Exhibit 10.1


 


NONQUALIFIED
STOCK OPTION AGREEMENT


 


CANO PETROLEUM, INC.


2005 LONG-TERM INCENTIVE PLAN


 


1.                                       Grant of Option.  Pursuant to the Cano Petroleum, Inc.
2005 Long-Term Incentive Plan (the “Plan”) for employees, consultants and outside
directors of Cano Petroleum, Inc., a Delaware corporation (the “Company”), the
Company grants to


 


 


(the “Participant”),


 


an
option to purchase shares of Common Stock (“Common Stock”) of the Company as
follows:


 


On the date hereof, the Company grants to the
Participant an option (the “Option” or “Stock Option”) to purchase                          
full shares (the “Optioned
Shares”) of Common Stock at an Option Price equal to $
        per share.  The Date of Grant of this Stock Option is
                          
    ,          .


 


The
“Option Period”
shall commence on the Date of Grant and shall expire on the date immediately
preceding the tenth (10th) anniversary of the Date of Grant.  The Stock Option is a Nonqualified Stock
Option.  This Stock Option is intended to
comply with the provisions governing nonqualified stock options under Internal
Revenue Service Notice 2005-1 and the proposed Treasury Regulations issued
under Section 409A of the Code on September 29, 2005 in order to
exempt this Stock Option from application of Section 409A of the Code.


 


2.                                       Subject to Plan.  The Stock Option and its exercise are subject
to the terms and conditions of the Plan, and the terms of the Plan shall
control to the extent not otherwise inconsistent with the provisions of this
Agreement. The capitalized terms used herein that are defined in the Plan shall
have the same meanings assigned to them in the Plan.  The Stock Option is subject to any rules promulgated
pursuant to the Plan by the Board or the Committee and communicated to the
Participant in writing.


 


3.                                       Vesting; Time of
Exercise.  Except as specifically provided in
this Agreement and subject to certain restrictions and conditions set forth in
the Plan, 100% of the total Optioned Shares shall vest and that portion of the
Stock Option shall become exercisable on the first anniversary of the Date of
Grant, provided the Participant is employed by (or, if the Participant is a
consultant or an Outside Director, is providing services to) the Company or a
Subsidiary on that date.  In the event
that a Change in Control occurs, then immediately prior to the effective date
of such Change in Control the total Optioned Shares not previously vested shall
thereupon immediately become vested and this Option shall become fully
exercisable if not previously so exercisable.


 


4.                                       Term; Forfeiture.


 


a.                                       Except as otherwise
provided in this Agreement, to the extent the unexercised portion of the Stock
Option relates to Optioned Shares which are not vested on the date of the
Participant’s Termination of Service, the Stock Option will be terminated on
that date.  The unexercised portion of
the Stock Option that relates to Optioned Shares which are vested will
terminate at the first of the following to occur:


 





















 


i.                                          5 p.m. on the
date the Option Period terminates;


 


ii.                                       5 p.m. on the
date which is twelve (12) months following the date of the Participant’s
Termination of Service due to death or Total and Permanent Disability;


 


iii.                                    5 p.m. on the
date of the Participant’s Termination of Service by the Company for cause (as
defined herein);


 


iv.                                   5 p.m. on the
date which is ninety (90) days following the date of the Participant’s
Termination of Service for any reason not otherwise specified in this Section 4.a.;
or


 


v.                                      5 p.m. on the
date the Company causes any portion of the Option to be forfeited pursuant to Section 7
hereof.


 


b.                                      Solely for purposes
of this Section 4, “Cause” shall mean (i) Participant’s gross
negligence in the performance or intentional nonperformance of any of his
duties and responsibilities (which remains uncured and continues for thirty
(30) days after delivery of written notice); (ii) Participant’s dishonesty
or fraud with respect to the business, reputation or affairs of the Company; (iii) Participant’s
conviction of a felony or crime involving moral turpitude; (iv) Participant’s
debilitating drug or alcohol abuse as determined by a qualified physician; (v) Participant’s
material breach of any provisions of an employment, consulting or service
agreement between the Company and Participant; or (vi) Participant’s
material violation of any written Company policy (which remains uncured or
continues thirty (30) days after delivery of written notice).


