business hours for Navy’s internal auditors, counsel and other designated
representatives to (x) the premises of Red Lion and its Subsidiaries and all
Information (and duplicating rights) within the knowledge, possession or control
of Red Lion and its Subsidiaries and (y) the officers and employees of Red Lion
and its Subsidiaries, so that Navy may conduct reasonable audits relating to the
financial statements provided by Red Lion and its Subsidiaries; provided,
however, that such access will not be unreasonably disruptive to the business
and affairs of the Red Lion Group.

(c) Financial Information for Red Lion. Without limitation to Section 4.2(a),
until the end of the second full fiscal year occurring after the Closing Date
(and for a reasonable period of time afterwards or as required by Law), Navy
will use its reasonable best efforts to enable Red Lion to meet its timetable
for dissemination of its financial statements and to enable Red Lion’s auditors
to timely complete their annual audit and quarterly reviews of financial
statements. As part of such efforts, to the extent reasonably necessary for the
preparation of financial statements or completing an audit or review of
financial statements or an audit of internal control over financial reporting,
(i) Navy will authorize and direct its auditors to make available to Red Lion’s
auditors, within a reasonable time prior to the date of Red Lion’s auditors’
opinion or review report, both (x) the personnel who performed or will perform
the annual audits and quarterly reviews of Navy and (y) work papers related to
such annual audits and quarterly reviews, to enable Red Lion’s auditors to
perform any procedures they consider reasonably necessary to take responsibility
for the work of Navy’s auditors as it relates to Red Lion’s auditors’ opinion or
report and (ii) until all governmental audits are complete, Navy will provide
reasonable access during normal business hours for Red Lion’s internal auditors,
counsel and other designated representatives to (x) the premises of Navy and its
Subsidiaries and all Information (and duplicating rights) within the knowledge,
possession or control of Navy and its

 

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Subsidiaries and (y) the officers and employees of Navy and its Subsidiaries, so
that Red Lion may conduct reasonable audits relating to the financial statements
provided by Navy and its Subsidiaries; provided, however, that such access will
not be unreasonably disruptive to the business and affairs of the Navy Group.

(d) Certifications. In order to enable the principal executive officer(s) and
principal financial officer(s) (as such terms are defined in the rules and
regulations of the U.S. Securities and Exchange Commission) of Navy to make any
certifications required of them under Section 302 or 906 of the Sarbanes-Oxley
Act of 2002, Red Lion will, within a reasonable period of time following a
request from Navy in anticipation of filing such reports, cause its principal
executive officer(s) and principal financial officer(s) to provide Navy with
certifications of such officers in support of the certifications of Navy’s
principal executive officer(s) and principal financial officer(s) required under
Section 302 or 906 of the Sarbanes-Oxley Act of 2002 with respect to Navy’s
Quarterly Report on Form 10-Q filed with respect to the fiscal quarter during
which the Closing occurs (unless such quarter is the fourth fiscal quarter),
each subsequent fiscal quarter through the third fiscal quarter of the year in
which the Closing occurs and Navy’s Annual Report on Form 10-K filed with
respect to the fiscal year during which the Closing occurs. Such certifications
will be provided in substantially the same form and manner as such Red Lion
officers provided prior to the Closing (reflecting any changes in certifications
necessitated by the Red Lion Restructuring or the Recapitalization or and any
other transactions related thereto) or as otherwise agreed upon between Navy and
Red Lion.

(e) Limitations of Liability. Neither Party will have any Liability to the other
Party in the event that any Information exchanged or provided pursuant to this
Agreement that is an estimate or forecast, or that is based on an estimate or
forecast, is found to be inaccurate in the absence of willful misconduct by the
providing Person.

(f) Ownership of Information. Any Information owned by a Party that is provided
to the other Party pursuant to this Section 4.2 remains the property of the
Party that owned and provided such Information. Each Party will, and will cause
members of their respective Groups to, remove and destroy any hard drives or
other electronic data storage devices from any computer or server that is
reasonably likely to contain Information that is protected by this Section 4.2
and that is transferred or sold to a third-party or otherwise disposed of in
accordance with Section 4.2(g), unless required by Law to retain such materials.

(g) Record Retention. Each Party agrees to use its commercially reasonable
efforts to retain all Information that relates to the operations of the Red Lion
Business in its respective possession or control at the Separation Time in
accordance with the policies of Navy as in effect on the Separation Time or such
other policies as may be adopted by Navy thereafter (provided, in the case of
Red Lion, that Navy notify Red Lion of any such change). No Party will destroy,
or permit any of its Subsidiaries to destroy, any Information which the other
Party may have the right to obtain pursuant to this Agreement prior to the end
of the retention period set forth in Navy’s retention policies without first
using its commercially reasonable efforts to notify the other Party of the
proposed destruction and giving the other Party the opportunity to take
possession or make copies of such Information prior to such destruction.
Notwithstanding the foregoing, Section 7.02 of the Tax Matters Agreement will
govern the retention of Tax Returns, schedules and work papers and all material
records or other documents relating thereto.

 

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(h) Other Agreements Providing for Exchange of Information. The rights and
obligations granted under this Section 4.2 are subject to any specific
limitations, qualifications or additional provisions on the sharing, exchange or
confidential treatment of Information set forth in this Agreement, the
Confidentiality Agreement and any Ancillary Agreement.

(i) Costs of Providing Information. Each Party will be responsible for paying
the fees and expenses incurred by it in connection with complying with the
provisions of this Section 4.2.

(j) Production of Witnesses; Records; Cooperation.

(i) After the Separation Time, except in the case of any Action by one Party or
its Affiliates against another Party or its Affiliates, each Party will use its
commercially reasonable efforts to make available to each other Party, upon
written request, the former, current and future directors, officers, employees,
other personnel and agents of the members of its respective Group as witnesses
and any books, records or other documents within its control or which it
otherwise has the ability to make available, to the extent that any such person
(giving consideration to business demands of such directors, officers,
employees, other personnel and agents) or books, records or other documents may
reasonably be required in connection with any Action in which the requesting
Party may from time to time be involved, regardless of whether such Action is a
matter with respect to which indemnification may be sought hereunder. The
requesting Party agrees to reimburse the other Party for the reasonable
out-of-pocket costs, if any, incurred in connection therewith.

(ii) If an Indemnifying Party chooses to defend or to seek to compromise or
settle any Third-Party Claim, the other Party will make available to such
Indemnifying Party, upon written request, the former, current and future
directors, officers, employees, other personnel and agents of the members of its
respective Group as witnesses and any books, records or other documents within
its control or which it otherwise has the ability to make available, to the
extent that any such person (giving consideration to business demands of such
directors, officers, employees, other personnel and agents) or books, records or
other documents may reasonably be required in connection with such defense,
settlement or compromise, or the prosecution, evaluation or pursuit thereof, as
the case may be, and will otherwise cooperate in such defense, settlement or
compromise, or such prosecution, evaluation or pursuit, as the case may be.

(iii) Without limiting the foregoing, the Parties will cooperate and consult to
the extent reasonably necessary with respect to Third-Party Claims.

