exv10w2



 





Exhibit 10.2




Upper Call Option Transaction




November 21, 2007



THE SECURITIES REPRESENTED HEREBY (THE “OPTIONS”) WERE ORIGINALLY ISSUED IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND THE OPTIONS MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS THEREOF.




	 	 	 	 	 
	 
	 	 	 	 
	To:

	 	TXCO Resources, Inc.
	 	 
	 

	 	777 E. Sonterra Blvd., Suite 350	 	 
	 

	 	San Antonio, TX 78258	 	 
	 

	 	Attention: James E. Sigmon, President	 	 
	 
	From:

	 	Capital Ventures International	 	 
	 

	 	By: Heights Capital Management, Inc., Its Authorized Agent
	 

	 	101 California Street, Suite 3250	 	 
	 

	 	San Francisco, CA 94111	 	 
	 

	 	Attention: Martin Kobinger	 	 






Ladies and Gentlemen:




     The purpose of this agreement (this “Confirmation”) is to confirm the+ terms and
conditions of the above-referenced transaction entered into on the Trade Date specified below (the
“Transaction”) between Capital Ventures International (“Party A”) and TXCO
Resources, Inc. (“Party B”). This communication constitutes a “Confirmation” as referred
to in the ISDA Master Agreement specified below.




	1.	 	This Confirmation is subject to, and incorporates, the definitions and provisions of the 2000
ISDA Definitions (including the Annex thereto) (the “2000 Definitions”) and the
definitions and provisions of the 2002 ISDA Equity Derivatives Definitions (the “Equity
Definitions” and, together with the 2000 Definitions, the “Definitions”), in each
case as published by the International Swaps and Derivatives Association, Inc.
(“ISDA”). In the event of any inconsistency between the 2000 Definitions and the
Equity Definitions, the Equity Definitions will govern.
	 
	 	 	This Confirmation evidences a complete and binding agreement between Party A and Party B as
to the terms of the Transaction to which this Confirmation relates. This Confirmation shall
be subject to an agreement (the “Agreement”) in the form of the 2002 ISDA Master
Agreement (the “ISDA Form”) as if Party A and Party B had executed an agreement in
such form (without any Schedule but with the elections set forth in this Confirmation, it
being understood the “Cross-Default” shall not apply to this Transaction). For the
avoidance of doubt, the Transaction shall be the only transaction under the Agreement.
	 
	 	 	All provisions contained in, or incorporated by reference to, the Agreement will govern this
Confirmation except as expressly modified herein. In the event of any inconsistency between
this Confirmation and either the Definitions or the Agreement, this Confirmation shall
govern.




 









 













UPPER CALL OPTION TRANSACTION




	 	 	 	 	 
	2.	 	The general terms relating to the Transaction are as follows:
	 
	 	 	 	 
	 

	 	Option Style:
	 	European
	 
	 	 	 	 
	 

	 	Option Seller:
	 	Party B
	 
	 	 	 	 
	 

	 	Option Buyer:
	 	Party A
	 
	 	 	 	 
	 

	 	Strike Price:
	 	$18.10
	 
	 	 	 	 
	 

	 	Trade Date:
	 	November 21, 2007
	 
	 	 	 	 
	 

	 	Effective Date:
	 	November 26, 2007, subject to Section 8(o) hereof
	 
	 	 	 	 
	 

	 	Option Type:
	 	Call
	 
	 	 	 	 
	 

	 	Components:
	 	The Transaction will be divided into individual
Components, each with the terms set forth in
this Confirmation, and, in particular, with the
Number of Options and Expiration Dates set forth
in this Confirmation. The payments and
deliveries to be made upon settlement of the
Transaction will be determined separately for
each Component as if each Component were a
separate Transaction under the Agreement.
	 
	 	 	 	 
	 

	 	Issuer:
	 	TXCO Resources, Inc.
	 
	 	 	 	 
	 

	 	Shares:
	 	The shares of common stock of the Issuer, par
value $0.01 per Share (Ticker Symbol: TXCO).
	 
	 	 	 	 
	 

	 	Number of Options:
	 	For each Component, as provided in
Annex A to
this Confirmation.
	 
	 	 	 	 
	 

	 	Option Entitlement:
	 	One Share per Option
	 
	 	 	 	 
	 

	 	Market Disruption Event:
	 	Section 6.3(a) of the Equity Definitions is
hereby amended by replacing clause (ii) thereof
in its entirety with the following: “(ii) an
Exchange Disruption, or” and inserting
immediately following clause (iii) thereof the
following: “; in each case that the Calculation
Agent reasonably determines is material.”
	 
	 	 	 	 
	 

	 	Relevant Price:
	 	VWAP Price






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UPPER CALL OPTION TRANSACTION




	 	 	 	 	 
	 

	 	VWAP Price:
	 	The “Volume Weighted Average Price” per Share on
such day, as displayed on Bloomberg Page “TXCO
UQ<equity>AQR” (or any successor thereto)
for the Issuer with respect to the period from
9:30 a.m. to 4:00 p.m. (New York City time) on
such day, as determined by the Calculation
Agent. If no price at such time is available,
or there is a Market Disruption Event on such
Expiration Date, the Calculation Agent shall
determine the VWAP Price in a commercially
reasonable manner.
	 
	 	 	 	 
	 

	 	Premium:
	 	$17,852,212.10
	 
	 	 	 	 
	 

	 	Premium Payment Date:
	 	Effective Date.
	 
	 	 	 	 
	 

	 	Exchange:
	 	The Nasdaq Global Market
	 
	 	 	 	 
	 

	 	Related Exchange:
	 	Any exchange on which options or futures on the
relevant Shares are traded.
	 
	 	 	 	 
	 

	 	Clearance System:
	 	DTC
	 
	 	 	 	 
	 

	 	Calculation Agent:
	 	Party A. Whenever the Calculation Agent acts or
makes a determination, it will do so in good
faith and in a commercially reasonable manner
consistent with its obligations under the Equity
Definitions.
	 