 


5.                                       Who May Exercise.  Subject to the terms and conditions set forth
in Sections 3 and 4 above, during the lifetime of the Participant, the
Stock Option may be exercised only by the Participant, or by the Participant’s
guardian or personal or legal representative. 
If the Participant’s Termination of Service is due to his death prior to
the date specified in Section 4.i. hereof, or Participant dies
prior to the termination dates specified in Sections 4.i., ii., iii., or iv.
hereof, and the Participant has not exercised the Stock Option as to the
maximum number of vested Optioned Shares as set forth in Section 3
hereof as of the date of death, the following persons may exercise the
exercisable portion of the Stock Option on behalf of the Participant at any
time prior to the earliest of the dates specified in Section 4
hereof:  the personal representative of
his estate, or the person who acquired the right to exercise the Stock Option
by bequest or inheritance or by reason of the death of the Participant;
provided that the Stock Option shall remain subject to the other terms of this
Agreement, the Plan, and applicable laws, rules, and regulations.  Notwithstanding the foregoing
sentence, by delivering to the Company the prescribed form (see Appendix A),
the Participant may designate one or more beneficiaries and successor
beneficiaries who may exercise the exercisable portion of the Option on behalf
of the Participant at any time prior to the earliest of the dates specified in Section 4
hereof (provided that the Option shall remain subject to the other terms of
this Agreement and applicable laws, rules, and regulations) in the event (i) of
the Participant’s Termination of Service due to his death prior to the date
specified in Section 4.a.i. hereof, or  (ii) the Participant dies prior to the
termination dates specified in Sections 4.a.i., ii., iii., iv. or v. hereof,
and the Participant has not exercised the Option as to the maximum number of
vested Optioned Shares as set forth in Section 3 hereof as of the
date of death.  In the event the
Participant does not deliver to the Company a form designating one or more
beneficiaries, or no designated beneficiary survives the Participant, the
foregoing sentence shall not apply.


 


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6.                                       No Fractional Shares.  The Stock Option may be exercised only with
respect to full shares, and no fractional share of stock shall be issued.


 


7.                                       Manner of Exercise.  Subject to such administrative regulations as
the Committee may from time to time adopt, the Stock Option may be exercised by
the delivery of written notice to the Committee setting forth the number of
shares of Common Stock with respect to which the Stock Option is to be
exercised, the date of exercise thereof (the “Exercise Date”) which shall be at least
three (3) days after giving such notice unless an earlier time shall have
been mutually agreed upon.  On the
Exercise Date, the Participant shall deliver to the Company consideration with
a value equal to the total Option Price of the shares to be purchased, payable
as follows:  (a) cash, check, bank
draft, or money order payable to the order of the Company, (b) Common
Stock (including Restricted Stock owned by the Participant on the Exercise
Date, valued at its Fair Market Value on the Exercise Date, and which the
Participant has not acquired from the Company within six (6) months prior
to the Exercise Date, (c) if the Optioned Shares are Publicly Traded (as
defined herein), by delivery (including by FAX) to the Company or its
designated agent of an executed irrevocable option exercise form together with
irrevocable instructions from the Participant to a broker or dealer, reasonably
acceptable to the Company, to sell certain of the shares of Common Stock
purchased upon exercise of the Stock Option or to pledge such shares as
collateral for a loan and promptly deliver to the Company the amount of sale or
loan proceeds necessary to pay such purchase price, and/or (d) in any
other form of valid consideration that is acceptable to the Committee in its
sole discretion.  In the event that
shares of Restricted Stock are tendered as consideration for the exercise of a
Stock Option, a number of shares of Common Stock issued upon the exercise of
the Stock Option equal to the number of shares of Restricted Stock used as
consideration therefor shall be subject to the same restrictions and provisions
as the Restricted Stock so tendered.  For
purposes of this Section 7, the Common Stock shall be “Publicly Traded” if
the Common Stock subjects the Company to the periodic reporting requirements of
Sections 12(g) or 15(d) of the 1934 Act.