(iv) Without limiting any provision of this Section 4.2(j), each of the Parties
will cooperate, and will cause each member of its respective Group to cooperate,
with each other in the defense of any claim that the Red Lion Business infringes
Intellectual Property of any third Person or that challenges the validity of any
Intellectual Property licensed to any Party pursuant to this Agreement or any
Ancillary Agreement, and no Party will claim to acknowledge, or permit any
member of its respective Group to claim to acknowledge, the validity or
infringing use of any Intellectual Property of a third Person in a manner that
would hamper or undermine the defense of such infringement, validity or similar
claim or challenge except as required by Law.

 

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(v) The obligation of the Parties to provide witnesses pursuant to this
Section 4.2(j) is intended to be interpreted in a manner so as to facilitate
cooperation and will include the obligation to provide as witnesses inventors
and other officers without regard to whether the witness or the employer of the
witness could assert a possible business conflict.

(vi) In connection with any matter contemplated by this Section 4.2(j), the
Parties will enter into a mutually acceptable joint defense agreement so as to
maintain to the extent practicable any applicable attorney-client privilege or
work product immunity of any member of any Group.

(k) Restrictions. Except as expressly provided in this Agreement or the
Ancillary Agreements, no Party or member of such Party’s Group hereunder grants
or confers rights of license in any Information owned by any member of such
Party’s Group to any member of the other Party’s Group hereunder.

Section 4.3 Privileged Matters.

(a) The respective rights and obligations of the Parties to maintain, preserve,
assert or waive any or all privileges belonging to either Party or its
Subsidiaries with respect to the Red Lion Business or the Non-Red Lion Business,
including the attorney-client and work product privileges (collectively,
“Privileges”), will be governed by the provisions of this Section 4.3. With
respect to Privileged Information of Navy, Navy will have sole authority in
perpetuity to determine whether to assert or waive any or all Privileges, and
Red Lion will not take any action (or permit any member of its Group to take
action) without the prior written consent of Navy that could result in any
waiver of any Privilege that could be asserted by Navy or any member of its
Group under applicable Law and this Agreement. With respect to Privileged
Information of Red Lion arising after the Separation Time, Red Lion will have
sole authority in perpetuity to determine whether to assert or waive any or all
Privileges, and Navy will take no action (nor permit any member of its Group to
take action) without the prior written consent of Red Lion that could result in
any waiver of any Privilege that could be asserted by Red Lion or any member of
its Group under applicable Law and this Agreement. The rights and obligations
created by this Section 4.3 will apply to all Information as to which a Party or
its respective Groups would be entitled to assert or have asserted a Privilege
without regard to the effect, if any, of the Red Lion Restructuring or the
Recapitalization (“Privileged Information”).

(b) Privileged Information of Navy and its Group includes (i) any and all
Information regarding the Non-Red Lion Business and the Navy Group (other than
Information relating to the Red Lion Business (“Red Lion Information”)), whether
or not such Information (other than Red Lion Information) is in the possession
of Red Lion or any Affiliate thereof, (ii) all communications subject to a
Privilege between counsel for Navy (other than counsel for the Red Lion
Business) (including any person who, at the time of the communication, was an
employee of Navy or its Group in the capacity of in-house counsel, regardless of
whether such employee is or becomes an employee of Penny, Red Lion or any
Affiliate thereof) and any person who, at the time of the communication, was an
employee of Navy, regardless of whether such employee is

 

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or becomes an employee of Red Lion or any Affiliate thereof, and (iii) all
Information generated, received or arising after the Separation Time that refers
or relates to and discloses Privileged Information of Navy or its Group
generated, received or arising prior to the Separation Time.

(c) Privileged Information of Red Lion and its Group includes (i) any and all
Red Lion Information, whether or not it is in the possession of Navy or any
member of its Group, (ii) all communications subject to a Privilege between
counsel for the Red Lion Business (including any person who, at the time of the
communication, was an employee of Navy or its Group in the capacity of in-house
counsel, regardless of whether such employee is or remains an employee of Navy
or any Affiliate thereof) and any person who, at the time of the communication,
was an employee of Navy, Red Lion or any member of either Group or the Red Lion
Business regardless of whether such employee was, is or becomes an employee of
Navy or any of its Subsidiaries, and (iii) all Information generated, received
or arising after the Separation Time that refers or relates to and discloses
Privileged Information of Red Lion or its Group generated, received or arising
after the Separation Time.

(d) Upon receipt by Navy or Red Lion, or any of their respective Affiliates, as
the case may be, of any subpoena, discovery or other request from any third
party that actually or arguably calls for the production or disclosure of
Privileged Information of the other or if Navy or Red Lion, or any of their
respective Affiliates, as the case may be, obtains knowledge that any current or
former employee of Navy or Red Lion, or any of their respective Affiliates, as
the case may be, receives any subpoena, discovery or other request from any
third party that actually or arguably calls for the production or disclosure of
Privileged Information of the other, Navy or Red Lion, as the case may be, will
promptly notify the relevant other Party of the existence of the request and
will provide such other Party a reasonable opportunity to review the Information
and to assert any rights it may have under this Section 4.3 or otherwise to
prevent the production or disclosure of Privileged Information. Navy or Red
Lion, as the case may be, will not, and will cause their respective Affiliates
not to, produce or disclose to any third party any of the other Party’s
Privileged Information under this Section 4.3 unless (i) the other Party has
provided its express written consent to such production or disclosure or (ii) a
court of competent jurisdiction has entered an Order not subject to
interlocutory appeal or review finding that the Information is not entitled to
protection from disclosure under any applicable privilege, doctrine or rule.

(e) Navy’s transfer of books and records pertaining to the Red Lion Business and
other Information to Red Lion, Navy’s agreement to permit Red Lion to obtain
Information existing prior to the Red Lion Restructuring, Red Lion’s transfer of
books and records pertaining to Navy, if any, and other Information to Navy and
Red Lion’s agreement to permit Navy to obtain Information existing prior to the
Red Lion Restructuring are made in reliance on Navy’s and Red Lion’s respective
agreements, as set forth in Section 4.2 and this Section 4.3, to maintain the
confidentiality of such Information and to take the steps provided herein for
the preservation of all Privileges that may belong to or be asserted by Navy or
Red Lion, as the case may be. The access to Information, witnesses and
individuals being granted pursuant to Section 4.2 and the disclosure to Red Lion
and Navy of Privileged Information relating to the Red Lion Business or the
Non-Red Lion Business pursuant to this Agreement in connection with the Red Lion
Restructuring will not be asserted by Navy or Red Lion to constitute, or
otherwise deemed, a waiver of any Privilege that has been or may be asserted
under this Section 4.3 or otherwise. Nothing in this Agreement will operate to
reduce, minimize or condition the rights granted to Navy and Red Lion in, or the
obligations imposed upon Navy and Red Lion by, this Section 4.3.