	 	 	 	 
	 

	 	Procedures for Exercise:	 	 
	 
	 	 	 	 
	 

	 	In respect of each Component:	 	 
	 
	 	 	 	 
	 

	 	Expiration Time:
	 	The close of trading on the Exchange
	 
	 	 	 	 
	 

	 	Expiration Date:
	 	Each of the ten (10) consecutive Scheduled
Trading Days occurring immediately prior to the
Component Expiration Date, provided that if any
Expiration Date shall not be an Exchange
Business Day, such Expiration Date shall be
postponed to the immediately succeeding Exchange
Business Day and the corresponding Expiration
Date for each subsequent Daily Number of Options
shall be moved back an equal number of Exchange
Business Days reflecting such postponement.
	 
	 	 	 	 
	 

	 	Component Expiration Date:
	 	The Component Expiration Date
provided in Annex
 A to this Confirmation.






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UPPER CALL OPTION TRANSACTION




	 	 	 	 	 
	 
	 	 	 	 
	 

	 	Daily Number of Options:
	 	One-tenth the Number of Options provided in
Annex A to this Confirmation with respect to
each Component.
	 
	 	 	 	 
	 

	 	Automatic Exercise:
	 	Applicable.
	 
	 	 	 	 
	 

	 	Settlement Terms:	 	 
	 
	 	 	 	 
	 

	 	Settlement Method Election:
	 	Applicable; provided that (i) any such election
shall apply to all Exercise Dates (in accordance
with the terms below) and may be for Cash
Settlement or Net Share Settlement; (ii)
references to “Physical Settlement” in Section
7.1 of the Equity Definitions shall be replaced
by references to “Net Share Settlement”; (iii)
Party B may elect Cash Settlement only if Party
B represents and warrants to Party A in writing
on the date of such election that, as of such
date, Party B is not aware of any material
nonpublic information concerning itself or the
Shares and is electing Cash Settlement in good
faith and not as part of a plan or scheme to
evade compliance with the federal securities
laws; and (iv) any election of settlement method
shall apply to all Components. At any time
prior to making a Settlement Method Election,
Party B may, without the consent of Party A,
amend this Confirmation by notice to Party A to
eliminate Party B’s right to elect Cash
Settlement.
	 
	 	 	 	 
	 

	 	Electing Party:
	 	Party B
	 
	 	 	 	 
	 

	 	Settlement Method Election Date:
	 	The thirtieth (30th) Scheduled Trading Day
immediately preceding the first Expiration Date.
	 
	 	 	 	 
	 

	 	Default Settlement Method:
	 	Net Share Settlement
	 
	 	 	 	 
	 

	 	Settlement Date:
	 	For the Daily Number of Options exercised or
deemed exercised on each Expiration Date prior
to the Component Expiration Date, the third
Exchange Business Day following the Component
Expiration Date.
	 
	 	 	 	 
	 

	 	Cash Settlement:
	 	If Cash Settlement applies, then,
notwithstanding any contrary terms of Article 8
of the Equity Definitions, for any Daily Number
of Options exercised or deemed exercised on any
Expiration Date, Party B shall pay, on the
Settlement Date, the Cash Settlement Amount to
Party A. The Cash Settlement Amount shall be
determined as follows:






4









 






UPPER CALL OPTION TRANSACTION




	 	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	(i) If the Settlement Price is less than or
equal to the Strike Price, then the Cash
Settlement Amount shall equal zero.




(ii) If the Settlement Price is greater than
the Strike Price, then the Cash Settlement
Amount shall equal the product of (x) the Daily
Number of Options, (y) the Option Entitlement
and (z) the Settlement Price minus the Strike
Price.
	 
	 	 	 	 
	 

	 	Net Share Settlement:
	 	On a Settlement Date, Party B shall deliver to
Party A a number of Shares equal to the Number
of Shares to be Delivered and will pay to Party
A the Fractional Share Amount, if any.
	 
	 	 	 	 
	 

	 	Number of Shares to be Delivered:
	 	The Cash Settlement Amount (determined as if
Cash Settlement were applicable) divided by the
Settlement Price, rounded down to the nearest
whole number.
	 
	 	 	 	 
	 

	 	Cash Settlement Payment Date:
	 	For all Daily Number of Options exercised or
deemed exercised on each Expiration Date, the
third Exchange Business Day following the
Component Expiration Date.
	 
	 	 	 	 
	 

	 	Settlement Currency:
	 	USD
	 
	 	 	 	 
	 

	 	Settlement Price:
	 	For any Daily Number of Options, the VWAP Price
of the Shares on the relevant Expiration Date
determined by Calculation Agent at the
Expiration Time on the relevant Expiration Date
for such Daily Number of Options. If no price
at such time is available, or there is a Market
Disruption Event on such Expiration Date, the
Calculation Agent shall determine the Settlement
Price in a commercially reasonable manner.
	 
	 	 	 	 
	 

	 	Failure to Deliver:
	 	Applicable
	 
	 	 	 	 
	 

	 	Other Applicable Provisions:
	 	To the extent Party B is obligated to deliver
Shares hereunder, the provisions of Sections
9.1(c), 9.8, 9.9, 9.10, 9.11 (except that the
Representation and Agreement contained in
Section 9.11 of the Equity Definitions shall be
modified by excluding any representations
therein relating to restrictions, obligations,
limitations or requirements under applicable
securities laws as a result of the fact that
Party B is the issuer of the Shares) and 9.12 of
the Equity Definitions will be applicable as if
“Physical Settlement” applied to the
Transaction.






