Document:

Exhibit 10.3

 

**** INDICATES CONFIDENTIAL MATERIAL OMITTED PURSUANT TO A

REQUEST FOR CONFIDENTIAL TREATMENT AND FILED WITH THE

SECURITIES AND EXCHANGE COMMISSION SEPARATELY WITH A REQUEST

FOR CONFIDENTIAL TREATMENT.

 

JOINT DEVELOPMENT AGREEMENT

 

BY AND BETWEEN

 

LONESTAR RESOURCES AMERICA, INC.

 

AND

 

IOG SOUTH TEXAS I, LLC

 

DATED JULY 27, 2015

 

Confidential material omitted and filed separately with the Commission.

 

 

Table of Contents

	
 
    	
 
    	
PAGE
    
	
 
    	
 
    	
 
    
	
ARTICLE 1.
    	
DEFINITIONS
    	
1
    
	
 
    	
 
    	
 
    
	
ARTICLE 2.
    	
CAPITAL   COMMITMENT
    	
7
    
	
 
    	
 
    	
 
    
	
2.1.
    	
Capital Commitment
    	
7
    
	
 
    	
 
    	
 
    
	
ARTICLE 3.
    	
PROJECTS
    	
7
    
	
 
    	
 
    	
 
    
	
3.1.
    	
Project Proposal
    	
7
    
	
 
    	
 
    	
 
    
	
3.2.
    	
IOG Election
    	
8
    
	
 
    	
 
    	
 
    
	
3.3.
    	
Material Change
    	
8
    
	
 
    	
 
    	
 
    
	
ARTICLE 4.
    	
WELL   PROPOSAL
    	
8
    
	
 
    	
 
    	
 
    
	
4.1.
    	
Well Proposals
    	
8
    
	
 
    	
 
    	
 
    
	
4.2.
    	
IOG Election
    	
9
    
	
 
    	
 
    	
 
    
	
4.3.
    	
Failure to Drill
    	
10
    
	
 
    	
 
    	
 
    
	
ARTICLE 5.
    	
PARTICIPATION   TERMS AND PROCEDURES
    	
10
    
	
 
    	
 
    	
 
    
	
5.1.
    	
Participation Terms Election
    	
10
    
	
 
    	
 
    	
 
    
	
5.2.
    	
Basic Participation Terms
    	
10
    
	
 
    	
 
    	
 
    
	
5.3.
    	
Alternate Participation Terms
    	
10
    
	
 
    	
 
    	
 
    
	
5.4.
    	
Earned Interest
    	
11
    
	
 
    	
 
    	
 
    
	
5.5.
    	
Joint Operating Agreement
    	
12
    
	
 
    	
 
    	
 
    
	
5.6.
    	
Reversion
    	
12
    
	
 
    	
 
    	
 
    
	
5.7.
    	
IOG’s Payment Obligations
    	
13
    
	
 
    	
 
    	
 
    
	
5.8.
    	
****
    	
13
    
	
 
    	
 
    	
 
    
	
5.9.
    	
Operator Payment Obligations
    	
13
    
	
 
    	
 
    	
 
    
	
ARTICLE 6.
    	
OPERATIONS   AND MARKETING
    	
14
    
	
 
    	
 
    	
 
    
	
6.1.
    	
JOA
    	
14
    
	
 
    	
 
    	
 
    
	
6.2.
    	
Operator’s Financial   Responsibilities
    	
14
    
	
 
    	
 
    	
 
    
	
6.3.
    	
Burdens on Leases
    	
15
    
	
 
    	
 
    	
 
    
	
6.4.
    	
Conflict Between Agreements
    	
15
    
	
 
    	
 
    	
 
    
	
6.5.
    	
Payment of Burdens
    	
15
    
	
 
    	
 
    	
 
    
	
6.6.
    	
Access to Information
    	
15
    
	
 
    	
 
    	
 
    
	
6.7.
    	
Quarterly Meetings
    	
15
    
	
 
    	
 
    	
 
    
	
6.8.
    	
Daily Production Reports
    	
15
    
	
 
    	
 
    	
 
    
	
6.9.
    	
Information Acquired by Operator
    	
15
    
	
 
    	
 
    	
 
    
				

 

i

 

	
6.10.
    	
Information Maintained By   Operator
    	
16
    
	
 
    	
 
    	
 
    
	
6.11.
    	
Access Rights
    	
17
    
	
 
    	
 
    	
 
    
	
6.12.
    	
Certain Lease Matters
    	
17
    
	
 
    	
 
    	
 
    
	
6.13.
    	
Third Party Rights
    	
17
    
	
 
    	
 
    	
 
    
	
6.14.
    	
Marketing
    	
18
    
	
 
    	
 
    	
 
    
	
6.15.
    	
