Exhibit 10.2


 


AMENDED AND RESTATED REGULATIONS


 


OF


 


SABINE PRODUCTION OPERATING, LLC


 


(A Texas Limited Liability Company)


 


THE UNITS REFERENCED
HEREIN HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS.  WITHOUT REGISTRATION, THESE SECURITIES MAY NOT
BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED AT ANY TIME
WHATSOEVER, EXCEPT ON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL
SATISFACTORY TO THE MANAGERS OF THE COMPANY THAT REGISTRATION IS NOT REQUIRED
FOR THE TRANSFER, OR THE SUBMISSION TO THE MANAGERS OF THE COMPANY OF OTHER
EVIDENCE SATISFACTORY TO THE MANAGERS TO THE EFFECT THAT ANY TRANSFER WILL NOT
BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS OR ANY RULE OR REGULATIONS PROMULGATED THEREUNDER.
ADDITIONALLY, ANY SALE OR OTHER TRANSFER OF UNITS IS SUBJECT TO CERTAIN
RESTRICTIONS THAT ARE SET FORTH IN THESE AMENDED AND RESTATED REGULATIONS.


 





















 


AMENDED AND RESTATED REGULATIONS OF 

SABINE PRODUCTION OPERATING, LLC

A TEXAS LIMITED LIABILITY COMPANY


effective as of August 3, 2005 (the “Effective Date”)


 


RECITALS


 


Sabine
Production Operating, LLC (the “Company”) was organized as a Texas
limited liability company by the filing of Articles of Organization (the “Articles”)
under and pursuant to the Texas Limited Liability Company Act (as amended from
time to time, the “Act”) and the issuance of a certificate of
organization for the Company by the Secretary of State of Texas, on May 12,
2005 (the “Formation Date”).


 


Effective
the Formation Date, Cano Petroleum, Inc., a Delaware corporation (“Cano”),
Carlile Management, LLC, a Texas limited liability company (“Carlile
Management”), and Haddock Enterprises, LLC, a Texas limited liability
company (“Haddock Enterprises”), being all of the Members of the
Company, adopted, executed and agreed to the Regulations of Sabine Production
Operating, LLC (the “Original Regulations”).  “Members” is defined in Section 2.01
of the Original Regulations.


 


Section 9.05
of the Original Regulations provides that the Original Regulations may be
amended or restated only with the approval of the Manager (as defined in Section 5.01
of the Original Regulations) and all of the Members.


 


Pursuant
to Section 5.03 of the Original Regulations, the initial Manager of the
Company, and the Manager of the Company as of the Effective Date, is Haddock
Enterprises, which is the person named in the Articles as the initial Manager
of the Company.


 


Haddock
Enterprises, in its capacity as the Manager, and all of the Members of the
Company desire to amend, restate and replace the Original Regulations in their
entirety with the following Amended and Restated Regulations of Sabine
Production Operating, LLC (these “Restated Regulations”) dated as of the
Effective Date.


 


NOW,
THEREFORE, in consideration of the foregoing premises, and for good and
valuable consideration, the Manager and all the Members do hereby adopt,
execute and agree to the following Restated Regulations:


 


Article I


Definitions


 


Section 1.01.  Definitions.  The following terms used in these Regulations
shall have the following meanings (unless otherwise expressly provided herein):


 





















 


“Act”
is defined in the recitals.


 


“Affiliate”
of any specified Person means any other Person, directly or indirectly,
controlling or controlled by or under direct or indirect common control with
such specified Person.  For the purposes
of this definition, “control” when used with respect to any Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the beneficial ownership of a majority of voting
securities, by contract or otherwise; and the terms ‘controlling” and “controlled”
have meanings correlative to the foregoing.


 


“Articles”
is defined in the recitals.


 


“Cano”
is defined in the recitals.


 


“Capital
Contributions” is defined in Section 4.01.


 


“Carlile
Management” is defined in the recitals.


 


“Change
of Control” means (i) the acquisition by any Person (or group of
Persons acting in concert), directly or indirectly, of beneficial ownership of
a majority of the voting power of a Member, whether through the purchase of
voting securities, partnership or membership interests; (ii) the election
or appointment of a number of members to the board of directors (or comparable
governing authority) of a Member of new members constituting a majority of the
entire board of directors (or comparable governing authority), if such new
members were elected or appointed without the prior approval of a majority of
Continuing Members (a “Continuing Member” is a member of the board of directors
or comparable governing authority of a Member as of the Effective Date and any
successor who is nominated to succeed him by a majority of the Continuing
Members); or (iii) a merger, consolidation, sale of all or substantially
all of the assets, liquidation or dissolution of a Member (other than (a) a
merger or consolidation effected solely for the purpose of changing the
domicile of the Member or (b) a merger or consolidation in which the
holders of securities that represented 100% of the voting power of the Member
immediately prior to the merger or consolidation own directly or indirectly at
least a majority of the voting power of the surviving entity in such merger or
consolidation immediately after such transaction); or (iv) any other
transaction or series of related transactions the result of which is that
holders of securities that represented 100% of the voting power of the Member
immediately before such transaction or series of related transactions hold,
immediately after such transaction or series of related transactions, less than
a majority of the voting power in the Member.


 


“Code”
means the Internal Revenue Code of 1986, as amended from time to time.


 


“Commitment”
means, with respect to a Member, the Commitment set forth opposite such Member’s
name on Exhibit A.


 


“Company”
is defined in the recitals.


 


3





















 


“Compensation
Reimbursement Agreement” means the Compensation Reimbursement Agreement
dated the date hereof among the Company and Cano.


 


“Disposition”
is defined in Section 3.02(a).     


 


“Effective
Date” means August 3, 2005.


 


“Formation
Date” is defined in the recitals.


 


“General
Partner” is defined in Section 2.04.


 


“Governing
Board of Managers” means the Governing Board of Managers of the Company.


 


“Haddock
Enterprises” is defined in the recitals.


 


“Independent
Manager” means a Manager that satisfies the standards of independence as
are or may be established by the SEC and the NYSE. A Manager will be considered
to be independent only if the Governing Board of Managers has determined, upon
inquiry, that the Manager has no material relationship with the Company (either
directly or as a partner, shareholder or officer of an organization that has a
relationship with the Company or its subsidiaries) and is independent under
relevant standards adopted by the SEC and NYSE.


 


“Majority
Interest” with respect to any group of referenced Members, means a majority
of the Membership Interests owned by all such Members; provided, that if
Carlile Management has been required to relinquish its voting rights with
respect to the Company pursuant to the Noncompetition Agreement, then the
Membership Interest owned by Carlile Management shall be deemed to be zero for
purposes of calculating the Majority Interest.


 


“Manager”
is defined in Section 6.01(b).


 


“Member”
means each Person executing these Restated Regulations as of the date hereof as
Members and each Person that is hereafter admitted to the Company as a Member
in accordance with these Restated Regulations


 


“Membership
Interest” is defined in Section 3.02(a).


 


“Member
Recourse Debt” is defined in Section 6.01(h).


 


“Minimum
Portion” means three percent (3%) of the Membership Interests issued by the
Company.


 


“Net
Cash Flow” means all cash funds derived by the Company (including interest
received on reserves, borrowings, and capital transactions), without reduction
for any non-cash


 


4





















 


charges, but less cash funds used to pay current operating expenses,
debt payments, capital improvements, replacements, and – as determined by the
Governing Board of Managers  – to
establish reasonable reserves for future expenses and costs and for the
fulfillment by the Company of its duties as the owner of the General Partner
and, to the extent applicable, the General Partner’s duties as the general
partner of the Partnership.


 


“Noncompetition
Agreement” means the Noncompetition and Confidentiality Agreement dated the
date hereof between the Partnership and Dr. Kenneth Q. Carlile.


 


“NYSE”
means the New York Stock Exchange.


 


“Offered
Interest” is defined in Section 3.02(d).