5









 






UPPER CALL OPTION TRANSACTION




	 	 	 	 	 
	 
	 	 	 	 
	 

	 	Adjustments:	 	 
	 
	 	 	 	 
	 

	 	     Method of Adjustment:
	 	Calculation Agent Adjustment
	 
	 	 	 	 
	 

	 	Extraordinary Dividend:







Extraordinary Events:


	 	Any dividend or distribution that has an
ex-dividend date occurring on or after the Trade
Date and on or prior to the date on which Party
B satisfies all of its delivery obligations
hereunder; provided that no regular or periodic
dividend on Party B’s Preferred Shares shall be
an Extraordinary Dividend.






	 	 	 	 	 
	 	 	     Consequences of Merger Events and Tender Offers:
	 
	 	 	 	 
	 

	 	          (a) Share-for-Share:
	 	Modified Calculation Agent Adjustment, or at Party A’s election, Cancellation and
Payment (Calculation Agent Determination)
	 
	 	 	 	 
	 

	 	          (b) Share-for-Other:
	 	Cancellation and Payment (Calculation Agent Determination)
	 
	 	 	 	 
	 

	 	          (c) Share-for-Combined:
	 	Component Adjustment, or at Party A’s election, Cancellation and Payment
(Calculation Agent Determination)
	 
	 	 	 	 
	 

	 	Tender Offer:
	 	Applicable
	 
	 	 	 	 
	 

	 	Nationalization, Insolvency or

Delisting:
	 	Cancellation and Payment (Calculation Agent Determination)
	 
	 	 	 	 
	 

	 	Additional Disruption Events:	 	 
	 
	 	 	 	 
	 

	 	(a) Change in Law:
	 	Applicable; provided that Section 12.9(a)(ii) of the Equity Definitions is hereby
amended by (i) replacing the phrase “the interpretation” in the third line thereof
with the phrase “or announcement or statement of the formal or informal
interpretation” and (ii) immediately following the word “Transaction” in clause (X)
thereof, adding the phrase “in the manner contemplated by the Hedging Party on the
Trade Date”.
	 
	 	 	 	 
	 

	 	(b) Failure to Deliver
	 	Applicable
	 
	 	 	 	 
	 

	 	(c) Insolvency Filing:
	 	Applicable
	 
	 	 	 	 
	 

	 	(d) Hedging Disruption:
	 	Applicable
	 
	 	 	 	 
	 

	 	(e) Increased Cost of Hedging:
	 	Applicable
	 
	 	 	 	 
	 

	 	(f) Loss of Stock Borrow:
	 	Applicable






6









 






UPPER CALL OPTION TRANSACTION




	 	 	 	 	 
	 

	 	     Maximum Stock Loan Rate:
	 	5%
	 
	 	 	 	 
	 

	 	Hedging Party:
	 	Party A for all applicable Additional Disruption Events
	 
	 	 	 	 
	 

	 	Determining Party:
	 	Party A for all applicable Additional Disruption Events
	 
	 	 	 	 
	 

	 	Non-Reliance:
	 	Applicable
	 
	 	 	 	 
	 

	 	Agreements and Acknowledgments
	 	Applicable
	 

	 	Regarding Hedging Activities:	 	 
	 
	 	 	 	 
	 

	 	Additional Acknowledgments:
	 	Applicable
	 
	 	 	 	 
	 

	 	Additional Termination Events:
	 	Applicable. The following will constitute an Additional Termination Event:
	 
	 	 	 	 






	 	(a)	 	Party B shall send Party A an Early Exercise Notice under the terms of the
lower call option Transaction entered into herewith, and the sole Affected Party
will be Party B.





	 	 	 	 	 
	 

	 	Additional Termination at Party B

election:
	 	Party B may elect at any time with advance written notice of thirty (30) Scheduled
Trading Days to early terminate this Transaction; provided that that termination
amount shall be determined by Calculation Agent in accordance with Section 6(e) of
the Agreement where Party B is the sole affected party, and such amount shall be
paid in cash on the scheduled termination date.







	3.	 	Account Details:
	 
	 	 	Party A Payment Instructions:
	 
	 	 	     To be provided by Party A.
	 
	 	 	Party B Payment Instructions:
	 
	 	 	     To be provided by Party B.
	 
	4.	 	Offices:
	 
	 	 	The Office of Party A for the Transaction is:
	 
	 	 	                    Capital Ventures International
	 
	 	 	                    C/O Heights Capital Management, Inc.

                    101 California Street, Suite 3250

                    San Francisco, CA 94111




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UPPER CALL OPTION TRANSACTION





	 	 	The Office of Party B for the Transaction is:
	 
	 	 	                    TXCO Resources, Inc.

                    777 E. Sonterra Blvd., Suite 350

                    San Antonio, TX 78258
	 
	5.	 	Notices: For purposes of this Confirmation:






	 	(a)	 	Address for notices or communications to Party B:





	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	To:
	 	TXCO Resources Inc.
	 	 
	 

	 	 	 	777 E. Sonterra Blvd., Suite 350	 	 
	 

	 	 	 	San Antonio, TX 78258	 	 
	 

	 	 	 	Attn:	 	 
	 

	 	 	 	Telephone:	 	 
	 

	 	 	 	Facsimile:	 	 







	 	(b)	 	Address for notices or communications to Party A:





	 	 	 	 	 	 	 
	 

	 	To:
	 	Capital Ventures International
	 	 
	 

	 	 	 	C/O Heights Capital Management, Inc.	 	 
	 

	 	 	 	101 California Street, Suite 3250	 	 
	 

	 	 	 	San Francisco, CA 94111	 	 
	 
	 

	 	 	 	Attention: Martin Kobinger-	 	 
	 

	 	 	 	Telephone: (415) 403-6500	 	 
	 

	 	 	 	Facsimile: (415) 403-6525	 	 







	6.	 	If any of the transactions contemplated by the Securities Purchase Agreement dated as of
November 21, 2007 (the “Purchase Agreement”) among Party B and each of the Buyers
specified therein relating to the sale of up to 100,000 shares of Perpetual Convertible
Preferred Stock (the “Preferred Shares”) of Party B, shall fail to close on the date
specified therein for any reason, or any subsequent date allowed thereunder for postponements
permitted under the terms thereof, the entirety of this Transaction shall terminate
automatically and Party B shall be the sole Affected Party and this Transaction shall be the
sole Affected Transaction and such termination shall be treated as an Additional Termination
Event. For purposes of determining Loss in relation to any Additional Termination Events or
otherwise, it shall be assumed that all conditions to the exercise of these Options have
occurred.