 

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Section 4.4 Intellectual Property Assignment/Recordation. Each Party will be
responsible for, and will pay all expenses (whether incurred before, at or after
the Separation Time) involved in notarization, authentication, legalization
and/or consularization of the signatures of any representatives of its Group on
any of the Transfer Documents relating to the transfer of Intellectual Property.
Red Lion will be responsible for, and will pay, all expenses (whether incurred
before, at or after the Separation Time) incurred in connection with the
transfer of licenses or procurement of new licenses from third parties as may be
necessary or advisable in connection with the Transfer Documents relating to the
transfer of Intellectual Property to Red Lion. Red Lion will be responsible for,
and will pay, all expenses (whether incurred before, at or after the Separation
Time) relating to, the recording of any such Transfer Documents relating to the
transfer of Intellectual Property to any member of the Red Lion Group with any
Governmental Authorities as may be necessary or appropriate.

Section 4.5 Use of Names of the Navy Group by Red Lion. Except as allowed under
the Alliance Agreement, from and after the Separation Time, Red Lion will take
all actions necessary to assure that no member of the Red Lion Group operates
the Red Lion Business utilizing, based on or taking advantage of the name,
reputation, Trademarks or goodwill of any member of the Navy Group; provided
that Penny and members of the Red Lion Group may refer to the Navy Group and
Trademarks of the Navy Group in connection with describing the historical
relationship of the Red Lion Group to the Navy Group. In addition, Red Lion and
each member of the Red Lion Group may use products, product labeling, packaging,
advertising, sale and promotional materials, printed stationery, brochures and
literature bearing any of the corporate names, Trademarks or consumer
information telephone numbers of the Navy Group after the Separation Time;
provided, that Red Lion will, and will cause each member of the Red Lion Group
to, cease use of products, product labeling, packaging, advertising, sale and
promotional materials, printed stationery, brochures and literature bearing any
of the corporate names, Trademarks or consumer information telephone numbers
beginning on the first anniversary of the Separation Time; provided, further,
that there will be no time limit with respect to Red Lion’s sale of products
bearing the corporate name, Trademarks or consumer information telephone numbers
or that use any packaging bearing that same included in the Red Lion Inventory.
The Red Lion Group will use commercially reasonable efforts to cease the sale or
use of such products, product labeling or packaging as promptly as reasonably
practicable following the Separation Time, consistent with their ordinary course
of business. Red Lion will, and will cause each member of the Red Lion Group to,
maintain quality standards for products of the Red Lion Business not materially
different from those maintained by the Red Lion Business prior to the Separation
Time for so long as any member of the Red Lion Group continues to sell or use
any products, product labeling, packaging, advertising, sales or promotional
materials bearing the corporate names, Trademarks or consumer information
telephone numbers of any member of the Navy Group.

Section 4.6 Removal of Tangible Assets.

(a) Except as may be otherwise provided in the TSA, or otherwise agreed to by
the Parties, all tangible Red Lion Assets that are located at any Non-Red Lion
Facilities will be

 

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moved as promptly as practicable after the Separation Time from such facilities,
at Navy’s expense and in a manner so as not to unreasonably interfere with the
operations of any member of the Navy Group and to not cause damage to such
facility, and such member of the Navy Group will provide reasonable access to
such facility to effectuate same. Red Lion will remove any Red Lion Assets that
remain at any such facilities in connection with the performance of services
under the TSAs as promptly as practicable after the termination of such service
pursuant to the same terms and conditions stated in the immediately preceding
sentence.

(b) Except as may be otherwise provided in the TSAs or otherwise agreed to by
the Parties, all tangible Excluded Assets that are located at any of the Red
Lion Facilities will be moved as promptly as practicable after the Separation
Time from such facilities, at Navy’s expense and in a manner so as not to
unreasonably interfere with the operations of any member of the Red Lion Group
and to not cause damage to such Red Lion Facility, and such member of the Red
Lion Group will provide reasonable access to such Red Lion Facility to
effectuate such movement. Navy will remove any Excluded Assets that remain at
any such Red Lion Facilities in connection with the performance of services
under the TSAs as promptly as practicable after the termination of such service
pursuant to the same terms and conditions stated in the immediately preceding
sentence.

Section 4.7 Insurance.

(a) Rights Under Policies. Notwithstanding any other provision of this
Agreement, from and after the Separation Date, none of Red Lion nor any other
member of the Red Lion Group will have any rights whatsoever with respect to any
Policies, except that (i) Navy will, if requested by Red Lion, use commercially
reasonable efforts to assert, on behalf of Red Lion, claims for any loss,
liability or damage with respect solely to the Red Lion Assets or Red Lion
Liabilities under Policies with third-party insurers or SOL Insurance Ltd. which
are “occurrence basis” insurance policies (“Occurrence Basis Policies”) arising
out of insured incidents occurring from the date coverage thereunder first
commenced until the Separation Date to the extent that the terms and conditions
of any such Occurrence Basis Policies and agreements relating thereto so allow,
and (ii) Navy will, if requested by Red Lion, use commercially reasonable
efforts to continue to prosecute, on behalf of Red Lion, claims with respect
solely to Red Lion Assets or Red Lion Liabilities properly asserted with an
insurer prior to the Separation Date under Policies with third-party insurers
which are insurance policies written on a “claims made” basis (“Claims Made
Policies”) arising out of insured incidents occurring from the date coverage
thereunder first commenced until the Separation Date to the extent that the
terms and conditions of any such Claims Made Policies and agreements relating
thereto so allow; provided that in the case of both clauses (i) and (ii) above,
(A) all of Navy’s and each member of the Navy Group’s costs and expenses
incurred in connection with the foregoing are promptly paid by Red Lion,
(B) Navy and the Navy Group may, at any time, without Liability or obligation to
Red Lion or any member of the Red Lion Group (other than as set forth in
Section 4.7(c)), amend, commute, terminate, buy-out, extinguish liability under
or otherwise modify any Occurrence Basis Policies or Claims Made Policies (and
such claims will be subject to any such amendments, commutations, terminations,
buy-outs, extinguishments and modifications), (C) any such claim will be subject
to all of the terms and conditions of the applicable Policy and (D) Red Lion
promptly pays to Navy any applicable deductible.

 

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(b) Assistance by Navy. Until the one-year anniversary of the Separation Time
and as requested by Red Lion, Navy will use commercially reasonable efforts to
assist Red Lion in connection with any efforts by Red Lion to acquire insurance
coverage with respect to the Red Lion Business for incidents occurring prior to
the Separation Date, as described in Section 4.7(a); provided, that all of
Navy’s reasonable costs and expenses incurred in connection with the foregoing
are promptly paid by Red Lion.

(c) Navy Actions. In the event that after the Separation Date, Navy or any
member of the Navy Group proposes to amend, commute, terminate, buy-out,
extinguish liability under or otherwise modify any Policies under which Red Lion
has rights to assert claims pursuant to Section 4.7(a) in a manner that would
adversely affect any such rights of Red Lion (i) Navy will give Red Lion prior
written notice thereof (it being understood that the decision to take any such
action will be in the sole discretion of Navy) and (ii) Navy will pay to Red
Lion its equitable share (which must be determined by Navy in good faith based
on the amount of premiums paid or allocated to the Red Lion Business in respect
of the applicable Policy) of any net proceeds actually received by Navy from the
insurer under the applicable Policy as a result of such action by Navy (after
deducting Navy’s reasonable costs and expenses incurred in connection with such
action). The Tax treatment of any such payments to Red Lion by Navy will be
handled in accordance with Section 3.4(c).