 


“Omnibus
Agreement” means the Omnibus Agreement dated the date hereof among the
Company and the Members.


 


“Other
Members” is defined in Section 3.02(d).


 


“Original
Regulations” is defined in the recitals.


 


“Partnership”
means Sabine Production Partners, LP, a Delaware limited partnership.


 


“Partnership
Agreement” means the Agreement of Limited Partnership of the Partnership
and any amendments and restatements thereof.


 


“Permitted
Encumbrance” means the pledge or hypothecation as security for any
indebtedness or other obligations of any or all Membership Interests beneficially
owned by a Member provided that such Member obtains, prior to such pledge or
hypothecation, the written consent from the pledgee that upon the occurrence of
an event which gives the pledgee the right to foreclose on the pledged
Membership Interest (a “Foreclosure Event”) such pledgee shall provide
to the Company prompt written notice of such Foreclosure Event and provide the
Company the right to purchase such Membership Interests at a cash purchase
price equal to the lesser of (a) the fair market value of the Membership
Interest as of the date of receipt of the notice of the pending foreclosure
sale or (b) the amount of the indebtedness secured by such Membership
Interest.  In order to exercise its
purchase rights in connection with a Foreclosure Event, the Company must
deliver a written notice to the pledgee to such effect within ten business days
after receipt of written notice of the Foreclosure Event and complete such
purchase within 120 days from the delivery of such notice.


 


“Permitted
Withdrawal” means a Member’s withdrawal from the Company that is expressly
allowed by Section 3.04.


 


5





















 


“Person”
means any individual, corporation, partnership, limited liability company,
joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.


 


“Pro
Rata” means the ratio determined by dividing the Membership Interest to
whom a particular provision of these Restated Regulations is stated to apply by
the aggregate Membership Interests of all Members to whom that provision is
stated to apply.


 


“Proceedings”
is defined in Section 6.07.


 


“Proxy
Statement” is defined in Section 2.04.


 


“Proxy
Statement Date” means the date on which the Proxy Statement is first mailed
or otherwise transmitted to unit holders of SRT.


 


“Registration
Statement” means the Registration Statement on Form S-4 (No. 333-12732303)
filed by the Partnership with the SEC.


 


“Registration
Statement Effective Date” means the date on which the SEC declares the
Registration Statement effective.


 


“Related
Party Transaction” is defined in Section 6.06(b).


 


“Remaining
Interests” is defined in Section 3.02(d).


 


“Restated
Regulations” means these Amended and Restated Regulations of the Company.


 


“SEC”
means the Securities and Exchange Commission.


 


“Sharing
Ratio,”  with respect to a Member,
means the Sharing Ratio set forth opposite such Member’s name on Exhibit A.


 


“SRT”
means Sabine Royalty Trust.


 


“Tax
Matters Member” is defined in Section 7.02.


 


“Transfer
Notice Date” is defined in Section 3.02(d).


 


“Transferee”
is defined in Section 3.02(d).


 


“Transferring
Member” is defined in Section 3.02(d).


 


“Transaction”
is defined in Section 2.04.


 


6





















 


“Transaction
Closing Date” means the date on which the Partnership completes the
acquisition of assets of SRT as described in the Registration Statement.


 


“Transaction
Documents” means, collectively, the Omnibus Agreement, the Compensation
Reimbursement Agreement and the Noncompetition Agreement and any other
agreements, arrangements or understandings between or among the Company, the
General Partner, the Company, on the one hand, and a Member, on the other hand.


 


Article 2 


Organization


 


2.01. Formation. The Company has been organized as a Texas limited
liability company by the filing of Articles under and pursuant to the Act and
the issuance of a certificate of organization for the Company by the Secretary
of State of Texas. 


 


2.02. Name. The name of the Company is “Sabine Production
Operating, LLC” and all Company business must be conducted in that name or such
other names that may be selected by the Governing Board of Managers (as defined
in Section 6.01) and that comply with applicable law.


 


2.03.  Registered Office; Registered
Agent; Offices. The registered office and registered agent of the
Company in the State of Texas shall be as specified in the Articles or as
designated by the Governing Board of Managers in the manner provided by
applicable law. The offices of the Company shall be at such places as the
Governing Board of Managers may designate, which need not be in the State of
Texas. 


 


2.04. Purposes. The purposes of the Company are to serve as the
manager of Sabine Production Management, LLC, in its capacity as the sole
general partner (the “General Partner”) of the Partnership, to cause the
General Partner to fulfill its duties under the Partnership Agreement, and to
engage in any other business or activity that now or hereafter may be
necessary, incidental, proper, advisable, or convenient to accomplish the
foregoing purposes (including obtaining financing therefor) and that is not
forbidden by the law of the jurisdiction in which the Company engages in that
business.  The Partnership has been
formed to formulate, pursue and consummate a transaction (the “Transaction”)
with SRT pursuant to which the Partnership shall seek, through the use of a
proxy statement/registration statement (the “Proxy Statement”) filed
with and declared effective by the SEC, to obtain the approval of holders of a
majority of the outstanding units of SRT, a Texas trust the units of which are
publicly traded on the NYSE, to acquire substantially all of the assets of SRT,  in exchange for limited partner interests in
the Partnership to be distributed among the unit holders of SRT, who thereupon
shall be admitted to the Partnership as limited partners; and thereafter to
hold, manage, exploit, dispose of, increase and otherwise handle and deal with the
properties and assets acquired in the Transaction and other oil and gas
properties and related assets that may thereafter be acquired by the
Partnership. 


 


7





















 


2.05. Foreign Qualification. Prior to the Company’s conducting
business in any jurisdiction other than Texas, the Governing Board of Managers
shall cause the Company to comply with all requirements necessary to qualify
the Company as a foreign limited liability company in that jurisdiction.


 


2.06. Term. The Company commenced on the date the Secretary of
State of Texas issued a certificate of organization for the Company and shall
continue in existence for the period fixed in the Articles for the duration of
the Company, or such earlier time as these Restated Regulations may specify.


 


2.07. No State-Law Partnership. The Members intend that the
Company not be a partnership (including a limited partnership) or joint
venture, and that no Member or Manager be a partner or joint venturer of any
other Member or Manager, for any purposes other than applicable tax laws, and
these Restated Regulations may not be construed to suggest otherwise.


 


Article 3


Membership; Dispositions of Interests


 


3.01. Members; Sharing Ratios. The Members are the Persons
executing these Restated Regulations as of the date hereof as Members and each
Person that is hereafter admitted to the Company as a member in accordance with
these Restated Regulations. The “Sharing Ratio” and “Commitment”
(herein so called) of each initial Member is set forth on Exhibit A.


 


3.02. Dispositions of Membership Interests. 


 


(a) General.  Notwithstanding any other provision of these
Restated Regulations, but subject to the following proviso, no Member may,
directly or indirectly, make a sale, assignment, transfer, conveyance, gift,
exchange, or other disposition (voluntarily, involuntarily, or by operation of
law) ( a “Disposition”) of all or any portion of its rights or interest
in the Company (“Membership Interest”) unless (i) that Member has
fully complied with the provisions of these Restated Regulations for the
Disposition; (ii) after giving effect thereto, such Disposition would not
otherwise terminate the Company for the purposes of Code Section 708 or
cause the Company to be classified as other than a partnership for U.S. federal
income tax purposes; (iii) such Disposition would not result in a
violation of applicable law, including U.S. federal or state securities laws,
or any term or condition of these Restated Regulations; (iv) the
Disposition constitutes the Disposition of all of the Membership Interest owned
by such Member and (v) the transferee, contemporaneously with the
Disposition, assumes all of the obligations and rights of the transferring
Member under these Restated Regulations and the Transaction Documents and
becomes a Member; provided, however, that neither a Permitted Encumbrance nor a
Permitted Withdrawal constitutes a “Disposition”. In connection with any
Disposition of a Membership Interest or any portion thereof, and any admission
of an assignee as a Member, the Member making such Disposition and the assignee
shall furnish the Governing Board of Managers with such documents regarding the
Disposition as it may request (in form and substance satisfactory to the
Governing Board of Managers), including a copy of the Disposition instrument, a


 


8





















 


ratification by the assignee of these Restated Regulations, a legal
opinion that the Disposition complies with applicable federal and state
securities laws, a legal opinion that the Disposition will not result in the
Company’s termination under Section 708 of the Code and documentation
reflecting the assumption by the transferee of obligations under the
Transaction Documents.  In connection
with a Disposition (other than a Disposition that is a Permitted Encumbrance)
in accordance with these Regulations, the transferring Member shall be deemed
to be released from all of its obligations under these Restated Regulations and
the Transaction Documents.  Any purported
Disposition by a Member that is not in compliance with these Restated
Regulations is hereby declared to be null and void and of no force or effect
whatsoever.