8









 











UPPER CALL OPTION TRANSACTION





	7.	 	Additional agreements, representations, warranties and covenants:






	 	(a)	 	In addition to the representations and warranties in the Agreement and those
contained elsewhere herein, Party B represents and warrants to and for the benefit of,
and agrees with, Party A as follows:






     (i) In relation to the Transaction, Party B acknowledges its responsibilities under
applicable federal securities laws, including without limitation Rule 10b-5 under the
Exchange Act. Party B represents and warrants on the Trade Date, (A) none of Party B
and its officers and directors is aware of any material nonpublic information regarding
Party B or the Shares and (b) all reports and other documents filed by Party B with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) when considered as a whole (with the more recent
such reports and documents deemed to amend inconsistent statements contained in any
earlier such reports and documents), do not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances in which they were made,
not misleading.




     (ii) Prior to the Trade Date, Party B shall deliver to Party A a resolution of
Party B’s board of directors authorizing the Transaction and such other certificate or
certificates as Party A shall reasonably request.




     (iii) Party B is not entering into this Confirmation to create actual or apparent
trading activity in the Shares (or any security convertible into or exchangeable for
Shares) or to manipulate the price of the Shares (or any security convertible into or
exchangeable for Shares) or otherwise in violation of the Exchange Act.




     (iv) Party B is not, and after giving effect to the transactions contemplated
hereby will not be, required to register as an “investment company” as such term is
defined in the Investment Company Act of 1940, as amended.




     (v) On any Expiration Date, Party B shall not, and shall cause its affiliates and
affiliated purchasers (each as defined in Rule 10b-18 under the Exchange Act (“Rule
10b-18”)) not to, directly or indirectly (including, without limitation, by means of
any cash-settled or other derivative instrument) purchase, offer to purchase, place any
bid or limit order that would effect a purchase of, or commence any tender offer
relating to, any Shares (or an equivalent interest, including a unit of beneficial
interest in a trust or limited partnership or a depository share) or any security
convertible into or exchangeable or exercisable for Shares, except through Party A.




     (vi) On the Trade Date (A) the assets of Party B at their fair valuation exceed the
liabilities of Party B, including contingent liabilities, (B) the capital of Party B is
adequate to conduct the business of Party B and (C) Party B has the ability to pay its
debts and obligations as such debts mature and does not intend to, or does not believe
that it will, incur debt beyond its ability to pay as such debts mature.




     (vii) On the Effective Date, the Shares or securities that are convertible into, or
exchangeable or exercisable for Shares, are not subject to a “restricted period,” as
such term is defined in Regulation M (“Regulation M”) under the Exchange Act.




     (viii) Any Shares, when issued and delivered in a Net Share Settlement of the
Options or a Share Termination Alternative settlement in accordance with the terms
of this Confirmation, will be duly




9












 





UPPER
CALL OPTION TRANSACTION





	 	 	 	authorized and validly issued, fully paid and nonassessable, and the issuance
thereof will not be subject to any preemptive or similar rights.
	 
	 	(b)	 	Each of Party A and Party B agrees and represents that it is an “eligible
contract participant” as defined in Section 1a(12) of the U.S. Commodity Exchange Act,
as amended.
	 
	 	(c)	 	Each of Party A and Party B acknowledges that the offer and sale of the
Transaction to it is intended to be exempt from registration under the Securities Act
of 1933, as amended (the “Securities Act”), by virtue of Section 4(2) thereof.
Accordingly, Party A represents and warrants to Party B that (i) it has the financial
ability to bear the economic risk of its investment in the Transaction and is able to
bear a total loss of its investment, (ii) it is an “accredited investor” as that term
is defined in Regulation D as promulgated under the Securities Act, (iii) it is
entering into the Transaction for its own account and without a view to the
distribution or resale thereof, and (iv) the assignment, transfer or other disposition
of the Transaction has not been and will not be registered under the Securities Act and
is restricted under this Confirmation, the Securities Act and state securities laws.
	 
	 	(d)	 	The parties hereto further agree and acknowledge (A) that this Confirmation is
(i) a “securities contract,” as such term is defined in Section 741(7) of the Title 11
of the United States Code (the “Bankruptcy Code”), with respect to which each
payment and delivery hereunder is a “settlement payment,” as such term is defined in
Section 741(8) of the Bankruptcy Code, and (ii) a “swap agreement,” as such term is
defined in Section 101(53B) of the Bankruptcy Code, with respect to which each payment
and delivery hereunder is a “transfer,” as such term is defined in Section 101(54) of
the Bankruptcy Code, and (B) that Party A is entitled to the protections afforded by,
among other sections, Sections 362(b)(6), 362(b)(17), 546(e), 546(g), 555 and 560 of
the Bankruptcy Code.