(d) Insurance Premiums. Subject to clause (B) of the proviso to Section 4.7(a),
from and after the Separation Date, Navy will pay, if so directed by Red Lion,
all premiums (retrospectively-rated or otherwise) as required under the terms
and conditions of the respective Policies in respect of periods prior to the
Separation Date, whereupon Red Lion will upon the request of Navy, promptly
reimburse Navy for that portion of such premiums paid by Navy as are reasonably
determined by Navy (and reasonably approved by Red Lion) to be attributable to
the Red Lion Business.

(e) Agreement for Waiver of Conflict and Shared Defense. In the event that a
Policy provides coverage for both Navy and/or a member of the Navy Group, on the
one hand, and Red Lion and/or a member of the Red Lion Group, on the other hand,
relating to the same occurrence or claim, Navy and Red Lion agree to defend
jointly and to waive any conflict of interest necessary to the conduct of that
joint defense.

(f) Termination. The obligations of Navy and the Navy Group set forth in this
Section 4.7 will terminate on the one-year anniversary of the Separation Time,
except with respect to any claims against Occurrence Basis Policies.

(g) No Limitation to Indemnity. Nothing in this Section 4.7 will be construed to
limit or otherwise alter in any way the indemnity obligations of the parties to
this Agreement, including those created by this Agreement.

 

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ARTICLE V

MISCELLANEOUS

Section 5.1 Expenses. Except as otherwise provided in this Agreement, including
Section 1.7(b), Section 1.7(c), Section 1.10, Section 2.7(d), Section 3.4(b),
Section 3.5(b), Section 3.6(b), Section 3.6(d), Section 4.2(i), Section 4.4,
Section 4.7, the Merger Agreement or any Ancillary Agreement, each Party will be
responsible for the fees and expenses of the Parties as provided in Section 6.8
of the Merger Agreement.

Section 5.2 Entire Agreement. This Agreement, the Merger Agreement, the
Ancillary Agreements and the Confidentiality Agreement, including any related
annexes, schedules and exhibits, as well as any other agreements and documents
referred to herein and therein, will together constitute the entire agreement
between the Parties with respect to the subject matter hereof and thereof and
will supersede all prior negotiations, agreements and understandings of the
Parties of any nature, whether oral or written, with respect to such subject
matter.

Section 5.3 Governing Law. This Agreement and, unless expressly provided
therein, each Ancillary Agreement (and any claims or disputes arising out of or
related hereto or thereto or to the transactions contemplated hereby and thereby
or to the inducement of any Party to enter herein and therein, whether for
breach of contract, tortious conduct or otherwise and whether predicated on
common law, statute or otherwise) is governed by and construed and interpreted
in accordance with the Laws of the State of New York irrespective of the choice
of laws principles of the State of New York, including all matters of validity,
construction, effect, enforceability, performance and remedies.

Section 5.4 Notices. Any notice, demand, claim or other communication under this
Agreement shall be sufficient if in writing, and sent by facsimile transmission
(provided that any notice received by facsimile transmission or otherwise at the
addressee’s location on any Business Day after 5:00 p.m. (addressee’s local
time) shall be deemed to have been received at 9:00 a.m. (addressee’s local
time) on the next Business Day), by reliable overnight delivery service (with
proof of service), hand delivery or certified or registered mail (return receipt
requested and first-class postage prepaid), addressed as follows:

 

If to Navy or, prior to the Effective Time, Red Lion:    Nabors Industries Ltd.
  

Crown House

Second Floor

4 Par-la-Ville Road

Hamilton, HM 08

Bermuda

   Attention: Corporate Secretary with a copy (which shall not constitute
notice) to:    Nabors Corporate Services, Inc.    515 West Greens Road, Suite
1200

 

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   Houston, Texas 66057    Attention:    Laura Doerre    Facsimile:    (281)
775-4319 with a copy (which shall not constitute notice) to:   

Milbank, Tweed, Hadley & McCloy LLP

One Chase Manhattan Plaza

New York, New York 10005

   Attention:    Charles J. Conroy       Scott W. Golenbock    Facsimile:   
(212) 530-5219 If to Red Lion, after the Effective Time:    C&J Energy Services
Ltd.    3990 Rogerdale    Houston, TX 77042    Attention:    Theodore Moore   
Facsimile:    (713) 325-5920 with a copy (which shall not constitute notice) to:
  

Vinson & Elkins L.L.P.

1001 Fannin, Suite 2500

Houston, Texas 77002

   Attention:    Jeffery B. Floyd       Stephen M. Gill    Facsimile:    (713)
615-5956

or to such other address as any Party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed. Any Party to this Agreement
may notify any other party of any changes to the address or any of the other
details specified in this paragraph; provided that such notification shall only
be effective on the date specified in such notice or five (5) Business Days
after the notice is given, whichever is later. Rejection or other refusal to
accept or the inability to deliver because of changed address of which no notice
was given shall be deemed to be receipt of the notice as of the date of such
rejection, refusal or inability to deliver. Any notice to Navy will be deemed
notice to all members of the Navy Group, and any notice to Red Lion will be
deemed notice to all members of the Red Lion Group.

Section 5.5 Priority of Agreements. If there is a conflict between any provision
of this Agreement and a provision in any of the Ancillary Agreements, the
provision of this Agreement will control unless specifically provided otherwise
in this Agreement or in the Ancillary Agreement.

 

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Section 5.6 Amendments and Waivers.

(a) This Agreement may be amended and any provision of this Agreement may be
waived; provided that any such amendment or waiver will be binding upon a Party
only if such amendment or waiver is set forth in a writing executed by such
Party. In addition, unless the Merger Agreement shall have been terminated in
accordance with its terms, no such amendment or waiver shall be effective
without the prior written consent of Penny. No course of dealing between or
among any Persons having any interest in this Agreement will be deemed effective
to modify, amend or discharge any part of this Agreement or any rights or
obligations of any Party hereto under or by reason of this Agreement.

(b) No delay or failure in exercising any right, power or remedy hereunder will
affect or operate as a waiver thereof; nor will any single or partial exercise
thereof or any abandonment or discontinuance of steps to enforce such a right,
power or remedy preclude any further exercise thereof or of any other right,
power or remedy. Any waiver, permit, consent or approval of any kind or
character of any breach or default under this Agreement or any such waiver of
any provision of this Agreement must satisfy the conditions set forth in
Section 5.6(a) and will be effective only to the extent in such writing
specifically set forth.

Section 5.7 Termination. This Agreement will terminate without further action at
any time before the Effective Time upon termination of the Merger Agreement. If
terminated, no Party will have any Liability of any kind to the other Party or
any other Person on account of this Agreement, except as provided in the Merger
Agreement.