 


(b) 
Dispositions to Affiliates. 
Subject to Section 3.02(a) and Section 3.02(e),
a Member may Dispose of all or not less than a Minimum Portion of its
Membership Interest to an Affiliate without the consent of the Governing Board
of Managers or any Member, and the transferee may become a Member and become
subject to the terms and conditions of these Restated Regulations; provided, however, that
the Member making the Disposition must own at least a majority of the voting
power of that Affiliate at the time of the Disposition. Each Member agrees to
promptly notify the Company in writing when he/it no longer owns all of the
voting power of his/its Affiliate.


 


(c) Two
Year Restriction.  From the Effective
Date until the second anniversary of the Transaction Closing Date, (i) no
Member may make a Disposition of all or any portion of its Membership Interest
other than a pursuant to a Permitted Encumbrance or pursuant to Section 3.02(b) and
(ii) if a Change of Control of a Member occurs, then the Company shall
have the right to purchase such Member’s entire Membership Interest as set
forth afterwards in this Section 3.02(c). 
A Member that suffers a Change of Control shall give the Company notice
thereof within ten business days after the date of the occurrence of such
Change of Control (the “Change of Control Date”) and the Company shall
have until the 10th day following the date of receipt of such notice to notify
such Member of the Company’s election to establish the Fair Value of such
Membership Interest as of the Change in Control Date; for purposes of this Section 3.02(c),
the “Fair Value” of a Membership Interest of such Member shall be
determined by two qualified appraisers (each a “Party Appraiser”), one
of whom is selected by the Company and the other of whom is selected by such
Member, and who shall cooperate to determine the fair market value (without any
consideration given to the discount used in determining Adjusted Fair Value (as
defined below) or the fact that the Membership Interest may be transferred at
the Adjusted Fair Value) of such Membership Interest as of the Change of
Control Date; but if the two Appraisers are unable, within a reasonable time,
to agree upon the fair market value of such Membership Interest,  then the two Party Appraisers shall (x) each
give the Company and such Member written notice of such Party Appraiser’s evaluation
of the Fair Value of the Membership Interest as of the Change of Control Date (“Party
Appraisal Notice”) and (y) select a third independent qualified appraiser
(the “Final Appraiser”) who shall determine the fair market value
(without any consideration given to the discount used in determining Adjusted
Fair Value (as defined below) or the fact that the Membership Interest may be
transferred at the Adjusted Fair Value) of such Membership Interest as of the
Change of Control Date, whose determination shall be final and binding upon the
Company and such Member, and who shall give the


 


9





















 


Company and such Member written notice of his determination of the Fair
Value of the Membership Interest as of the Change of Control Date (“Final
Appraiser Appraisal Notice”). Within twenty days following the date of
receipt of notice from the Party Appraisers 
(if they agree upon the fair market value of such Membership Interest)
or from the Final Appraiser (if applicable) of their or his determination of
the Fair Value of the Membership Interest of such Member as of the Change in
Control Date (the “Valuation Notice”), the Company shall notify such
Member of the Company’s election either to purchase such Member’s Membership
Interest at its Adjusted Fair Value or not to purchase such Membership’s
Membership Interest pursuant to this Section 3.02(c).  The “Adjusted Fair Value” of such
Membership Interest shall equal 80% of the Fair Value of such Membership
Interest as of the Change in Control Date. 
If the Company elects to purchase such Membership Interest at its
Adjusted Fair Value, then such Member shall become obligated to sell its
Membership Interest to the Company at its Adjusted Fair Value, and the closing
of such sale and purchase shall occur at a place and at a time (not later than
the Closing Date Deadline, as defined below) mutually agreed upon the Company
and such Member and the expenses of such closing shall be borne by the party
incurring the same.  Failure of the
Company to purchase the Member’s Membership Interest on or before the Closing
Date Deadline shall be deemed a waiver of the Company’s right to purchase the
Member’s Membership Interest following the Change of Control.  The “Closing Date Deadline” means the
later of (x) the 90th day (but if such day is not a business day,
then the first business day following such day) after the date of the Company’s
receipt of the Valuation Notice or (y) the 20th day (but if such day is not a
business day, then the first business day following such day) after all
conditions, the existence of which would make consummation of the purchase
impossible, illegal or commercially impracticable and the elimination or curing
of which is beyond the control of the Company, shall have been eliminated or
cured.  The expenses of the Party
Appraisers shall be borne by the party incurring same, and the expenses of the
Final Appraiser shall be borne and paid by the party whose Party Appraiser’s
valuation of the Fair Value of the Membership Interest as set forth in his
Party Appraisal Notice deviates more from the Final Appraiser’s valuation of
the Fair Value of the Membership Interest as set forth in his Final Appraiser
Appraisal Notice.


 


(d) Right
of First Refusal.    From the date
after the second anniversary until the earlier of (i) the fourth
anniversary of the Transaction Closing Date and (ii) the date on which the
Company abandons efforts with respect to an initial public offering of the
membership units of the General Partner: subject to Section 3.02(a),
prior to making a Disposition (other than a pursuant to Permitted Encumbrance
or pursuant to Section 3.02(b)) of all or not less than a Minimum
Portion of its Membership Interest, a Member (the “Transferring Member”)
shall notify the Governing Board of Managers and each of the other Members (the
“Other Members”) of its intention to make a Disposition of its
Membership Interest (the “Offered Interest”), identifying the proposed
transferee (the “Transferee”) and specifying the price and terms of
payment (if a sale).  Each Other Member
shall have until twentieth (20th) day following the date of receipt
of notice (the “Transfer Notice”) regarding the proposed Disposition
(the “Transfer Notice Date”) to notify the Company of that Other Member’s
election to purchase none, less than all or all of that Other Member’s Pro Rata
portion of the Offered Interest. If any of the Other Members elect to purchase
none or less than all of his/its Pro Rata portion of the Offered Interest


 


10





















 


(the remaining Offered Interest that such Other Members elect not to
purchase being called the “Remaining Interest”), the Company shall,
within twenty-five (25) days of the Transfer Notice Date, notify the Other
Members of such election and each Other Member, Pro Rata or as they may
otherwise agree, may elect, by notifying the Company in writing within
thirty-five (35) days of the Transfer Notice Date to purchase such Remaining
Interests.  Each Other Member may
exercise its option by timely giving the Transferring Member notice of its
exercise, in which event, subject to the following sentence, the Transferring
Member will become obligated to sell to such Other Member its Pro Rata portion,
and any Remaining Interests, of the Offered Interest upon such terms at a date
(not more than 45 days after the date the Transfer Notice Date)  and at a place to be mutually agreed upon by
the Transferring Member and the Other Member. 
If the Other Members do not elect to purchase all of the Offered
Interest within the period provided, then all of the Offered Interest may be
disposed of by the Transferring Member to the prospective transferee, for the
price and on the terms and conditions set forth in the Transfer Notice, at any
time within ninety days after the Transfer Notice Date; provided,
however, each transferee shall, prior to
a Disposition to such transferee, execute and deliver to the Company a valid
and binding agreement to the effect that any Offered Interest so Disposed shall
continue to be subject to all of the provisions of these Restated
Regulations.  Any Offered Interest not so
disposed of within such ninety-day period shall also remain subject to all of
the provisions of these Restated Regulations.