	8.	 	Other Provisions:






	 	(a)	 	Alternative Calculations and Payment on Early Termination and on Certain
Extraordinary Events. If Party B shall owe Party A any amount pursuant to Section
12.2, 12.3, 12.6, 12.7 or 12.9 of the Equity Definitions (except in the event of an
Insolvency, a Nationalization, a Tender Offer or a Merger Event, in each case, in which
the consideration or proceeds to be paid to holders of Shares consists solely of cash)
or pursuant to Section 6(d)(ii) of the Agreement (except in the event of an Event of
Default in which Party B is the Defaulting Party or a Termination Event in which Party
B is the Affected Party, that resulted from an event or events within Party B’s
control) (a “Payment Obligation”), Party B shall have the right, in its sole
discretion, to satisfy any such Payment Obligation by the Share Termination Alternative
(as defined below) by giving irrevocable telephonic notice to Party A, confirmed in
writing within one Scheduled Trading Day, between the hours of 9:00 AM and 12:00 PM,
New York City time, on the relevant Merger Date, Tender Offer Date, Announcement Date
or Early Termination Date, as applicable (“Notice of Share Termination”). Upon
such Notice of Share Termination, the following provisions shall apply on the Scheduled
Trading Day immediately following the Merger Date, Tender Offer Date, Announcement Date
or Early Termination Date, as applicable:





	 	 	 
	Share Termination Alternative:

	 	Applicable and means that Party B
shall deliver to Party A the Share
Termination Delivery Property on the
date on which the Payment Obligation
would otherwise be due pursuant to
Section 12.7 or 12.9 of the Equity
Definitions or Section 6(d)(ii) of
the Agreement, as applicable (the
“Share Termination Payment Date”), in
satisfaction of the Payment
Obligation.






10









 






UPPER
CALL OPTION TRANSACTION





	 	 	 
	Share Termination Delivery Property:

	 	A number of Share Termination
Delivery Units, as calculated by the
Calculation Agent, equal to the
Payment Obligation divided by the
Share Termination Unit Price. The
Calculation Agent shall adjust the
Share Termination Delivery Property
by replacing any fractional portion
of a security therein with an amount
of cash equal to the value of such
fractional security based on the
values used to calculate the Share
Termination Unit Price.
	 
	 	 
	Share Termination Unit Price:

	 	The value of property contained in
one Share Termination Delivery Unit
on the date such Share Termination
Delivery Units are to be delivered as
Share Termination Delivery Property,
as determined by the Calculation
Agent in its discretion by
commercially reasonable means and
notified by the Calculation Agent to
Party B at the time of notification
of the Payment Obligation.
	 
	 	 
	Share Termination Delivery Unit:

	 	In the case of a Termination Event,
Event of Default or Delisting, one
Share or, in the case of a Merger
Event, a Tender Offer, a
Nationalization or an Insolvency, a
unit consisting of the number or
amount of each type of property
received by a holder of one Share
(without consideration of any
requirement to pay cash or other
consideration in lieu of fractional
amounts of any securities) in such
Merger Event, Tender Offer,
Nationalization or Insolvency. If
such Merger Event, Tender Offer,
Nationalization or Insolvency
involves a choice of consideration to
be received by holders, such holder
shall be deemed to have elected to
receive the maximum possible amount
of cash.
	 
	 	 
	Failure to Deliver:

	 	Applicable
	 
	 	 
	Other applicable provisions:

	 	If Share Termination Alternative is
applicable, the provisions of
Sections 9.8, 9.9, 9.10, 9.11 (except
that the Representation and Agreement
contained in Section 9.11 of the
Equity Definitions shall be modified
by excluding any representations
therein relating to restrictions,
obligations, limitations or
requirements under applicable
securities laws as a result of the
fact that Seller is the issuer of the
Shares) and 9.12 of the Equity
Definitions will be applicable, as if
“Physical Settlement” were applicable
and all references to “Shares” shall
be read as references to “Share
Termination Delivery Units”.







	 	(b)	 	Registration/Private Placement Procedures. (i) If, in the reasonable judgment
of Party A or Party B, based on the advice of counsel, either (a) any securities of
Party B or its affiliates comprising any Share Termination Delivery Units or (b) any
Shares, in either case deliverable to Party A hereunder (any such securities or Shares,
“Delivered Securities”) would not be immediately freely transferable by Party A
under Rule 144(k) under the Securities Act, then the provisions set forth in this
Section 8(b) shall apply. At the election of Party B by notice to Party A within one
Exchange Business Day after the relevant delivery obligation arises, but in any event
at least one Exchange Business Day prior to the date on which such delivery obligation
is due, either (A) all Delivered Securities, delivered by Party B to Party A shall be
covered by an effective registration statement of Party B for immediate resale by Party
A (such




11









 





UPPER
CALL OPTION TRANSACTION




	 	 	 	registration statement and the corresponding prospectus (the “Prospectus”)
(including, without limitation, any sections describing the plan of distribution) in
form and content commercially reasonably satisfactory to Party A) or (B) Party B shall
deliver additional Delivered Securities so that the value of such Delivered Securities,
as determined by the Calculation Agent to reflect an appropriate liquidity discount,
equals the value of the number of Delivered Securities that would otherwise be
deliverable if such Delivered Securities were freely tradeable (without prospectus
delivery) upon receipt by Party A (such value, the “Freely Tradeable Value”);
provided that Party B may not make the election described in this clause (B) if, on the
date of its election, it has taken, or caused to be taken, any action that would make
unavailable either the exemption pursuant to Section 4(2) of the Securities Act for the
delivery by Party B to Party A (or any affiliate designated by Party A) of the Delivered
Securities or the exemption pursuant to Section 4(1) or Section 4(3) of the Securities
Act for resales of the Delivered Securities by Party A (or any such affiliate of Party
A). (For the avoidance of doubt, as used in this paragraph (b) only, the term “Party B”
shall mean the issuer of the relevant securities, as the context shall require.)