 


Upon payment of all amounts due from the Participant,
the Company shall cause certificates for the Optioned Shares then being
purchased to be delivered to the Participant (or the person exercising the
Participant’s Stock Option in the event of his death) at its principal business
office within ten (10) business days after the Exercise Date. The
obligation of the Company to deliver shares of Common Stock shall, however, be
subject to the condition that if at any time the Company shall determine in its
discretion that the listing, registration, or qualification of the Stock Option
or the Optioned Shares upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary as a condition of, or in connection with, the Stock Option or the
issuance or purchase of shares of Common Stock thereunder, then the Stock
Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent, or approval shall have been effected or
obtained free of any conditions not reasonably acceptable to the Committee.


 


If the Participant fails to pay for any of the
Optioned Shares specified in such notice or fails to accept delivery thereof,
then the Stock Option, and right to purchase such Optioned Shares may be
forfeited by the Company.


 


8.                                       Nonassignability.  The Stock Option is not assignable or
transferable by the Participant except by will or by the laws of descent and
distribution.


 


9.                                       Rights as Stockholder.  The Participant will have no rights as a
stockholder with respect to any shares covered by the Stock Option until the
issuance of a certificate or certificates to the Participant for the Optioned
Shares.  The Optioned Shares shall be
subject to the terms and conditions of this Agreement regarding such
Shares.  Except as otherwise provided in Section 10
hereof, no adjustment


 


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shall
be made for dividends or other rights for which the record date is prior to the
issuance of such certificate or certificates.


 


10.                                 Adjustment of Number
of Optioned Shares and Related Matters.  The
number of shares of Common Stock covered by the Stock Option, and the Option
Prices thereof, shall be subject to adjustment in accordance with Articles
11 - 13 of the Plan.


 


11.                                 Nonqualified Stock
Option.  The Stock Option shall not be
treated as an Incentive Stock Option.


 


12.                                 Voting.  The Participant, as record holder of some or
all of the Optioned Shares following exercise of this Stock Option, has the
exclusive right to vote, or consent with respect to, such Optioned Shares until
such time as the Optioned Shares are transferred in accordance with this
Agreement or a proxy is granted pursuant to Section 13 below; provided,
however, that this Section shall not create any voting right where
the holders of such Optioned Shares otherwise have no such right.


 


13.                                 Proxies.  The Participant shall execute an irrevocable
proxy with respect to any shares of Restricted Stock authorizing the Board to
vote such shares on all issues until the expiration of the Restriction
Period.  Subject to the foregoing
provisions of this Section, the Participant may not grant a proxy to any
person, other than a revocable proxy not to exceed 30 days in duration granted
to another stockholder for the sole purpose of voting for directors of the
Company.


 


14.                                 Community Property.  Each spouse individually is bound by, and
such spouse’s interest, if any, in any Optioned Shares is subject to, the terms
of this Agreement.  Nothing in this
Agreement shall create a community property interest where none otherwise
exists.


 


15.                                 Participant’s
Representations.  Notwithstanding any of the
provisions hereof, the Participant hereby agrees that he will not exercise the
Stock Option granted hereby, and that the Company will not be obligated to
issue any shares to the Participant hereunder, if the exercise thereof or the
issuance of such shares shall constitute a violation by the Participant or the
Company of any provision of any law or regulation of any governmental
authority.  Any determination in this
connection by the Company shall be final, binding, and conclusive.  The obligations of the Company and the rights
of the Participant are subject to all applicable laws, rules, and regulations.