 


(e) 
Termination of Right of First Refusal. 
From the day after the earlier of (i) the fourth anniversary of the
Transaction Closing Date and (ii) the date on which the Company abandons
efforts with respect to an initial public offering of the membership units of
the General Partner, subject to Section 3.02(a), a Member may at
any time and from time to time make a Disposition of all or any portion of its
Membership Interest to any Person, and the Person to whom the Membership
Interest is Disposed shall become a Member.


 


3.03. Creation of Additional Membership Interests. Additional
Membership Interests may be created and issued to existing Members or to other
Persons, and such other Persons may be admitted to the Company as Members with
the approval of all of the Members, on such terms and conditions, and with such
Sharing Ratios and Commitments, as all of the Members may determine at the time
of admission. The Governing Board of Managers may reflect the admission of any
new Members or the creation of any new class or group of Member in an amendment
to these Restated Regulations that need be executed only by the Governing Board
of Managers.


 


3.04. Withdrawal. Prior to the second anniversary of the
Transaction Closing Date, a Member does not have the right or power to withdraw
from the Company without the approval of all of the other Members, but
following the second anniversary of the Transaction Closing Date, a Member may
withdraw from the Company; provided, however, that any Member that withdraws
from the Company, whether before or after the second anniversary of the
Transaction Closing Date, thereby forfeits all of its Membership Interest and
shall not be entitled to return of any amounts in such Member’s capital account
or to receive the fair value of its Membership Interest and shall have no
obligation to return to the Company any distribution made to it prior to its
withdrawal and (except for Member Recourse Debt, if any) shall have no
obligation or


 


11





















 


liability with respect to nonrecourse indebtedness of the Company.  In addition, in connection with a withdrawal
permitted by this Section 3.04, the withdrawing Member shall be deemed to
be released from all of its obligations under these Restated Regulations and
the Transaction Documents.


 


3.05. Information. In addition to the other rights specifically
set forth in these Restated Regulations, each Member is entitled to all
information to which that Member is entitled to have access pursuant to Article 2.22
of the Act under the circumstances and subject to the conditions therein
stated.


 


3.06. Liability to Third Parties. No Member or Manager shall be
liable for the debts, obligations, or liabilities of the Company, including
under a judgment decree or order of a court.


 


3.07. Expulsion. A Member may not be expelled from the Company.


 


3.08.  Initial Public Offering.  It is the intention and agreement of the
Members to cooperate in good faith toward the goal of achieving an initial
public offering of equity in the Company at or around the third anniversary of
the Transaction Closing Date.


 


Article 4


Capital Contributions


 


4.01. Initial Contributions. Each Member has made the initial
capital contribution to the capital of the Company (“Capital Contributions”)
described for that Member in Exhibit A.


 


4.02. Subsequent Contributions. Without creating any rights in
favor of any third party, each Member shall contribute to the Company, in cash,
on or before the date specified as hereinafter described, that Member’s Sharing
Ratio of all monies that in the unanimous judgment of the Governing Board of
Managers are necessary to enable the Company to cause the assets of the Company
to be properly operated and maintained and to discharge its costs, expenses,
obligations, and liabilities; provided, however, that a Member is not obligated
to contribute a total amount that, when added to all Capital Contributions that
Member previously has made pursuant to Section 4.01 or this Section 4.02,
exceeds that Member’s Commitment.


 


4.03. Return of Contributions. A Member is not entitled to the
return of any part of its Capital Contributions or to be paid interest in
respect of either its capital account or its Capital Contributions.   


 


4.04. Advances by Members. If the Company does not have sufficient
cash to pay its obligations, any Member(s) that may agree to do so with the
consent of the Governing Board of Managers may advance all or part of the
needed funds to or on behalf of the Company, at such interest rate and on such
other terms as such Member and the Governing Board of Managers may agree. An
advance described in this Section 4.04 constitutes a loan from the
Member to the Company and is not a Capital Contribution.


 


12





















 


4.05.  Reimbursements.  Subject to the requirements of Section 6.06(b),
a Member shall be entitled to receive reimbursement from the Company, the
General Partner, the Partnership or an affiliate, as determined by the
Governing Board of Managers, for those expenses and costs actually incurred by
such Member for the benefit of the Partnership for which prior written approval
shall have been obtained from the Governing Board of Managers or any committee
or officer authorized by the Governing Board of Managers to grant such
approval.  Without limiting the foregoing,
Cano shall be entitled to reimbursement, in accordance with that Compensation
Reimbursement Agreement, for a portion of the salaries of S. Jeffrey Johnson
and Thomas D. Cochrane.


 


Article 5


Distributions and Allocations


 


5.01. Distributions. At such time as determined by the Governing
Board of Managers, but in no event no less often than annually on or before the
thirtieth (30th) day after the end of the fiscal year, Net Cash Flow for each
fiscal year (or such shorter period for which the distribution is made) shall
be distributed to the Members in proportion to their Sharing Ratios.


 


5.02. Allocations. Except as may be required by Code Section 704(c) and
Treasury Regulation Section 1.704-3, all items of income, gain, loss,
deduction, and credit of the Company shall be allocated to the Members in their
Sharing Ratios.


 


Article 6


Management; Members


 


6.01. Management by Governing Board of Managers.


 


(a) The
management of the Company shall be vested in and exercised by or under the
authority of, and the business and affairs of the Company shall be managed
under the direction of, the Governing Board of Managers designated by the
Members as provided in Section 6.01(e).


 


(b) The
number of Persons, each of whom shall be an individual (hereinafter referred to
as “Managers”), on the Governing Board of Managers shall be initially
four, one of whom shall be an Independent Manager.  The Governing Board of Managers shall seek to
appoint one additional Independent Manager to the Governing Board of Managers
within 90 days after the Registration Statement Effective Date, and another
additional Independent Manager to the Governing Board of Managers within 12
months, of the Registration Statement Date; at the time of each such
appointment, the number of Managers constituting the entire Governing Board of
Managers shall be increased by one.  If Dr. Kenneth
Q. Carlile delivers a notice of resignation in accordance with Noncompetition
Agreement, the size of the Governing Board of Managers shall thereafter be
reduced by one.  Each Manager shall be a “manager”
as defined in the Act but shall only have authority to act on behalf of the
Company as set forth herein.   No Manager
has the right, power, or authority to act for or on behalf of the Company, to
do any act that would be


 


13





















 


binding on the Company, or to incur any expenditures on behalf of the
Company, except as set forth herein.


 


(c) 
Except as provided in this Section 6.01(c) or as unanimously
decided by the then members of the Governing Board of Managers, the Managers
shall serve without compensation.  The
Governing Board of Managers from time to time shall fix and cause to be paid to
each Independent Manager such compensation as it determines to be fair and
reasonable.  Each Independent Manager
shall be reimbursed for all reasonable out-of-pocket expenses incurred by him
in connection with participating in each meeting of the Governing Board of
Managers and each meeting of a committee of the Governing Board of Managers.  


 


(d) 
Decisions or actions taken by the Governing Board of Managers in accordance
with these Restated Regulations shall constitute decisions or actions by the
Company and shall be binding on each Member, officer, and employee of the
Company.