	 	(i)	 	If Party B makes the election described in clause (b)(i)(A) above:






         (A) Party A (or an Affiliate of Party A designated by Party A) shall be afforded
a reasonable opportunity to conduct a “due diligence” investigation with respect to
Party B that is customary in scope for underwritten follow-on offerings of equity
securities of companies of comparable size, maturity and lines of business; provided
that if Party A is not reasonably satisfied with the results of the investigation
described in this subclause (A) or Party B’s compliance with clause (b)(i)(A) above
and subclause (ii)(B) below, then Party B shall be deemed to have made the election
described in clause (b)(i)(B) above; provided, however, that Party A has given Party
B reasonable notice of its determination and provided Party B with reasonable
opportunity to satisfy Party A’s concerns; and




         (B) Party A (or an Affiliate of Party A designated by Party A) and Party B shall
enter into an agreement (a “Registration Agreement”) on commercially
reasonable terms in connection with the public resale of such Delivered Securities by
Party A or such Affiliate substantially similar to underwriting agreements customary
for underwritten follow-on offerings of equity securities of companies of comparable
size, maturity and lines of business, in form and substance commercially reasonably
satisfactory to Party A or such Affiliate and Party B, which Registration Agreement
shall include, without limitation, provisions substantially similar to those
contained in such underwriting agreements relating to the indemnification of, and
contribution in connection with the liability of, Party A and its Affiliates and
Party B, shall provide for the payment by Party B of all registration expenses in
connection with such resale, including all registration costs and reasonable expenses
of counsel for Party A, and shall provide for the delivery of accountants’ “comfort
letters” to Party A or such Affiliate with respect to the financial statements and
certain financial information contained in or incorporated by reference into the
Prospectus as are customarily requested in comfort letters covering underwritten
follow-on offers of equity securities of companies of comparable size, maturity and
lines of business.




	 	(ii)	 	If Party B makes or is deemed to make the election described in clause
(b)(i)(B) above:






         (A) All Delivered Securities shall be delivered to Party A (or any Affiliate of
Party A designated by Party A) pursuant to the exception from the registration
requirements of the Securities Act provided by Section 4(2) thereof;



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         (B) Party A (or an Affiliate of Party A designated by Party A) and any potential
institutional purchaser of any such Delivered Securities from Party A or such
Affiliate identified by Party A shall be afforded a commercially reasonable
opportunity to conduct a due diligence investigation in compliance with applicable
law with respect to Party B customary in scope for private placements of equity
securities of companies of comparable size, maturity and lines of business
(including, without limitation, the right to have made available to them for
inspection all financial and other records, pertinent corporate documents and other
information reasonably requested by them);




         (C) Party A (or an Affiliate of Party A designated by Party A) and Party B shall
enter into an agreement (a “Private Placement Agreement”) on commercially
reasonable terms in connection with the private placement of such Delivered
Securities by Party B to Party A or such Affiliate and the private resale of such
 shares by Party A or such Affiliate, substantially similar to private placement
purchase agreements customary for private placements of equity securities of
companies of comparable size, maturity and lines of business, in form and substance
commercially reasonably satisfactory to Party A and Party B, which Private Placement
Agreement shall include, without limitation, provisions substantially similar to
those contained in such private placement purchase agreements relating to the
indemnification of, and contribution in connection with the liability of, Party A and
its Affiliates and Party B, shall provide for the payment by Party B of all expenses
in connection with such resale, including all fees and expenses of counsel for Party
A, shall contain representations, warranties and agreements of Party B reasonably
necessary or advisable to establish and maintain the availability of an exemption
from the registration requirements of the Securities Act for such resales, and shall
use commercially reasonable efforts to provide for the delivery of accountants’
“comfort letters” to Party A or such Affiliate with respect to the financial
statements and certain financial information contained in or incorporated by
reference into the offering memorandum prepared for the resale of such Shares as are
customarily requested in comfort letters covering private placements of equity
securities of companies of comparable size, maturity and lines of business;




         (D) Party B agrees that any Delivered Securities so delivered to Party A, (i)
may be transferred by and among Party A and its Affiliates, and Party B shall effect
such transfer without any further action by Party A and (ii) after the minimum
“holding period” under Rule 144(k) under the Securities Act has elapsed with respect
to such Delivered Securities, Party B shall promptly remove, or cause the transfer
agent for such Delivered Securities to remove, any legends referring to any such
restrictions or requirements from such Delivered Securities upon delivery by Party A
(or such Affiliate of Party A) to Party B or such transfer agent of seller’s and
broker’s representation letters customarily delivered by Party A in connection with
resales of restricted securities pursuant to Rule 144 under the Securities Act,
without any further requirement for the delivery of any certificate, consent,
agreement, opinion of counsel, notice or any other document, any transfer tax stamps
or payment of any other amount or any other action by Party A (or such affiliate of
Party A); and




         (E) Party B and Party A shall not take, or cause to be taken, any action that
would make unavailable either the exemption pursuant to Section 4(2) of the
Securities Act for the delivery by Party B to Party A (or any affiliate designated by
Party A) of the Delivered Securities or the exemption pursuant to Section 4(1) or
Section 4(3) of the Securities Act for resales of the Delivered Securities by Party A
(or any such affiliate of Party A).




	 	(c)	 	Make-whole. If (x) Party B elects to deliver Share Termination Delivery Units
pursuant to Section 8(a) hereof or (y) Party B makes the election described in clause
(b)(i)(B) of Section 8(b) hereof, then in either case Party A or its affiliate may sell
such Shares or Share Termination Delivery Units, as the case may be,




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	 	 	 	during a period (the “Resale Period”) commencing on the Exchange Business Day
following delivery of such Shares or Share Termination Delivery Units, as the case may
be, and ending on the Exchange Business Day on which Party A completes the sale of all
such Shares or Share Termination Delivery Units, as the case may be, or a sufficient
number of Shares or Share Termination Delivery Units, as the case may be, so that the
realized net proceeds of such sales exceed the amount of the Payment Obligation (in the
case of clause (x), or in the case that both clause (x) and clause (y) apply) or the
Freely Tradeable Value (in the case that only clause (y) applies)(such amount of the
Payment Obligation or Freely Tradeable Value, as the case may be, the “Required
Proceeds”). If any of such delivered Shares or Share Termination Delivery Units
remain after such realized net proceeds exceed the Required Proceeds, Party A shall
return such remaining Shares or Share Termination Delivery Units to Party B. If the
Required Proceeds exceed the realized net proceeds from such resale, Party B shall
transfer to Party A by the open of the regular trading session on the Exchange on the
Exchange Trading Day immediately following the last day of the Resale Period the amount
of such excess (the “Additional Amount”) in cash or in a number of additional
Shares (“Make-whole Shares”) in an amount that, based on the Relevant Price on
the last day of the Resale Period (as if such day was the “Valuation Date” for purposes
of computing such Relevant Price), has a dollar value equal to the Additional Amount.
The Resale Period shall continue to enable the sale of the Make-whole Shares in the
manner contemplated by this Section 8(c). This provision shall be applied successively
until the Additional Amount is equal to zero, subject to Section 8(g).
	 