Standard of Care
    	
18
    
	
 
    	
 
    	
 
    
	
6.16.
    	
Hedging
    	
18
    
	
 
    	
 
    	
 
    
	
6.17.
    	
Facilities
    	
18
    
	
 
    	
 
    	
 
    
	
6.18.
    	
Drainage Protection
    	
19
    
	
 
    	
 
    	
 
    
	
ARTICLE 7.
    	
ACQUIRED   INTERESTS
    	
19
    
	
 
    	
 
    	
 
    
	
7.1.
    	
Acquired Interest
    	
19
    
	
 
    	
 
    	
 
    
	
ARTICLE 8.
    	
REPRESENTATIONS,   WARRANTIES AND AGREEMENTS
    	
19
    
	
 
    	
 
    	
 
    
	
8.1.
    	
Representations and Warranties
    	
19
    
	
 
    	
 
    	
 
    
	
8.2.
    	
Representations and Warranties of   IOG
    	
20
    
	
 
    	
 
    	
 
    
	
8.3.
    	
Representations, Warranties and   Covenants of Operator
    	
20
    
	
 
    	
 
    	
 
    
	
8.4.
    	
Compliance Matters
    	
25
    
	
 
    	
 
    	
 
    
	
ARTICLE 9.
    	
TAX   PARTNERSHIP
    	
25
    
	
 
    	
 
    	
 
    
	
9.1.
    	
Tax Partnership Agreement
    	
25
    
	
 
    	
 
    	
 
    
	
9.2.
    	
Tax Treatment
    	
25
    
	
 
    	
 
    	
 
    
	
ARTICLE 10.
    	
INDEMNIFICATION
    	
26
    
	
 
    	
 
    	
 
    
	
10.1.
    	
Liabilities
    	
26
    
	
 
    	
 
    	
 
    
	
10.2.
    	
Indemnification of IOG by   Operator
    	
26
    
	
 
    	
 
    	
 
    
	
10.3.
    	
Indemnification of Operator by   IOG
    	
26
    
	
 
    	
 
    	
 
    
	
10.4.
    	
Indemnification Procedures
    	
27
    
	
 
    	
 
    	
 
    
	
(a)
    	
Terms
    	
27
    
	
 
    	
 
    	
 
    
	
(b)
    	
Claim Notice
    	
27
    
	
 
    	
 
    	
 
    
	
ARTICLE 11.
    	
TRANSFER
    	
28
    
	
 
    	
 
    	
 
    
	
11.1.
    	
Transfer by Operator
    	
28
    
	
 
    	
 
    	
 
    
	
11.2.
    	
Transfer by IOG
    	
28
    
	
 
    	
 
    	
 
    
	
11.3.
    	
Sale
    	
29
    
	
 
    	
 
    	
 
    
	
11.4.
    	
Settlement
    	
29
    
	
 
    	
 
    	
 
    
	
ARTICLE 12.
    	
NOTICES
    	
30
    
	
 
    	
 
    	
 
    
	
12.1.
    	
Notices
    	
30
    
	
 
    	
 
    	
 
    
	
12.2.
    	
Daily Notices
    	
31
    
	
 
    	
 
    	
 
    
				

 

ii

 

	
ARTICLE 13.
    	
TERMINATION   AND REMEDIES
    	
31
    
	
 
    	
 
    	
 
    
	
13.1.
    	
Term
    	
31
    
	
 
    	
 
    	
 
    
	
13.2.
    	
Notice of Default; Remedies
    	
31
    
	
 
    	
 
    	
 
    
	
13.3.
    	
Effect of Termination
    	
32
    
	
 
    	
 
    	
 
    
	
ARTICLE 14.
    	
MISCELLANEOUS
    	
32
    
	
 
    	
 
    	
 
    
	
14.1.
    	
Entire Agreement
    	
32
    
	
 
    	
 
    	
 
    
	
14.2.
    	
Amendments
    	
32
    
	
 
    	
 
    	
 
    
	
14.3.
    	
Waiver
    	
32
    
	
 
    	
 
    	
 
    
	
14.4.
    	
Applicable Law
    	
32
    
	
 
    	
 
    	
 
    
	
14.5.
    	
Jury and Bench Trial Waiver
    	
32
    
	
 
    	
 
    	
 
    
	
14.6.
    	
Dispute Resolution/Arbitration
    	
33
    
	
 
    	
 
    	
 
    
	
14.7.
    	
Expenses
    	
35
    
	
 
    	
 
    	
 
    
	
14.8.
    	
Payments
    	
35
    
	
 
    	
 
    	
 
    
	
14.9.
    	
Limitation on Damages
    	
36
    
	
 
    	
 
    	
 
    
	
14.10.
    	
Injunctive Relief and Lien   Foreclosure
    	
36
    
	
 
    	
 
    	
 
    
	
14.11.
    	