 


(e) Each
Member shall vote (at a meeting or by written consent) and shall take all other
necessary or desirable actions within that Member’s control so that there shall
always be the number of Managers required in accordance with Section 6.01,
to be designated as follows:


 


(i)    For
so long as Cano, together with its Affiliates over which it owns at least a
majority of the voting power, owns a 25% Membership Interest, Cano, in its sole
discretion, shall have the right to elect one Manager, who shall initially be
S. Jeffrey Johnson;


 


(ii)   For
so long as Haddock Enterprises, together with its Affiliates over which it owns
at least a majority of the voting power, owns a 25% Membership Interest,
Haddock Enterprises, in its sole discretion, shall have the right to elect one
Manager, who shall initially be Gerald W. Haddock;


 


(iii)  For
so long as Carlile Management, together with its Affiliates over which it owns
at least a majority of the voting power, owns a 25 % Membership Interest and
Carlile Management has not been required to relinquish its voting rights with
respect to the Company pursuant to the Noncompetition Agreement, Carlile
Management, in its sole discretion, shall have the right to elect one Manager,
who shall initially be Dr. Kenneth Q. Carlile.


 


As of the Effective Date,
the Members hereby designate Jack I. Tompkins as the sole initial Independent
Manager.  Each such individual set forth
in this Section 6.01(e) shall serve as a Manager until the
first annual meeting of Members and until his successor is elected and qualified
or until his earlier resignation or removal.


 


(f) 
The Managers shall be elected at each annual meeting of the Members and each
Manager elected shall hold such office until the next annual meeting of Members
and until his successor is elected and qualified or until his earlier
resignation or removal.  Any Manager may
resign at any time upon written notice to the Governing Board of Managers.  Any Manager may be removed at any time with
or without cause by the Member designating such Manager.


 


14





















 


(g) Vacancies
and newly created managerships resulting from any increases in the authorized
number of Managers may be filled by a majority of the Managers then in office,
though less than a quorum, or by a sole remaining Manager, and the Managers so
chosen shall hold office until the next annual meeting of Members and until
their successors are duly elected and shall qualify, or until their earlier
resignation or removal; provided that any vacancy occurring for any reason in
the position of a designated Manager shall be filled by the Person authorized
to designate that Manager in accordance with Section 6.01(e).


 


(h) 
The Governing Board of Managers by resolution passed by a majority of all the
Managers then in office may designate one or more committees, each committee to
consist of one or more of the Managers. 
The Governing Board may designate one or more Managers as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee.  Any such
committee, to the extent provided in the resolution, and subject to any
restrictions imposed by applicable law, may make recommendations to the
Governing Board of Managers but, except as otherwise required by applicable law
or by the NYSE, such committee shall not have and may not exercise the powers
of the Governing Board of Managers in the management of the business and
affairs of the Company.  Such committee
or committees shall have such name or names as may be determined from time to
time by resolution adopted by the Governing Board of Managers.


 


The
Company’s committees shall include, without limitation, the following:


 


(i) An
Audit Committee, which shall consist solely of Independent Managers. The Audit
Committee shall be solely responsible for the engagement and termination of
independent public accountants and shall be directly responsible for the
appointment, compensation, retention and oversight of independent public
accountants. The Audit Committee shall review with the independent public
accountants the plans and results of each audit engagement, approve
professional services provided by the independent public accountants,  review the independence of the independent
public accountants, consider the range of audit and non-audit fees and review
the adequacy of the Company’s internal accounting controls. The Audit Committee
shall have such other or additional powers as may be approved by the Governing
Board of Managers by resolution. 


 


(ii) A
Conflicts Committee, which shall consist solely of Independent Managers, which
shall have the purposes and responsibilities set forth in the Partnership
Agreement; however, in addition, the Conflicts Committee also shall be
responsible for (i) reviewing, evaluating and analyzing each potential
Related Party Transaction, (ii) preparing and presenting to the Governing
Board of Managers a summary and analysis of each such potential Related Party
Transaction, including but not limited to evaluating the fairness of the
transaction to the Company and the Partnership, and (iii) either
recommending such potential Related Party Transaction to the Governing Board of
Managers or denying approval to such potential Related Party Transaction.  The Conflicts Committee’s denial of approval
to a potential Related Party Transaction shall be deemed to constitute the
decision of the Governing Board of Managers (and


 


15





















 


therefore the decision of the Company, for itself and in its capacities
as the manager of and as a member of the General Partner, in its capacity as
the General Partner of the Partnership) to deny approval to such Related Party
Transaction and shall be binding upon the Company, the General Partner and the
Partnership.


 


Each committee shall keep
regular minutes of its meetings and report the same to the Governing Board of
Managers when required. 


 


(i) 
The Governing Board of Managers may adopt equity incentive plans pursuant to
which Managers, officers, employees and agents of the Company or its affiliates
may be granted from time to time membership interests, or options to acquire
membership interests, in the Company and limited partnership interests, or
options to acquire limited partnership interests, in the Partnership; provided,
however, that the maximum amount of equity interests in each entity which may
be reserved under each plan shall not exceed ten percent of the total equity
interests in such entity.


 


(j) In
addition to an annual meeting, the Governing Board of Managers shall hold such
regular and special meetings as they determine to be necessary or in the best
interests of the Company.  Regular
meetings shall be held, without the giving of notice, on such dates and at such
places as the Governing Board of Managers from time to time may fix.  Special meetings shall be called upon the
written request of the Chairman or other member of the Governing Board of
Managers and shall be held, after the giving of at least three business days
prior notice, on such dates and at such places as the Chairman or the Governing
Board of Managers may determine.


 


6.02. Meetings of Members. An annual meeting of the Members for
the election of Managers and for the transaction of such business as may
properly come before the meeting shall be held on such date and at such time as
the Governing Board of Managers shall specify in the notice of the meeting,
which shall be delivered to each Member at least three days prior to such
meeting. Special meetings of the Members may be called by the Governing Board
of Managers or by a Majority Interest. Any such meeting shall be held on such
date and at such time as the Person calling such meeting shall specify in the
notice of the meeting, which shall be delivered to each Member at least ten
days prior to such meeting. Only business within the purpose or purposes
described in the notice (or waiver thereof) for such meeting may be conducted
at such meeting. 


 


6.03. Provisions Applicable to Meetings of Members, Meetings of the
Governing Board of Managers, or Meetings of Committees of the Governing Board
of Managers. In connection with any meeting of the Members, the
Governing Board of Managers, or any committee of the Governing Board of
Managers,  the following provisions shall
apply: 


 


(a)   Any such meeting
shall be held at the principal place of business of the Company, unless the
notice of such meeting specifies a different place, which need not be in the
State of Texas. 


 


16





















 


(b) 
Attendance of a Person at such meeting shall constitute a waiver of notice of
such meeting, except where such Person attends the meeting for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened. 


 


(c) Unless
otherwise expressly provided in these Restated Regulations, at any meeting of
the Members, a Majority Interest; at any meeting of the Governing Board of
Managers, a majority of the Managers; and at any meeting of a committee of the
Governing Board of Managers, a majority of the members of such committee,
represented either in person or by proxy, shall constitute a quorum for the
transaction of business.


 


(d) Unless
otherwise expressly provided in these Restated Regulations, (i) at any
meeting of the Members at which a quorum is present, the affirmative vote of a
Majority Interest represented in person or by proxy shall be the act of the
Members; (ii) at any meeting of the Governing Board of Managers at which a
quorum is present, the affirmative vote of a majority of the Managers
represented in person or by proxy shall be the act of the Governing Board of
Managers; and (iii) at any meeting of a committee of the Governing Board
of Managers at which a quorum is present, the affirmative vote of a majority of
the members of such committee represented in person or by proxy shall be the
act of such committee. 


 


(e) 
A Person may vote at such meeting by a written proxy executed by that Person
and delivered to another Member. A proxy shall be revocable unless it is stated
to be irrevocable. 


 


(f) 
Any action required or permitted to be taken at such a meeting may be taken
without a meeting, without prior notice, and without a vote if a consent or
consents in writing, setting forth the action so taken, is signed, in the case
of meetings of Members, by Members having not fewer than the minimum number of
Sharing Ratios or votes that would be necessary to take the action at a meeting
at which all Members entitled to vote on the action were present and voted; in
the case of meetings of the Governing Board of Managers, by all of the
Managers; and in the case of meetings of a committee of the Governing Board of
Managers, by all of the members of such committee. 