	 	(d)	 	Repurchase Notices. Party B shall, on any day on which Party B effects any
repurchase of Shares, use its best efforts to promptly give Party A a written notice of
such repurchase (a “Repurchase Notice”) on such day if, following such
repurchase, the Notice Percentage as determined on such day is (i) greater than 8.9%
and (ii) greater by 0.5% than the Notice Percentage included in the immediately
preceding Repurchase Notice (or, in the case of the first such Repurchase Notice,
greater than the Notice Percentage as of the date hereof). The “Notice
Percentage” as of any day is the fraction, expressed as a percentage, the numerator
of which is the Number of Shares and the denominator of which is the number of Shares
outstanding on such day.
	 
	 	(e)	 	Beneficial Ownership. Notwithstanding anything to the contrary in the Agreement
or this Confirmation, in no event shall Party A be entitled to receive, or shall be
deemed to receive, any Shares if, upon such receipt of such Shares, the “beneficial
ownership” (within the meaning of Section 13 of the Exchange Act and the rules
promulgated thereunder) of Shares by Party A or any entity that directly or indirectly
controls Party A (collectively, “Party A Group”) would be equal to or greater
than 9.9% or more of the outstanding Shares. If any delivery owed to Party A hereunder
is not made, in whole or in part, as a result of this provision, Party B’s obligation
to make such delivery shall not be extinguished and Party B shall make such delivery as
promptly as practicable after, but in no event later than one Exchange Business Day
after, Party A gives notice to Party B that such delivery would not result in Party A
Group directly or indirectly so beneficially owning in excess of 9.9% of the
outstanding Shares.
	 
	 	(f)	 	Limitations on Settlement by Party B. Notwithstanding anything herein or in
the Agreement to the contrary, in no event shall Party B be required to deliver Shares
in connection with the Transaction in excess of 6,832,000 Shares (the “Capped
Number”). Party B represents and warrants (which shall be deemed to be repeated on
each day that the Transaction is outstanding) that the Capped Number is equal to or
less than the number of authorized but unissued Shares of Party B that are not reserved
for future issuance in connection with transactions in the Shares (other than the
Transaction) on the date of the determination of the Capped Number (such Shares, the
“Available Shares”). In the event Party B shall not have delivered the full
number of Shares otherwise deliverable as a result of this Section 8(g) (the resulting
deficit, the “Deficit Shares”), Party B shall be continually obligated to
deliver, from time to time until the full number of Deficit Shares have been delivered
pursuant to this paragraph, Shares when, and to




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	 	 	 	the extent, that (i) Shares are repurchased, acquired or otherwise received by Party B
or any of its subsidiaries after the Trade Date (whether or not in exchange for cash,
fair value or any other consideration), (ii) authorized and unissued Shares reserved for
issuance in respect of other transactions prior to such date which prior to the relevant
date become no longer so reserved and (iii) Party B additionally authorizes unissued
Shares that are not reserved for other transactions. Party B shall immediately notify
Party A of the occurrence of any of the foregoing events (including the number of Shares
subject to clause (i), (ii) or (iii) and the corresponding number of Shares to be
delivered) and promptly deliver such Shares thereafter. Party B shall not take any
action to decrease the number of Available Shares below the Capped Number.
	 
	 	(g)	 	Right to Extend. Party A may postpone any Exercise Date or any other date of
valuation or delivery with respect to some or all of the relevant Options (in which
event the Calculation Agent shall make appropriate adjustments to the Number of Shares
to be Delivered with respect to one or more Components) for up to an aggregate number
of thirty (30) Exchange Business Days, if Party A determines, in its reasonable
discretion, that such extension is reasonably necessary or appropriate to preserve
Party A’s hedging or hedge unwind activity hereunder in light of existing liquidity
conditions or to enable Party A to effect purchases of Shares in connection with its
hedging, hedge unwind or settlement activity hereunder in a manner that would, if Party
A were Party B or an affiliated purchaser of Party B, be in compliance with applicable
legal, regulatory or self-regulatory requirements, or with related policies and
procedures applicable to Party A.
	 
	 	(h)	 	Equity Rights. Party B intends that all documentation with respect to this
Transaction is intended to qualify this Transaction as an equity instrument for
purposes of SFAS 150 and EITF 00-19. Party A acknowledges and agrees that this
Confirmation is not intended to convey to it rights with respect to the Transaction
that are senior to the claims of common stockholders in the event of Party B’s
bankruptcy. For the avoidance of doubt, the parties agree that the preceding sentence
shall not apply at any time other than during Party B’s bankruptcy to any claim arising
as a result of a breach by Party B of any of its obligations under this Confirmation or
the Agreement. For the avoidance of doubt, the parties acknowledge that this
Confirmation is not secured by any collateral that would otherwise secure the
obligations of Party B hereinunder or pursuant to any other agreement.
	 
	 	(i)	 	Transfer and Assignment. Party B may not transfer or assign its rights and
obligations hereunder and under the Agreement without the prior written consent of
Party A. Party A may transfer or assign its rights and obligations hereunder and under
the Agreement, in whole or in part, at any time without the consent of Party B, subject
to the restrictions set forth in the legend appearing at the top of this Confirmation.
	 
	 	(j)	 	Disclosure. Effective from the date of commencement of discussions concerning
the Transaction, Party B and each of its employees, representatives, or other agents
may disclose to any and all persons, without limitation of any kind, the tax treatment
and tax structure of the Transaction and all materials of any kind (including opinions
or other tax analyses) that are provided to Party B relating to such tax treatment and
tax structure.
	 