 


16.                                 Investment Representation.  Unless the Common Stock is issued to him in a
transaction registered under applicable federal and state securities laws, by
his execution hereof, the Participant represents and warrants to the Company
that all Common Stock which may be purchased hereunder will be acquired by the
Participant for investment purposes for his own account and not with any intent
for resale or distribution in violation of federal or state securities
laws.  Unless the Common Stock is issued
to him in a transaction registered under the applicable federal and state
securities laws, all certificates issued with respect to the Common Stock shall
bear an appropriate restrictive investment legend and shall be held
indefinitely, unless they are subsequently registered under the applicable
federal and state securities laws or the Participant obtains an opinion of
counsel, in form and substance satisfactory to the Company and its counsel,
that such registration is not required.


 


17.                                 Participant’s
Acknowledgments.  The Participant acknowledges
receipt of a copy of the Plan, which is annexed hereto, and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all the terms and provisions thereof. The Participant
hereby agrees to accept as binding, conclusive, and final all decisions or
interpretations of the Committee or the Board, as appropriate, upon any
questions arising under the Plan or this Agreement.


 


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18.                                 Law Governing.  This Agreement shall be governed by,
construed, and enforced in accordance with the laws of the State of Texas
(excluding any conflict of laws rule or principle of Texas law that might
refer the governance, construction, or interpretation of this agreement to the
laws of another state).


 


19.                                 No Right to Continue
Service or Employment.  Nothing
herein shall be construed to confer upon the Participant the right to continue
in the employ or to provide services to the Company or any Subsidiary, whether
as an employee or as a consultant or as an Outside Director, or interfere with
or restrict in any way the right of the Company or any Subsidiary to discharge
the Participant as an employee, consultant or Outside Director at any time.


 


20.                                 Legal Construction.  In the event that any one or more of the
terms, provisions, or agreements that are contained in this Agreement shall be
held by a Court of competent jurisdiction to be invalid, illegal, or
unenforceable in any respect for any reason, the invalid, illegal, or
unenforceable term, provision, or agreement shall not affect any other term,
provision, or agreement that is contained in this Agreement and this Agreement
shall be construed in all respects as if the invalid, illegal, or unenforceable
term, provision, or agreement had never been contained herein.


 


21.                                 Covenants and
Agreements as Independent Agreements.  Each
of the covenants and agreements that is set forth in this Agreement shall be
construed as a covenant and agreement independent of any other provision of
this Agreement.  The existence of any
claim or cause of action of the Participant against the Company, whether
predicated on this Agreement or otherwise, shall not constitute a defense to
the enforcement by the Company of the covenants and agreements that are set
forth in this Agreement.


 


22.                                 Entire Agreement.  This Agreement together with the Plan
supersede any and all other prior understandings and agreements, either oral or
in writing, between the parties with respect to the subject matter hereof and
constitute the sole and only agreements between the parties with respect to the
said subject matter.  All prior
negotiations and agreements between the parties with respect to the subject
matter hereof are merged into this Agreement. 
Each party to this Agreement acknowledges that no representations,
inducements, promises, or agreements, orally or otherwise, have been made by
any party or by anyone acting on behalf of any party, which are not embodied in
this Agreement or the Plan and that any agreement, statement or promise that is
not contained in this Agreement or the Plan shall not be valid or binding or of
any force or effect.


 


23.                                 Parties Bound.  The terms, provisions, and agreements that
are contained in this Agreement shall apply to, be binding upon, and inure to
the benefit of the parties and their respective heirs, executors,
administrators, legal representatives, and permitted successors and assigns,
subject to the limitation on assignment expressly set forth herein. No person
or entity shall be permitted to acquire any Optioned Shares without first
executing and delivering an agreement in the form satisfactory to the Company
making such person or entity subject to the restrictions on transfer contained
herein.


 


24.                                 Modification.  No change or modification of this Agreement
shall be valid or binding upon the parties unless the change or modification is
in writing and signed by the parties; provided, however, that the Company may
change or modify this Agreement without Individual’s consent or signature if
the Company determines, in its sole discretion, that such change or
modification is necessary for purposes of compliance with or exemption from the
requirements of Section 409A of the Code or any regulations or other
guidance issued thereunder.