 


(g) 
Members may participate in and hold such meeting by means of conference telephone,
videoconference, or similar communications equipment by means of which all
Persons participating in the meeting can hear each other.  No Member shall vote on any Related Party
Transaction as to which the Member is a Related Party.


 


(h) 
Notwithstanding any power or authority granted the Members or the Governing
Board of Managers under the Act, the Articles or these Restated Regulations,
none of the following powers may be exercised nor any of the following actions
taken without the affirmative vote, consent or approval of all of the Members:


 


(i) The
amendment of these Restated Regulations;


 


17





















 


(ii) The
consent of the Company, in its capacities as the manager of and as a member of
the General Partner,  to the amendment of
the regulations of the General Partner;


 


(iii) The
consent of the Company, in its capacities as the manager of and as a member of
the General Partner, in its capacity as the General Partner of the Partnership,
to the amendment of the Agreement of Limited Partnership of the Partnership;


 


(iv) The
dissolution of, or the merger or sale of all or substantially all of the assets
of, the Company or the Disposition of the membership interests in the General
Partner owned by the Company;


 


(v) The
consent of the Company, in its capacities as the manager of and as a member of
the General Partner,  to the dissolution
of, or the merger or sale of all or substantially all of the assets of, the
General Partner;


 


(vi) 
The consent of the Company, in its capacities as the manager of and as a member
of the General Partner, in its capacity as the General Partner of the
Partnership, to the dissolution of, or the sale of all or substantially all of
the assets of, the Partnership;


 


(vii) The
incurrence by the Company of funded indebtedness that is or by its stated terms
may become a personal obligation of any Member (“Member Recourse Debt”);


 


(viii) The
consent of the Company, in its capacities as the manager of and as a member of
the General Partner,  to the incurrence
by the General Partner of Member Recourse Debt; or


 


(ix) 
The consent of the Company, in its capacities as the manager of and as a member
of the General Partner, in its capacity as the General Partner of the
Partnership, to the incurrence by the Partnership of Member Recourse Debt.


 


6.04. Officers.


 


(a) 
The officers of the Company shall be chosen by the Governing Board of Managers
and shall include a Chairman, a Chief Financial Officer, a General Counsel, and
a Vice President of Engineering; in addition, the Governing Board of Managers
shall choose one or more individuals to serve in the Office of Chief Executive
Officer.  Any number of offices may be
held by the same individual unless these Restated Regulations provide
otherwise.


 


(b) 
The Governing Board of Managers may appoint one or more vice presidents and
such other officers and agents it shall deem necessary, who shall hold offices
for such terms and shall exercise such powers and perform such duties as shall
be determined from time to time by the Governing Board of Managers.


 


(c)   The Governing Board of Managers at its first
meeting after each annual meeting of Members shall choose the officers of the
Company, except that the initial officers of the


 


18





















 


Company shall be as follows:


 


	
  Gerald W.
  Haddock

  	
   

  	
  Office of the
  Chief Executive Officer and Chairman

  
	
  S. Jeffrey
  Johnson

  	
   

  	
  Office of the
  Chief Executive Officer

  
	
  Kenneth Q.
  Carlile

  	
   

  	
  Office of the
  Chief Executive Officer

  
	
  James E. Farrell

  	
   

  	
  Vice President
  and Chief Financial Officer

  
	
  Stephen R.
  Robinson

  	
   

  	
  Vice President
  and General Counsel

  
	
  Thomas D.
  Cochrane

  	
   

  	
  Vice President,
  Engineering

  
	
  Zachary Q.
  Carlile

  	
   

  	
  Vice President

  



 


Each such individual
shall hold such office until the first annual meeting of Members and until his
successor is elected and qualified or until his earlier resignation or removal.


 


(d) 
The salaries, bonuses, and other compensation terms of all officers and agents
of the Company shall be fixed by or in the manner prescribed by the Governing
Board of Managers, except that the annual salaries of the initial officers of
the Company shall be as follows:


 


	
  Office of the
  Chief Executive Officer (Haddock and Carlile only)

  	
   

  	
  $ 110,000 per
  individual

  
	
  Office of the
  Chief Executive Officer (Johnson only)

  	
   

  	
  *

  
	
  Chairman

  	
   

  	
  Unsalaried

  
	
  Vice President
  and Chief Financial Officer

  	
   

  	
  $ 95,000

  
	
  Vice President
  and General Counsel

  	
   

  	
  $ 65,000

  
	
  Vice President,
  Engineering

  	
   

  	
  *

  
	
  Vice President
  (Zachary Carlile only)

  	
   

  	
  Unsalaried

  



 










*Pursuant
to the Compensation Reimbursement Agreement, Messrs. Johnson and Cochrane
will not receive a salary or other compensation from the Company, the General
Partner or the Partnership; their employer, Cano, shall be reimbursed by the
Partnership up to $110,000 annually for Mr. Johnson and up to $85,000
annually for Mr. Cochrane for time they spend on Partnership, Company or
General Partner matters.


 


(e) 
Each officer of the Company shall hold office until his successor is elected
and qualified or until his earlier resignation or removal.  Any officer may be removed at any time by the
affirmative vote of a majority of the total number of Managers.  Any officer may resign at any time upon
written notice to the Governing Board of Managers.  Any vacancy occurring in any office of the Company
shall be filled by or in the manner prescribed by the Governing Board of
Managers.


 


(f) 
The Office of Chief Executive Officer shall have general supervision, direction
and control of the business and officers of the Company, subject to the
direction and authority of the Governing Board of Managers, and shall have the
general powers and duties of management usually vested in the office of chief
executive officer and president of corporation organized under the laws of the
State of Texas and shall have such other powers and duties as may be


 


19





















 


prescribed from time to time by the Governing Board of Managers.  The Office of Chief Executive shall be held
by one or more individuals; if more than one individual occupies such office,
then all decisions and actions to be taken shall require the consent or
approval of a majority of the individuals then holding such office.


 


(g) 
The Chief Financial Officer shall have the custody of the Company’s funds and
securities, shall keep full and accurate accounts of receipts disbursements in
the Company’s books and records, and shall deposit all monies and other
valuable effects in the name and to the credit of the Company, in such
depositories as may be designated by the Governing Board of Managers.  The Chief Financial Officer shall disburse
the funds of the Company as may be ordered by the Governing Board of Managers
and shall render to the Governing Board of Managers an account of all of his
transactions in such office and of the financial condition of the Company.  The Chief Financial Officer shall have such
other powers and duties as may be prescribed from time to time by the Governing
Board of Managers.  In carrying out his
responsibilities, the Chief Financial Officer shall be supervised by, and shall
report to, the Office of the Chief Executive Officer.


 


(h) 
The Vice President of Engineering shall be the officer primarily responsible
for all matters directly pertaining to the drilling and production, monitoring,
reporting, and diligence relating to, 
oil and gas property interests owned or leased, or to be acquired, by
the Company or its affiliates.  He shall
have such other powers and duties as may be prescribed from time to time by the
Governing Board of Managers.  In carrying
out his responsibilities, the Vice President of Engineering shall be supervised
by, and shall report to, the Office of the Chief Executive Officer.


 


(i) 
The General Counsel shall be the officer primarily responsible for all matters
pertaining to legal compliance and other legal matters relating to the Company
and its affiliates.  He shall have such
other powers and duties as may be prescribed from time to time by the Governing
Board of Managers. In carrying out his responsibilities, the General Counsel
shall be supervised by, and shall report to, the Office of the Chief Executive
Officer.


 


(j)
The Chairman, who shall be a member of the Governing Board of Managers,  shall preside at all meetings of Members and
of the Governing Board of Managers.  He
shall have such other powers and duties as may be prescribed from time to time
by the Governing Board of Managers.