Section 5.8 Parties in Interest. This Agreement is binding upon and is for the
benefit of the Parties hereto and their respective successors and permitted
assigns. Penny shall be a third-party beneficiary of the rights of Red Lion
under this Agreement. This Agreement is not made for the benefit of any Person
not a Party hereto, and no Person other than the Parties hereto or their
respective successors and permitted assigns will acquire or have any benefit,
right, remedy or claim under or by reason of this Agreement, except (i) as
contemplated in the preceding sentence, (ii) for the provisions of Article III
with respect to indemnification of Indemnitees and (iii) for the second sentence
of Section 5.6(a), which shall be to the benefit of Penny.

Section 5.9 Assignability. No Party may assign its rights or delegate its duties
under this Agreement without the written consent of the other Party, except that
a Party may assign its rights or delegate its duties under this Agreement to a
member of its Group; provided that the member agrees in writing to be bound by
the terms and conditions contained in this Agreement; and provided, further,
that the assignment or delegation will not relieve any Party of its
indemnification obligations or obligations in the event of a breach of this
Agreement. Except as provided in the preceding sentence, any attempted
assignment or delegation will be void.

Section 5.10 Construction. When a reference is made in this Agreement to an
Article or Section, such reference shall be to an Article or Section of this
Agreement unless otherwise indicated. The table of contents to this Agreement is
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. The descriptive headings herein are inserted
for convenience of reference only and are not intended to be a substantive part

 

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of or to affect the meaning or interpretation of this Agreement. Whenever the
words “include,” “includes” or “including” are used in this Agreement, they
shall be deemed to be followed by the words “without limitation.” The words
“hereof,” “hereby,” “herein” and “hereunder” and words of similar import when
used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. All terms defined in this Agreement
shall have the defined meanings when used in any certificate or other document
made or delivered pursuant thereto unless otherwise defined therein. The
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms and to the masculine as well as to the
feminine and neuter genders of such term. Any agreement, instrument or statute
defined or referred to herein or in any agreement or instrument that is referred
to herein means such agreement, instrument or statute as from time to time
amended, modified or supplemented, including (in the case of agreements or
instruments) by waiver or consent and (in the case of statutes) by succession of
comparable successor statutes, including all attachments thereto and instruments
incorporated therein. References to a Person are also to its permitted
successors and assigns. References to a date or time shall be deemed to be such
date or time in New York City, unless otherwise specified. References to dollar
amounts are to U.S. dollars, unless otherwise specified. Each of the parties has
participated in the drafting and negotiation of this Agreement. If an ambiguity
or question of intent or interpretation arises, this Agreement must be construed
as if it is drafted by all the parties and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of authorship of any of
the provisions of this Agreement. Except as otherwise expressly provided
elsewhere in this Agreement, the Merger Agreement, or any Ancillary Agreement,
any provision herein which contemplates the agreement, approval or consent of,
or exercise of any right of, a Party, such Party may give or withhold such
agreement, approval or consent, or exercise such right, in its sole and absolute
discretion, the Parties hereto hereby expressly disclaim any implied duty of
good faith and fair dealing or similar concept.

Section 5.11 Severability. If any provision of this Agreement or any Ancillary
Agreement, or the application of any provision to any Person or circumstance,
shall be declared judicially to be invalid, unenforceable or void, such decision
shall not have the effect of invalidating or voiding the remainder of this
Agreement or such Ancillary Agreement, it being the intent and agreement of the
parties hereto that this Agreement and any Ancillary Agreement shall be deemed
amended by modifying such provision to the extent necessary to render it valid,
legal and enforceable while preserving its intent or, if such modification is
not possible, by substituting therefor another provision that is legal and
enforceable and that achieves the same objective.

Section 5.12 Counterparts. This Agreement may be executed in multiple
counterparts (any one of which need not contain the signatures of more than one
Party), each of which will be deemed to be an original but all of which taken
together will constitute one and the same agreement. This Agreement, and any
amendments hereto, to the extent signed and delivered by means of a facsimile
machine or other electronic transmission, will be treated in all manner and
respects as an original agreement and will be considered to have the same
binding legal effects as if it were the original signed version thereof
delivered in person. At the request of a Party, the other Party will re-execute
original forms thereof and deliver them to the requesting Party. No Party will
raise the use of a facsimile machine or other electronic means to deliver a
signature or the fact that any signature was transmitted or communicated through
the use of facsimile machine or other electronic means as a defense to the
formation of a Contract and each such Party forever waives any such defense.

 

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Section 5.13 Survival of Covenants. Except as expressly set forth in any
Ancillary Agreement, the covenants, representations and warranties contained in
this Agreement and each Ancillary Agreement, and liability for the breach of any
obligations contained herein, will survive each of the Red Lion Restructuring
and the Recapitalization and will remain in full force and effect.

Section 5.14 Jurisdiction; Consent to Jurisdiction.

(a) Exclusive Jurisdiction. Each of the Parties irrevocably agrees that any
claim, dispute or controversy (of any and every kind or type, whether based on
contract, tort, statute, regulation or otherwise, and whether based on state,
federal, foreign or any other law), arising out of, relating to or in connection
with this Agreement, the Ancillary Agreements, the documents referred to in this
Agreement, or any of the transactions contemplated thereby, and including
disputes relating to the existence, validity, breach or termination of this
Agreement (any such claim being a “Covered Claim”) may be brought and determined
in any of the courts of the State of New York located in the City of New York,
Borough of Manhattan, or of the United States of America sitting in the Southern
District of New York, and any appellate court from any thereof, and each of the
Parties hereto hereby irrevocably submits in respect of Covered Claims for
itself and in respect to its property, generally and unconditionally, to the
exclusive jurisdiction of the aforesaid courts and agrees that it may be served
with such legal process at the address and in the manner set forth in
Section 5.4. Each of the Parties hereto hereby irrevocably waives, and agrees
not to assert, by way of motion, as a defense, counterclaim or otherwise, in any
action or proceeding in respect of Covered Claims (i) any claim that it is not
personally subject to the jurisdiction of the above-named courts for any reason
other than the failure to lawfully serve process, (ii) that it or its property
is exempt or immune from jurisdiction of any such court or from any legal
process commenced in such courts (whether through service of notice, attachment
prior to judgment, attachment in aid of execution of judgment, execution of
judgment or otherwise) and (iii) to the fullest extent permitted by applicable
Laws, that (A) the suit, action or proceeding in any such court is brought in an
inconvenient forum, (B) the venue of such suit, action or proceeding is improper
and (iii) this Agreement, or the subject matter hereof, may not be enforced in
or by such courts.

(b) Waiver of Jury Trial. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY
CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, THE ANCILLARY AGREEMENTS OR THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT AND THE ANCILLARY AGREEMENTS. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF ANY LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER,
(ii) EACH PARTY

 

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UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY
MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 5.14(b).