Relationship of Parties
    	
36
    
	
 
    	
 
    	
 
    
	
14.12.
    	
Severability
    	
36
    
	
 
    	
 
    	
 
    
	
14.13.
    	
Covenants Running with Lands
    	
36
    
	
 
    	
 
    	
 
    
	
14.14.
    	
Timing
    	
36
    
	
 
    	
 
    	
 
    
	
14.15.
    	
Successors and Assigns
    	
36
    
	
 
    	
 
    	
 
    
	
14.16.
    	
Announcements
    	
37
    
	
 
    	
 
    	
 
    
	
14.17.
    	
Confidentiality
    	
37
    
	
 
    	
 
    	
 
    
	
14.18.
    	
Further Assurances
    	
37
    
	
 
    	
 
    	
 
    
	
14.19.
    	
Counterpart Execution
    	
37
    
	
 
    	
 
    	
 
    
	
14.20.
    	
Memorandum of Agreement
    	
37
    
	
 
    	
 
    	
 
    
	
14.21.
    	
References and Construction
    	
37
    
				

 

iii

 

Exhibits

	
 
    	
 
    	
 
    
	
Exhibit A
    	
 
    	
Form of Assignment
    
	
 
    	
 
    	
 
    
	
Exhibit B
    	
 
    	
Tax Partnership Agreement
    
	
 
    	
 
    	
 
    
	
Exhibit C
    	
 
    	
Memorandum of Agreement
    
	
 
    	
 
    	
 
    
	
Exhibit D
    	
 
    	
Joint Operating Agreement
    
	
 
    	
 
    	
 
    
	
Schedule 14.8
    	
 
    	
Bank Account
    

 

iv

 

Glossary

	
AAA
    	
 
    	
Section 14.6(a)
    
	
Acquired Interest
    	
 
    	
Section 7.1
    
	
Affiliate and Affiliated
    	
 
    	
Article 1
    
	
Agreement
    	
 
    	
Article 1
    
	
Appellate Rules
    	
 
    	
Section 14.6(e)(iii)
    
	
Applicable Environmental Laws
    	
 
    	
Article 1
    
	
Arms-Length Sale
    	
 
    	
Article 1
    
	
Asset Taxes
    	
 
    	
Section 8.3(f)(i)
    
	
Assets
    	
 
    	
Article 1
    
	
Assignment
    	
 
    	
Section 5.4(b)
    
	
Availability Period
    	
 
    	
Article 1
    
	
Business Day
    	
 
    	
Article 1
    
	
Change of Control Event
    	
 
    	
Article 1
    
	
Claim Notice
    	
 
    	
Section 10.4(b)
    
	
Code
    	
 
    	
Article 1
    
	
Complete or Completing
    	
 
    	
Article 1
    
	
Control and Controlled by
    	
 
    	
Article 1
    
	
Cumulative ROI Payout Amount
    	
 
    	
Article 1
    
	
Development AFE
    	
 
    	
Article 1
    
	
Dispute Notice
    	
 
    	
Section 14.6(a)
    
	
Drill or Drilling
    	
 
    	
Article 1
    
	
Drilling Unit
    	
 
    	
Article 1
    
	
Earned Well
    	
 
    	
Article 1
    
	
Effective Date
    	
 
    	
Preamble
    
	
Elect
    	
 
    	
Article 1
    
	
Election
    	
 
    	
Article 1
    
	
Equip or Equipping
    	
 
    	
Article 1
    
	
Execution Date
    	
 
    	
Preamble
    
	
Existing Facilities
    	
 
    	
Preamble
    
	
Existing Operator Interest
    	
 
    	
Article 1
    
	
Existing Well
    	
 
    	
Preamble
    
	
Facilities
    	
 
    	
Article 1
    
	
Good Cause
    	
 
    	
Section 6.1(c)
    
	
Governmental Authority
    	
 
    	
Article 1
    
	
Hedging Transaction
    	
 
    	
Article 1
    
	
Indemnified Party
    	
 
    	
Section 10.4(a)
    
	
Indemnifying Party
    	
 
    	
Section 10.4(a)
    
	
Initial Funding Date
    	
 
    	
Article 1
    
	
IOG
    	
 
    	
Preamble
    
	
IOG Indemnified Parties
    	
 
    	
Section 10.1
    
	
IOG Net Proceeds
    	
 
    	
Article 1
    
	
IOG Share
    	
 
    	
Article 1
    
	
IRR Payout Date
    	
 
    	
Article 1
    
	
Joint Operating Agreement and JOA
    	
 
    	
Article 1
    
	
Laws
    	
 
    	
Article 1
    

 

v

 

	
Leases
    	
 
    	
Article 1
    
	
Liabilities
    	
 
    	
Section 10.1
    
	
Material Contracts
    	
 
    	