 


6.05 Limitations on Duties and Liabilities of Managers. A
Manager shall be liable to the Company and the other Members for acts or omissions
in the management of the Company only in the case of gross negligence, willful
misconduct or breach of these Restated Regulations by such Manager; but a
Manager shall not be liable to the Company or any other Member for any other
acts or omissions, including the negligence, strict liability or other fault or
responsibility (short of gross negligence, willful misconduct or breach of
these Restated Regulations) by such Manager. Except for such duties as may be
expressly set forth in these Restated Regulations, a Manager shall not be
subject to any duties (including fiduciary duties) in the management of the
Company. 


 


20





















 


6.06. Conflicts of Interest.


 


(a) 
Subject to the other express provisions of these Restated Regulations and the
Transaction Documents, each Member, Manager, Officer, or Affiliate thereof may
engage in and possess interests in other business ventures of any and every
type and description, independently or with others, with no obligation to offer
to the Company or any other Member, Manager, or officer the right to
participate therein.   Subject to the
other express provisions of these Restated Regulations, the Company may
transact business with any Member, Manager, officer, or affiliate thereof,
provided the terms of those transactions are no less favorable than those the
Company could obtain from unrelated third parties.


 


(b) Except
for the Transaction Documents, neither the Company nor any affiliate of the
Company shall directly or indirectly enter into or engage in any transaction or
business relationship, or series of related transactions or relationships,
involving more than a nominal or de minimis monetary amount, with a Member, a
Manager or an officer, or with an affiliate of a Member, a Manager or an
officer, other than in compliance with the terms of this subsection.  Any such transaction or relationship is
called a “Related Party Transaction.” 
Each potential Related Party Transaction first shall be submitted to the
Conflicts Committee by the Governing Board of Managers, which shall carry out
its duties as set forth in Section 6.01(h)(ii).   Approval by the Governing Board of Managers
of a potential Related Party Transaction recommended by the Conflicts Committee
shall require the majority vote or consent of all disinterested Managers, with
all interested Managers abstaining from such vote or consent (for purposes of
any Related Party Transaction arising under the Omnibus Agreement, as
hereinafter defined, a Manager shall be regarded as “interested” in such
transaction if the Member which appointed that Manager is not a disinterested
party with respect to such transaction).


 


(c) As
set forth and as defined in the Omnibus Agreement, each of the following shall
be treated as a Related Party Transaction: the Company’s decision whether to
accept or reject an Oil & Gas Opportunity and the exercise by the
Company of a Co-Investment Right.


 


6.07 Indemnification. The Company shall indemnify, defend,
protect and hold harmless each Manager and officer from and against all
actions, suits or proceedings (collectively, “Proceedings”) and all
other claims, demands, losses, damages, liabilities, judgments, awards,
penalties, fines, settlements, costs and expenses (including court costs and
reasonable attorneys’ fees), arising out of the management of the Company or
his service or status as a Manager or officer. THIS
INDEMNITY SHALL APPLY TO MATTERS THAT ARISE OUT OF THE NEGLIGENCE, STRICT
LIABILITY OR OTHER FAULT OR RESPONSIBILITY BY A MANAGER OR OFFICER; PROVIDED,
HOWEVER, THAT THIS INDEMNITY SHALL NOT APPLY TO MATTERS ARISING OUT OF THE
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT BY SUCH MANAGER OR OFFICER. The
Company, by decision of Governing Board of Managers, may indemnify an employee
or agent of the Company to the same extent and subject to the same conditions
under which it may indemnify a Manager or officer under the proceeding
sentence. The Company may purchase and maintain


 


21





















 


insurance to protect itself and any Manager, Officer, employee or agent
of the Company and may enter into separate indemnification contracts with any
such person. 


 


Article 7


Taxes 


 


7.01. Tax Returns. The Company shall prepare and timely file all
federal, state, and local tax returns required to be filed by the Company. Each
Member shall furnish to the Company all pertinent information in its possession
relating to the Company’s operations that is necessary to enable the Company’s
tax returns to be timely prepared and filed. The Company shall deliver a copy
of each such return to the Members on or before ten days prior to the due date
of any such return, together with such additional information as may be
required by the Members in order for the Members to file their individual returns
reflecting the Company’s operations. The Company shall bear the costs of the
preparation and filing of its returns. 


 


7.02. Tax Matters Member. The Governing Board of Managers shall
designate the “tax matters partner” of the Company pursuant to Code Section 6231(a)(7) (the
“Tax Matters Member”).  The Tax
Matters Member shall take such action as may be necessary to cause to the
extent possible each other Member to become a “notice partner” within the
meaning of Code Section 6223. The Tax Matters Member shall inform each
other Member of all significant matters that may come to its attention in its
capacity as Tax Matters Member by giving notice thereof on or before the fifth
business day after becoming aware thereof and, within that time, shall forward
to each other Member copies of all significant written communications it may
receive in that capacity. The Tax Matters Member shall take no action without
the authorization of a Majority Interest, other than such action as may be
required by applicable law. Any cost or expense incurred by the Tax Matters
Member in connection with its duties, including the preparation for or
pursuance of administrative or judicial proceedings, shall be paid by the
Company.


 


Article 8


Books, Records, and Bank Accounts


 


8.01. Books and Records. The Governing Board of Managers shall
keep or cause to be kept at the principal office of the Company complete and
accurate books and records of the Company, supporting documentation of the
transactions with respect to the conduct of the Company’s business, and minutes
of the proceedings of Members. The books and records shall be maintained with
respect to accounting matters in accordance with sound accounting practices,
and all books and records shall be available at the Company’s principal office
for examination by any Member or the Member’s duly authorized representative at
any and all reasonable times during normal business hours.


 


8.02. Reports. Within seventy-five days after the end of each
taxable year, the Governing Board of Managers shall cause to be sent to each
Member at the end of the taxable year a complete accounting of the financial
affairs of the Company for the taxable year then ended. 


 


22





















 


8.03. Accounts. The Governing Board of Managers shall establish
one or more separate bank and investment accounts and arrangements for the
Company, which shall be maintained in the Company’s name with financial
institutions and firms that the Governing Board of Managers determines. The
Company’s funds shall not be commingled with the funds of any Manager or any
Member. 


 


Article 9 


Dissolution, Winding Up, and Termination 


 


9.01. Dissolution.


 


(a) Subject
to Section 9.01(b), the Company shall dissolve and its affairs
shall be wound up on the first to occur of the following events:


 


(i) the
expiration of the period, if any, fixed for the duration of the Company in the
Articles; 


 


(ii) the
consent of all of the Members; 


 


(iii) the
Transaction Closing Date shall not have occurred on or before December 31,
2006; and


 


(iv) entry
of a decree of judicial dissolution of the Company under Article 6.02 of
the Act.


 


No other event (including
an event described in Article 6.01(A)(5) of the Act) will cause the
Company to dissolve. 


 


(b) If
an event described in subparagraph (i) of Section 9.01(a) shall
occur and there shall be at least one other Member remaining, the Company shall
not be dissolved, and the business of the Company shall be continued, if all of
the remaining Members so agree within 90 days of the occurrence of such event.
If such election is made following the occurrence of an event described in
subparagraph (i) of Section 9.01(a), the Governing Board of
Managers shall promptly cause the Articles to be amended in the manner
described in Article 6.01(B) of the Act. 


 


9.02. Winding Up and Termination.


 


(a) On
the occurrence of an event described in Section 9.01(a), unless an
election is made to continue the business of the Company pursuant to Section 9.01(b),
the Governing Board of Managers shall appoint one or more Managers to act as
liquidator or may appoint one or more Members as liquidator. The liquidator
shall proceed diligently to wind up the affairs of the Company as provided in
the Act. Until final distribution, the liquidator shall continue to operate


 


23





















 


the Company properties with all of the power and authority of the
Governing Board of Managers. The costs of winding up shall be borne as a
Company expense.