 


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25.                                 Headings.  The headings that are used in this Agreement
are used for reference and convenience purposes only and do not constitute
substantive matters to be considered in construing the terms and provisions of
this Agreement.


 


26.                                 Gender and Number.  Words of any gender used in this Agreement
shall be held and construed to include any other gender, and words in the
singular number shall be held to include the plural, and vice versa, unless the
context requires otherwise.


 


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


 


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


 


Cano Petroleum, Inc.


309 West Seventh Street


Fort Worth, TX 
76102


Attn:  Corporate
Secretary


 


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


 


28.                                 Tax Requirements.  The Participant is hereby advised to consult
immediately with his or her own tax advisor regarding the tax consequences of this
Agreement.  The Company or, if
applicable, any Subsidiary (for purposes of this Section 28, the
term “Company”
shall be deemed to include any applicable Subsidiary), shall have the right to
deduct from all amounts hereunder paid in cash or other form, any Federal,
state, local, or other taxes required by law to be withheld in connection with
this Award.  The Company may, in its sole
discretion, also require the Participant receiving shares of Common Stock
issued under the Plan to pay the Company the amount of any taxes that the
Company is required to withhold in connection with the Participant’s income
arising with respect to this Award.  Such
payments shall be required to be made when requested by the Company and may be
required to be made prior to the delivery of any certificate representing
shares of Common Stock.  Such payment may
be made (i) by the delivery of cash to the Company in an amount that
equals or exceeds (to avoid the issuance of fractional shares under (iii) below)
the required tax withholding obligations of the Company; (ii) if the
Company, in its sole discretion, so consents in writing, the actual delivery by
the exercising Participant to the Company of shares of Common Stock other than (A) Restricted
Stock, or (B) Common Stock that the Participant has not acquired from the
Company within six (6) months prior to the date of exercise, which shares
so delivered have an aggregate Fair Market Value that equals or exceeds (to
avoid the issuance of fractional shares under (iii) below) the required
tax withholding payment; (iii) if the Company, in its sole discretion, so
consents in writing, the Company’s withholding of a number of shares to be
delivered upon the exercise of the Stock Option other than shares that will
constitute Restricted Stock, which shares so withheld have an aggregate fair
market value that equals (but does not exceed) the required tax withholding
payment; or (iv) any combination of (i), (ii), or (iii).  The Company may, in its sole discretion,
withhold any such taxes from any other cash remuneration otherwise paid by the
Company to the Participant.


 


* * * * * * * *


 


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IN WITNESS WHEREOF, the Company has caused this
Agreement to be executed by its duly authorized officer, and the Participant,
to evidence his consent and approval of all the terms hereof, has duly executed
this Agreement, as of the date specified in Section 1 hereof.


 


	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PARTICIPANT:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Signature

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
						



 


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APPENDIX A


 


Beneficiary Designation


 


To:                              Corporate Secretary designated in the Cano
Petroleum Inc. Nonqualified Stock Option Agreement by and between Cano Petroleum
Inc. and                                                 
(the “Agreement”)


 


From:                                                                                                     


 


Pursuant to Section 5 of the Agreement made as of
                 
   .
           , I hereby
designate the following persons(s) as beneficiary(ies) who on my death who may
exercise the exercisable portion of the Option on my behalf pursuant to the
Agreement:


 


Primary Beneficiary Name:                                                                                      


 


Secondary Beneficiary Name:                                                                                 


 


In making the above designation, I reserve the right
to revoke this beneficiary designation or change the beneficiary(ies)
designated at any time or times and without the consent of any beneficiary.


 


This beneficiary designation cancels and supersedes
any beneficiary designation I previously made with respect to this Agreement.


 


	
  Signed:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Individual

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Date

  	
   

  



 


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