Section 5.15 Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement or any other Ancillary Agreement, the Party who is, or is to be,
thereby aggrieved will have the right to specific performance and injunctive or
other equitable relief in respect of its rights under this Agreement or such
Ancillary Agreement, in addition to any and all other rights and remedies at law
or in equity, subject to Section 3.7. The Parties agree that the remedies at law
for any breach or threatened breach, including monetary damages, are inadequate
compensation for any loss and that any defense in any action for specific
performance that a remedy at law would be adequate is waived. Any requirements
for the securing or posting of any bond with such remedy are waived by each of
the Parties to this Agreement.

Section 5.16 Limitations of Liability. Notwithstanding anything in this
Agreement to the contrary, neither Red Lion or its Affiliates, on the one hand,
nor Navy or its Affiliates, on the other hand, will be liable under this
Agreement to the other for any special, indirect, punitive, exemplary, remote,
speculative or similar damages in excess of compensatory damages of the other
arising in connection with the transactions contemplated hereby (other than any
such liability with respect to a Third-Party Claim).

ARTICLE VI

DEFINITIONS

For purposes of this Agreement, the following terms, when utilized in a
capitalized form, will have the following meanings:

“Accounting Exhibit” means the accounting statement exhibit on Schedule 2.7(a)
attached hereto and the line items, accounting principles, methods, practices,
categories, estimates, judgments and assumptions set forth therein.

“Accounting Firm” has the meaning set forth in Section 2.7(d).

“Action” means any demand, charge, claim, action, suit, counter suit,
arbitration, hearing, inquiry, proceeding, audit, review, complaint, litigation
or investigation, or proceeding of any nature whether administrative, civil,
criminal, regulatory or otherwise, by or before any federal, state, local,
foreign or international Governmental Authority or any arbitration or mediation
tribunal.

“Adjusted Navy Restricted Share” has the meaning given to such term in the
Merger Agreement.

“Adjusted Options” has the meaning given to such term in the Merger Agreement.

 

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“Adjustment Amount” means (i) Working Capital, less (ii) the amount closest to
Working Capital in the Target Working Capital Range, calculated in accordance
with the Accounting Exhibit; provided, however, that if Working Capital is in
the Target Working Capital Range, then the Adjustment Amount will be equal to
zero.

“Adjustment Payment” has the meaning set forth in Section 2.7(f).

“Affiliate” means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with such other
Person as of the date on which, or at any time during the period for which, the
determination of affiliation is being made. For purposes of this definition, the
term “control” (including, with correlative meanings, the terms “controlled by”
and “under common control with”), as used with respect to any Person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by Contract or otherwise.

“Agreement” has the meaning set forth in the preamble.

“Alberta” has the meaning set forth in the recitals.

“Alliance Agreement” has the meaning set forth in Section 2.4(a)(v).

“Ancillary Agreements” means the Tax Matters Agreement, the TSAs, the Employee
Benefits Agreement, the Alliance Agreement and the Registration Rights
Agreement.

“Assets” means assets, properties and rights (including goodwill), wherever
located (including in the possession of vendors or other third parties or
elsewhere), whether real, personal or mixed, tangible, intangible or contingent,
in each case whether or not recorded or reflected or required to be recorded or
reflected on the books and records or financial statements of any Person.

“Business Day” means any day that is not a Saturday, a Sunday or other day that
is a statutory holiday under the federal Laws of the United States.

“Canada Completion Business” has the meaning set forth in the recitals.

“Claims Made Policies” has the meaning set forth in Section 4.7(a).

“Claims Notice” has the meaning set forth in Section 3.5(b)(i).

“Closing” has the meaning set forth in the Merger Agreement.

“Closing Adjustment Statement” has the meaning set forth in Section 2.7(b).

“Closing Date” has the meaning set forth in the Merger Agreement.

“Code” means the Internal Revenue Code of 1986 (or any successor statute), as
amended from time to time, and the regulations promulgated thereunder.

 

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“Confidentiality Agreement” means the confidentiality agreement to be entered
into between Navy and Red Lion prior to the Separation Time in form and
substance reasonably acceptable to Navy, Red Lion and Penny.

“Consents” means any consents, waivers or approvals from, or notification
requirements to, or authorizations by, any third parties.

“Contracts” means any contract, agreement, lease, license, sales order, purchase
order, instrument or other commitment, whether written or oral, that is binding
on any Person or any part of its property under applicable Law.

“Control” and its derivatives means, with respect to any Person (other than an
individual): (a) the legal, beneficial, or equitable ownership, directly or
indirectly, of (i) at least 50% of the aggregate of all voting equity interests
in such Person or (ii) equity interests having the right to at least 50% of the
profits of an entity or, in the event of dissolution, to at least 50% of the
Assets of such Person; or (b) the right to appoint, directly or indirectly, a
majority of the board of directors or equivalent governing body of such Person;
or (c) the right to control, directly or indirectly, the management or direction
of such Person by means of Contract, corporate governance document or a similar
instrument; or (d) in the case of a partnership, the holding of the position of
sole general partner.

“Convey” has the meaning set forth in Section 1.1(a). Variants of this term,
such as “Conveyance,” will have correlative meanings.

“Covered Claim” has the meaning set forth in Section 5.14(a).

“Debt Financing Agreements” has the meaning set forth in the recitals.

“Direct Claims” has the meaning set forth in the definition of “Losses.”

“Divested Business” means any business or product line of the Red Lion Business
sold or terminated by the Navy Group (or any predecessor) prior to the
Separation Time.

“Effective Time” has the meaning given to such term in the Merger Agreement.

“Employee Benefits Agreement” has the meaning set forth in Section 2.4(a)(i).
From and after the Separation Time, the Employee Benefits Agreement will refer
to the agreement executed and delivered pursuant to such section, as amended
and/or modified from time to time in accordance with its terms.

“Environmental Conditions” means the presence as of the Separation Time in the
environment, including the soil, groundwater, surface water or ambient air, of
any Hazardous Materials at a level which exceeds any applicable response action
standard or threshold established under any applicable Environmental Law or that
otherwise requires investigation or remediation (including investigation, study,
health or risk assessment, monitoring, removal, treatment or transport) under
any applicable Environmental Laws.

“Environmental Law” has the meaning set forth in the Merger Agreement.

 

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“Estimated Adjustment Payment” has the meaning set forth in Section 2.7(a).

“Estimated Closing Adjustment Statement” has the meaning set forth in
Section 2.7(a).

“Exchange Ratio” has the meaning given to such term in the Merger Agreement.

“Excluded Actions” has the meaning set forth in Section 1.5(b)(iii).

“Excluded Assets” has the meaning set forth in Section 1.4(b).

“Excluded Environmental Liabilities” has the meaning set forth in
Section 1.5(b)(vi).

“Excluded Liabilities” has the meaning set forth in Section 1.5(b).

“Final Adjustment Payment” has the meaning set forth in Section 2.7(f).

“Final Closing Adjustment Statement” has the meaning set forth in
Section 2.7(e).

“Final Determination” has the meaning set forth in the Tax Matters Agreement.