 


(b) Any
assets of the Company remaining at the conclusion of the winding-up process
shall be distributed among the Members in accordance with their Sharing Ratios.
All distributions in kind to the Members shall be made subject to the liability
of each distributee for costs, expenses, and liabilities theretofore incurred
or for which the Company has committed prior to the date of termination with
respect to the distribution received. The distribution of cash and/or property
to a Member in accordance with the provisions of this Section 9.02(b) constitutes
a complete return to the Member of its Capital Contributions and a complete
distribution to the Member of its Membership Interest and all the Company’s
property and constitutes a compromise to which all Members have consented
within the meaning of Article 5.02(D) of the Act.


 


(c) On
completion of such final distribution, the Governing Board of Managers shall
cause Articles of Dissolution to be filed with the Secretary of State of Texas,
cancel any other filings made pursuant to Section 2.05, and take
such other actions as may be necessary to terminate the existence of the
Company.


 


9.03. No Restoration of Deficit Capital Accounts. No Member shall
be required to pay to the Company, to any other Member or to any third party
any deficit balance that may exist from time to time in any capital or similar
account maintained for such Member for any purpose.


 


Article 10


General Provisions


 


10.01. Offset. Whenever the Company is to pay any sum to any
Member, any amounts that Member owes the Company may be deducted from that sum
before payment.


 


10.02. Notices. All notices, requests, or consents under these
Restated Regulations shall be (a) in writing, (b) delivered to the
recipient in person, by hand delivery, overnight courier or mail or by
facsimile, (c) if to a Member, delivered to such Member at the applicable
address on Exhibit A or such other address as that Member may
specify by notice to the other Members, (d) if to the Governing Board of
Managers or the Company, delivered to the each Manager at the address set forth
on Exhibit A or such other address as such Manager shall provide
the Company for notice purposes, and (e) effective only upon actual
receipt by such Person. Whenever any notice is required to be given by
applicable law, the Articles, or these Restated Regulations, a written waiver
thereof, signed by the Person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of such notice. 


 


10.03. Entire Agreement; Supersedure. These Restated Regulations
constitute the entire agreement of the Members relating to the Regulations of
the Company and supersede all prior regulations with respect to the Company,
whether oral or written, including, without limitation, the SPP Transaction
Summary dated August 4, 2005. 


 


24





















 


10.04. Effect of Waiver or Consent. A waiver or consent, express
or implied, to or of any breach or default by any Person in the performance by
that Person of its obligations with respect to the Company is not a consent or
waiver to or of any other breach or default in the performance by that Person
of the same or any other obligations of that Person with respect to the
Company. 


 


10.05. Amendments of Articles and Restated Regulations. The
Articles and these Restated Regulations may be amended or restated only with
the approval of the Governing Board of Managers and all of the Members;
provided, however, that amendments of the type described in Section 3.04
may be adopted as therein provided. 


 


10.06. Binding Effect. Subject to the restrictions on Dispositions
set forth in these Restated Regulations, these Restated Regulations are binding
on and inure to the benefit of the Members and their respective heirs, legal
representatives, successors, and assigns. 


 


10.07. Governing Law; Severability.  THESE
RESTATED REGULATIONS ARE GOVERNED BY AND SHALL BE ENFORCED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUDING ITS CONFLICT-OF-LAWS
RULES). If any provision of these Restated Regulations or the
application thereof to any Person or circumstance is held invalid or
unenforceable to any extent, the remainder of these Restated Regulations and
the application of that provision to Other Persons or circumstances is not
affected thereby and that provision shall be enforced to the greatest extent
permitted by applicable law. 


 


10.08. Construction. Unless the context requires otherwise: (a) the
gender (or lack of gender) of all words used in these Restated Regulations
includes the masculine, feminine, and neuter; (b) the word “including”  means “including, without limitation”; (c) references
to Articles and Sections refer to Articles and Sections of these Restated
Regulations; and (d) references to Exhibits are to the Exhibits attached to
these Restated Regulations, each of which is made a part hereof for all
purposes.


 


10.09.
Further Assurances. In connection with
these Restated Regulations and the transactions contemplated hereby, each
Member shall execute and deliver any additional documents and instruments and
perform any additional acts that may be necessary or appropriate to effectuate
and perform the provisions of these Restated Regulations and those
transactions. 


 


 


[Remainder of page intentionally blank]


 


25





















 


10.10. Counterparts. These Restated Regulations may be executed in
any number of counterparts, all of which shall constitute the same instrument.


 


IN
WITNESS WHEREOF, the Members and the initial Manager have executed these Restated
Regulations as of the date first set forth above.


 


 


	
  HADDOCK
  ENTERPRISES, LLC

  
	
   

  	
  as the initial
  Manager and as a Member

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gerald W.
  Haddock

  	
   

  
	
   

  	
   

  	
  Gerald
  W. Haddock, President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  CARLILE
  MANAGEMENT, LLC

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kenneth Q.
  Carlile

  	
   

  
	
   

  	
   

  	
  Kenneth
  Q. Carlile, President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  CANO PETROLEUM,
  INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ S. Jeffrey
  Johnson

  	
   

  
	
   

  	
   

  	
  S.
  Jeffrey Johnson, Chief Executive Officer

  	
   

  



 


26





















 


Exhibit A


Initial Members


 


	
  Cano Petroleum, Inc.

  	
   

  	
   

  	
   

  
	
  309 West Seventh
  Street, Suite 1600

  	
   

  	
   

  	
   

  
	
  Fort Worth,
  Texas 76102

  	
   

  	
   

  	
   

  
	
  Fax: 817 698
  0796

  	
   

  	
   

  	
   

  
	
  (same notice
  address for S. Jeffrey Johnson)

  	
   

  	
   

  	
   

  



 


	
   

  	
   

  	
   

  	
   

  
	
  Initial Capital Contribution:

  	
   

  	
  $

  	
  225,000.00

  	
   

  
	
  Commitment:

  	
   

  	
  $

  	
  325,000.00

  	
  *

  
	
  Sharing Ratio:

  	
   

  	
  33.33

  	
  %

  



 










*Includes Initial Capital Contribution


 


	
  Carlile
  Management, LLC

  	
   

  	
   

  	
   

  
	
  2615 E. End
  Blvd. S.

  	
   

  	
   

  	
   

  
	
  Marshall, Texas
  75672

  	
   

  	
   

  	
   

  
	
  Fax: 903 935
  0521

  	
   

  	
   

  	
   

  
	
  (same notice
  address for Dr. Kenneth Q. Carlile)

  	
   

  	
   

  	
   

  



 


	
   

  	
   

  	
   

  	
   

  
	
  Initial Capital Contribution:

  	
   

  	
  $

  	
  225,000.00

  	
   

  
	
  Commitment:

  	
   

  	
  $

  	
  325,000.00

  	
  *

  
	
  Sharing Ratio:

  	
   

  	
  33.33

  	
  %

  



 










*Includes Initial Capital Contribution


 


	
  Haddock
  Enterprises, LLC

  	
   

  	
   

  	
   

  
	
  210 Sixth
  Street, Suite 1206

  	
   

  	
   

  	
   

  
	
  Fort Worth,
  Texas 76102

  	
   

  	
   

  	
   

  
	
  Fax: 817 885
  8391

  	
   

  	
   

  	
   

  
	
  (same notice
  address for Gerald W. Haddock)

  	
   

  	
   

  	
   

  



 


	
   

  	
   

  	
   

  	
   

  
	
  Initial Capital Contribution:

  	
   

  	
  $

  	
  225,000.00

  	
   

  
	
  Commitment:

  	
   

  	
  $

  	
  325,000.00

  	
  *

  
	
  Sharing Ratio:

  	
   

  	
  33.34

  	
  %

  



 










*Includes Initial Capital
Contribution


 


27