	 	(k)	 	Designation by Party A. Notwithstanding any other provision in this
Confirmation to the contrary requiring or allowing Party A to purchase, sell, receive
or deliver any Shares or other securities to or from Party B, Party A may designate any
of its affiliates to purchase, sell, receive or deliver such Shares or other securities
and otherwise to perform Party A’s obligations in respect of the Transaction and any
such designee may assume such obligations. Party A shall be discharged of its
obligations to Party B to the extent of any such performance.




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	 	(l)	 	Additional Termination Event. If Party A reasonably determines that it is
advisable to terminate a portion of the Transaction so that Party A’s hedging
activities related to the Transaction will comply with applicable securities laws,
rules or regulations, an Additional Termination Event shall occur in respect of which
(1) Party B shall be the sole Affected Party and (2) the Transaction shall be the sole
Affected Transaction.
	 
	 	(m)	 	Opinion. Party B shall deliver to Party A an opinion of counsel, dated as of
the Trade Date and reasonably acceptable to Party A in form and substance covering the
matters specified in Annex I hereto.
	 
	 	(n)	 	Waiver of Trial by Jury. EACH OF PARTY B AND PARTY A HEREBY IRREVOCABLY WAIVES
(ON ITS OWN BEHALF AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF ITS
STOCKHOLDERS) ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
(WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THE
TRANSACTION OR THE ACTIONS OF PARTY A OR ITS AFFILIATES OR PARTY B OR ITS AFFILIATES IN
THE NEGOTIATION, PERFORMANCE OR ENFORCEMENT HEREOF.
	 
	 	(o)	 	Governing Law. THE AGREEMENT AND THIS CONFIRMATION AND ANY OTHER MATTERS
ARISING OUT OF OR RELATING TO THE TRANSACTION OR THE ACTIONS OF PARTY A OR ITS
AFFILIATES OR PARTY B OR ITS AFFILIATES IN THE NEGOTIATION, PERFORMANCE OR ENFORCEMENT
HEREOF SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. THE PARTIES HERETO
IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK
AND THE UNITED STATES COURT FOR THE SOUTHERN DISTRICT OF NEW YORK IN CONNECTION WITH
ALL MATTERS RELATING HERETO AND WAIVE ANY OBJECTION TO THE LAYING OF VENUE IN, AND ANY
CLAIM OF INCONVENIENT FORUM WITH RESPECT TO, THESE COURTS.




Party B hereby agrees (a) to check this Confirmation carefully and immediately upon receipt so that
errors or discrepancies can be promptly identified and rectified and (b) to confirm that the
foregoing (in the exact form provided by Party A) correctly sets forth the terms of the agreement
between Party A and Party B with respect to the Transaction, by manually signing this Confirmation
or this page hereof as evidence of agreement to such terms and providing the other information
requested herein and immediately returning an executed copy to Heights Capital Management, Inc.,
101 California Street, Suite 3250, San Francisco, CA 94111, Facsimile (415) 403-6525.




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     Please confirm that the foregoing correctly sets forth the terms of your agreement by signing
and returning this Confirmation.



	 	 	 	 	 	 	 
	 	 	Very truly yours,	 	 
	 
	 	 	 	 	 	 
	 	 	CAPITAL VENTURES INTERNATIONAL

BY: HEIGHTS CAPITAL MANAGEMENT, INC,

Its Authorized Agent

(Party A)	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 
 

	 	  
	 	 	Name: Martin Kobinger	 	 
	 	 	Title: Investment Manager	 	 






	 	 	 	 	 
	Agreed and Accepted By:	 	 
	 
	 	 	 	 
	TXCO RESOURCES INC.

(Party B)	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

James E. Sigmon
	 	 
	 

	 	President	 	 






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Annex A



For each Component of the Transaction, the Number of Options and Expiration Date are set forth
below.




	 	 	 	 	 	 	 
	Component Number	 	Number of Options	 	Component Expiration Date
	1

	 	 	1,266,114	 	 	May 21, 2013
	 
	 	 	 	 	 	 
	2

	 	 	1,266,114	 	 	November 21, 2013
	 
	 	 	 	 	 	 
	3

	 	 	1,266,114	 	 	May 21, 2014






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ANNEX I




Matters to be covered in Opinion of Counsel to Party B




     1. Party B is validly existing as a corporation in good standing under the laws of the State
of Delaware.



     2. Party B has the requisite corporate power and authority to enter into the Transaction (for
purposes of this Annex 1, the “Agreement”) and to carry out the Transactions contemplated
thereby.



     3. The execution and delivery by Party B of the Transaction, and the performance by Party B of
its obligations under the Transaction, have been duly authorized by all necessary corporate action
on the part of Party B.



     4. The Transaction has been duly authorized, executed and delivered by Party B.



     5. No consent, approval or authorization of, or registration, filing or declaration with, any
governmental or public body or authority is required in connection with the execution, delivery or
performance by Party B of the Transaction.



     6. The execution, delivery and performance by Party B of the Transaction and compliance by
Party B with the terms and provisions thereof will not, whether with or without the giving of
notice or lapse of time or both, result in a breach or violation of any of the terms and provisions
of, or constitute a default under, (A) any material indenture, mortgage, deed of trust, loan,
purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or
instrument to which Party B or any subsidiary is bound or by which Party B or any subsidiary or any
of their respective properties may be bound or affected, or (B) any Delaware or federal law,
statute, rule, regulation or order or any judgment, order, writ or decree of any governmental
agency or body or any court having jurisdiction over Party B or any of its properties.



     7. Neither Party B nor any subsidiary is an “investment company” or a company “controlled” by
an “investment company”, in each case within the meanings ascribed to such terms in the Investment
Company Act of 1940, as amended, nor is Party B or any subsidiary subject to regulation under said
Act.




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