“Governmental Approvals” means any notices, reports or other filings to be made,
or any Consents, registrations, permits or authorizations to be obtained from,
any Governmental Authority.

“Governmental Authority” means any federal, state, local, foreign or
international court, government, department, commission, board, bureau, agency,
official or other regulatory, administrative or governmental authority or
self-regulatory organization.

“Group” means the Navy Group, the Red Lion Group or the Penny Group, as the
context requires.

“Guarantee Release” has the meaning set forth in Section 1.10(b).

“Hazardous Materials” has the meaning set forth in the Merger Agreement.

“Indemnifying Party” means any Party which may be obligated to provide
indemnification to an Indemnitee pursuant to Article III hereof or any other
section of this Agreement or any Ancillary Agreement.

“Indemnitee” means any Person which may be entitled to indemnification from an
Indemnifying Party pursuant to Article III hereof or any other section of this
Agreement or any Ancillary Agreement.

“Inidigo” has the meaning set forth in the recitals.

“Information” means information in written, oral, electronic or other tangible
or intangible form, stored in any medium, including studies, reports, records,
books, Contracts, instruments, surveys, discoveries, ideas, concepts, know-how,
techniques, designs, specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, data,

 

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computer data, disks, diskettes, tapes, computer programs or other software,
marketing plans, customer names, communications by or to attorneys (including
attorney-client privileged communications), memos and other materials prepared
by attorneys or under their direction (including attorney work product), and
other technical, financial, employee or business information or data, but in any
case excluding back-up tapes.

“Insurance Proceeds” means those monies: (i) received by an insured from an
insurance carrier; or (ii) paid by an insurance carrier on behalf of the
insured.

“Intellectual Property” means, in any and all jurisdictions throughout the
world, all (i) inventions and discoveries (whether or not patentable or reduced
to practice), patents, patent applications, invention disclosures, and statutory
invention registrations, including reissues, divisionals, continuations,
continuations-in-part, extensions and reexaminations thereof, (ii) trademarks,
service marks, domain names, uniform resource locators, trade dress, slogans,
logos, symbols, trade names, brand names and other identifiers of source or
goodwill, including registrations and applications for registration thereof and
including the goodwill symbolized thereby or associated therewith (collectively,
“Trademarks”), (iii) published and unpublished works of authorship, whether
copyrightable or not, copyrights therein and thereto, registrations,
applications, renewals and extensions therefor, industrial designs, mask works,
and any and all rights associated therewith, (iv) computer data, computer
programs or other software, and databases, in each case whether in source code,
object code or other form, and all related documentation, (v) trade secrets and
all other confidential or proprietary Information (including know-how) and
invention rights, and all rights to limit the use or disclosure thereof,
(vi) rights of privacy and publicity, and (vii) any and all other proprietary
rights, and (viii) any and all other intellectual property under the Laws of any
country throughout the world.

“Intercompany Accounts” has the meaning set forth in Section 1.6(c).

“Laws” means any statute, law, ordinance, regulation, rule, code or other
requirement of, or Order issued by, a Governmental Authority.

“Liabilities” means all debts, liabilities, guarantees, assurances, commitments
and obligations, whether fixed, contingent or absolute, asserted or unasserted,
matured or unmatured, liquidated or unliquidated, accrued or not accrued, known
or unknown, due or to become due, whenever or however arising (including whether
arising out of any Contract or tort based on negligence or strict liability) and
whether or not the same would be required by generally accepted principles and
accounting policies to be reflected in financial statements or disclosed in the
notes thereto.

“Litigation Conditions” has the meaning set forth in Section 3.5(b)(ii).

“Losses” means liabilities, damages, penalties, judgments, assessments, losses,
costs and expenses in any case, whether arising under strict liability or
otherwise (including reasonable attorneys’ fees); provided, however, that
(i) with respect to claims made hereunder by (A) any member of the Navy Group,
on the one hand, against any member of the Red Lion Group, on the other hand, or
(B) by any member of the Red Lion Group, on the one hand, against any member of
the Navy Group, on the other hand (collectively, “Direct Claims”), “Losses” will
not include

 

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attorneys’ fees or other arbitration or litigation expenses (including without
limitation experts’ fees and administrative costs) incurred in connection with
the prosecution of such Direct Claim under the provisions set forth in
Article III or Section 5.14 and (ii) “Losses” will not include any punitive,
exemplary, special, consequential or similar damages or any diminution in value
or indirect damages (including lost profits, revenues or opportunities), in each
case, except to the extent awarded by a court of competent jurisdiction in
connection with a Third-Party Claim.

“LuxCo” has the meaning set forth in the recitals.

“Merger” has the meaning set forth in the recitals.

“Merger Agreement” has the meaning set forth in the recitals of this Agreement.

“Merger Sub” has the meaning set forth in the recitals.

“Navy” has the meaning set forth in the preamble.

“Navy Adjusted Option” has the meaning given to such term in the Merger
Agreement.

“Navy Group” means Navy and each of its Subsidiaries, but excluding any member
of the Red Lion Group.

“Navy Indemnitees” means Navy, each member of the Navy Group, and all Persons
who are or have been shareholders, stockholders, directors, partners, managers,
managing members, officers, agents or employees of any member of the Navy Group
(in each case, in their respective capacities as such).

“Navy Objection” has the meaning set forth in Section 2.7(c).

“Navy Stock Option” has the meaning given to such term in the Merger Agreement.

“Navy Transfer Documents” has the meaning set forth in Section 2.5.

“Navy TSA” has the meaning set forth in Section 2.4(a)(iii). From and after the
Separation Time, the Navy TSA will refer to the agreement executed and delivered
pursuant to such section, as amended and/or modified from time to time in
accordance with its terms.

“Non-Red Lion Business” means all businesses and operations (whether or not such
businesses or operations are or have been terminated, divested or discontinued)
conducted prior to the Separation Time by Navy, the Navy Subsidiaries, Red Lion
and the Red Lion Subsidiaries, in each case that are not included in the Red
Lion Business.

“Non-Red Lion Facilities” means all facilities that are used or held for use by
a member (or former member) of the Navy Group, including any formerly owned,
operated or leased properties of the Red Lion Business.

“Note Repayment” has the meaning set forth in the recitals.

“Notes” has the meaning set forth in the recitals.

 

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“Occurrence Basis Policies” has the meaning set forth in Section 4.7(a).

“Orders” means any orders, judgments, injunctions, awards, decrees, writs or
other legally enforceable requirement handed down, adopted or imposed by,
including any consent decree, settlement agreement or similar written agreement
with, any Governmental Authority.

“Parties” means Navy, and Red Lion and, for purposes of the obligations in
Section 3.2, the Red Lion Group.

“Penny” has the meaning set forth in the recitals.

“Penny Base Share Number” has the meaning set forth in Section 2.3.

“Penny Common Stock” has the meaning set forth in the recitals.

“Penny Group” means Penny and each of its Subsidiaries, including after the
Effective Time, the Red Lion Group.

“Penny Stock Options” has the meaning given to such term in the Merger
Agreement.

“Person” means an individual, a partnership, a corporation, a limited liability
company, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization or a Governmental Authority.

“Policies” means all insurance policies, insurance contracts and claim
administration contracts of any kind of Navy and its Subsidiaries (including
members of the Red Lion Group) and their predecessors which were or are in
effect at any time at or prior to the Separation Date, including but not limited
to commercial general liability, automobile liability, workers’ compensation and
employer’s liability, excess and umbrella liability, aircraft hull and
liability, commercial crime (including ERISA bond), property and business
interruption, directors’ and officers’ liability, fiduciary liability, errors
and omissions, special accident, environmental, inland and marine, and captive
insurance company arrangements, together with all rights, benefits and
privileges thereunder.

“Privileged Information” has the meaning set forth in Section 4.3(a).

“Privileges” has the meaning set forth in Section 4.3(a).

“Real Property Interests” means all interests in real property of whatever
nature, including easements, whether as owner or holder of a Security Interest,
lessor, sublessor, lessee, sublessee or otherwise.

“Recapitalization” has the meaning set forth in the recitals.

“Red Lion” has the meaning set forth in the recitals.

“Red Lion Accounts” means the bank and brokerage account owned by Red Lion or
any other member of the Red Lion Group.

 

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“Red Lion Assets” has the meaning set forth in Section 1.4(a).

“Red Lion Books and Records” has the meaning set forth in Section 1.4(a)(iv).

“Red Lion Business” has the meaning set forth in the recitals.

“Red Lion Common Shares” has the meaning set forth in the recitals.

“Red Lion Contracts” has the meaning set forth in Section 1.4(a)(iii).

“Red Lion Employee” has the meaning set forth in the Employee Benefits
Agreement.

“Red Lion Employee Benefit Plans” has the meaning set forth in the Merger
Agreement.

“Red Lion Entities” has the meaning set forth in Section 1.4(a)(ii).

“Red Lion Entity Interests” has the meaning set forth in Section 1.4(a)(ii).

“Red Lion Facilities” has the meaning set forth in Section 1.4(a)(i).

“Red Lion Financing” has the meaning set forth in the recitals.

“Red Lion Group” means Red Lion and each of its Subsidiaries. The Penny Group
will be deemed to be members of the Red Lion Group as of the Effective Time.

“Red Lion Indemnitees” means Red Lion, each member of the Red Lion Group, and
each of their respective successors and assigns, and all Persons who are or have
been shareholders, stockholders, directors, partners, managers, managing
members, officers, agents or employees of any member of the Red Lion Group (in
each case, in their respective capacities as such), and their respective heirs,
executors, administrators, successors and assigns.

“Red Lion Information” has the meaning set forth in Section 4.3(b).

“Red Lion Inventory” has the meaning set forth in Section 1.4(a)(xii).

“Red Lion Liabilities” has the meaning set forth in Section 1.5(a).

“Red Lion Restructuring” has the meaning set forth in the recitals.

“Red Lion Share Issuance” has the meaning set forth in Section 2.3.

“Red Lion Transfer Documents” has the meaning set forth in Section 2.6.

“Red Lion TSA” has the meaning set forth in Section 2.4(a)(ii). From and after
the Separation Time, the Red Lion TSA will refer to the agreement executed and
delivered pursuant to such section, as amended and/or modified from time to time
in accordance with its terms.

“Registration Rights Agreement” has the meaning set forth in Section 2.4(a)(vi).

 

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“Reserve Amount” has the meaning set forth in Schedule 2.7(b).

“Restricted Penny Share” has the meaning set forth in the Merger Agreement.

“Restricted Navy Share” has the meaning set forth in the Merger Agreement.

“Security Interest” means any mortgage, security interest, pledge, lien, charge,
claim, option, indenture, right to acquire, right of first refusal, deed of
trust, licenses to third parties, leases to third parties, security agreements,
voting or other restriction, right-of-way, covenant, condition, easement,
encroachment, restriction on transfer, or other encumbrance and other
restrictions or limitations on use of real or personal property of any nature
whatsoever.

“Separation Date” has the meaning set forth in Section 2.1.

“Separation Time” has the meaning set forth in Section 2.1.

“Shared Information” means (i) all Information provided by any member of the Red
Lion Group to a member of the Navy Group prior to the Separation Time, and
(ii) any Information in the possession or under the control of such respective
Group that relates to the operation of the Red Lion Business prior to the
Separation Time and that the requesting Party reasonably needs (A) to comply
with reporting, disclosure, filing or other requirements imposed on the
requesting Party (including under applicable securities and tax Laws) by a
Governmental Authority having jurisdiction over the requesting Party, (B) for
use in any other judicial, regulatory, administrative or other proceeding or in
order to satisfy audit, accounting, claims, regulatory, litigation or other
similar requirements, in each case other than claims or allegations that one
Party to this Agreement has against the other, (C) subject to the foregoing
clause (B) above, to comply with its obligations under this Agreement or the
Merger Agreement, or (D) to the extent such Information and cooperation is
necessary to comply with such reporting, filing and disclosure obligations, for
the preparation of financial statements or completing an audit, and as
reasonably necessary to conduct the ongoing businesses of Navy or Red Lion, as
the case may be.

“Subsidiary” of any Person means another Person (other than a natural Person),
an aggregate amount of the voting securities, other voting ownership or voting
partnership interests of which is sufficient to elect at least a majority of the
board of directors or other governing body (or, if there are no such voting
interests, 50% or more of the equity interests of which) is owned directly or
indirectly by such first Person.

“Target Working Capital Range” has the meaning set forth in Schedule 2.7(b).

“Tax” has the meaning set forth in the Tax Matters Agreement.

“Tax Matters Agreement” has the meaning set forth in Section 2.4(a)(iv). From
and after the Separation Time, the Tax Matters Agreement will refer to the
agreement executed and delivered pursuant to such section, as amended and/or
modified from time to time in accordance with its terms.

“Tax Return” has the meaning set forth in the Tax Matters Agreement.

 

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“Third-Party Claim” has the meaning set forth in Section 3.5(b)(i).

“Trademarks” has the meaning set forth in the definition of “Intellectual
Property.”

“Transactions” has the meaning set forth in the Tax Matters Agreement.

“Transfer Documents” has the meaning set forth in Section 2.6.

“TSAs” has the meaning set forth in Section 2.4(a)(iii).

“U.S. Completion Business” has the meaning set forth in the recitals.

“USHC” has the meaning set forth in the recitals.

“Working Capital” has the meaning set forth in Schedule 2.7(b).

[Signature Page Follows]

 

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IN WITNESS WHEREOF, each of the Parties has caused this Separation Agreement to
be executed on its behalf by its officers hereunto duly authorized on the day
and year first above written.

 

NABORS INDUSTRIES LTD. By:   /s/ Mark D. Andrews   Name:   Mark D. Andrews  
Title:   Corporate Secretary NABORS RED LION LIMITED By:  

/s/ Mark D. Andrews

  Name:   Mark D. Andrews   Title:   Director

[Signature Page to Separation Agreement]