Section 8.3(e)
    
	
Material Percentage
    	
 
    	
Article 1
    
	
Maximum Net Capital Deployed
    	
 
    	
Article 1
    
	
Net Capital
    	
 
    	
Article 1
    
	
Operator
    	
 
    	
Preamble
    
	
Operator Indemnified Parties
    	
 
    	
Section 10.2(a)
    
	
Operations
    	
 
    	
Article 1
    
	
Participate
    	
 
    	
Article 1
    
	
Parties
    	
 
    	
Preamble
    
	
Party
    	
 
    	
Preamble
    
	
Payout
    	
 
    	
Article 1
    
	
Permits
    	
 
    	
Article 1
    
	
Permitted Encumbrances
    	
 
    	
Section 8.3(c)
    
	
Permitted Pledge
    	
 
    	
Article 1
    
	
Person
    	
 
    	
Article 1
    
	
Post-Development Hurdle WI
    	
 
    	
Section 5.2(c)
    
	
Pre-Development Hurdle WI
    	
 
    	
Section 5.2(b)
    
	
Pre-Payout Costs
    	
 
    	
Section 5.6(b)
    
	
Pre-Payout Revenues
    	
 
    	
Section 5.6(c)
    
	
Production Burdens
    	
 
    	
Section 6.5
    
	
Project
    	
 
    	
Article 1
    
	
Project Area
    	
 
    	
Section 3.1(b)(i)
    
	
Project Effective Date
    	
 
    	
Article 1
    
	
Project Proposal
    	
 
    	
Article 1
    
	
Proposed Well
    	
 
    	
Article 1
    
	
Quarterly Meeting
    	
 
    	
Section 6.7
    
	
Records
    	
 
    	
Section 6.10(a)
    
	
Rules
    	
 
    	
Section 14.6(b)
    
	
Sale
    	
 
    	
Article 1
    
	
Sales Assets Allocated Purchase Price
    	
 
    	
Article 1
    
	
Sale Proceeds
    	
 
    	
Article 1
    
	
Second Year Anniversary
    	
 
    	
Article 1
    
	
Special Warranty
    	
 
    	
Section 8.3(b)
    
	
Subject Assets
    	
 
    	
Article 1
    
	
Tax Partnership
    	
 
    	
Section 9.2
    
	
Tax Partnership Agreement
    	
 
    	
Section 9.1
    
	
Tax Purposes
    	
 
    	
Section 9.2
    
	
Taxes
    	
 
    	
Article 1
    
	
Term
    	
 
    	
Section 13.1(a)
    
	
Third Party
    	
 
    	
Article 1
    
	
Third Party Action
    	
 
    	
Section 10.4(b)
    
	
Third Party JOA
    	
 
    	
Article 1
    
	
Third Party Right
    	
 
    	
Section 6.13(a)
    
	
Total Invested Capital
    	
 
    	
Article 1
    

 

vi

 

	
Transfer
    	
 
    	
Article 1
    
	
Well
    	
 
    	
Article 1
    
	
Well Costs
    	
 
    	
Article 1
    
	
Well Cost Percentage
    	
 
    	
Section 5.2(a)
    
	
Well Proposal
    	
 
    	
Article 1
    
	
Working Interest
    	
 
    	
Article 1
    

 

vii

 

**** INDICATES CONFIDENTIAL MATERIAL OMITTED PURSUANT TO A

REQUEST FOR CONFIDENTIAL TREATMENT AND FILED WITH THE

SECURITIES AND EXCHANGE COMMISSION SEPARATELY WITH A REQUEST

FOR CONFIDENTIAL TREATMENT.

 

JOINT DEVELOPMENT AGREEMENT

 

THIS JOINT DEVELOPMENT AGREEMENT is made and entered into this 27th day of July, 2015 (the “Execution Date”) but effective as of July 27, 2015 (the “Effective Date”) by and between Lonestar Resources America, Inc., a Delaware Corporation (“Operator”), and IOG South Texas I, LLC (“IOG”).  IOG, Operator are sometimes referred to individually as a “Party” and collectively as the “Parties”.

 

RECITALS

 

A.            Operator owns or expects to secure ownership of or rights to acquire oil and gas leases or mineral interests, the acquisition of which may also involve the acquisition of existing producing oil and gas wells (the “Existing Wells”) or other Facilities (the “Existing Facilities”).

 

B.            IOG desires to participate in the development of the Leases subject to the terms and conditions of this Agreement.

 

C.            The Parties desire to enter into this Agreement to govern their rights and obligations with respect to the exploration and development of the Leases.

 

NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

AGREEMENT

 

ARTICLE 1.
 DEFINITIONS

 

When not otherwise defined in the body of this Agreement, the following terms will have the below defined meaning:

 

“Affiliate” and “Affiliated” mean any Person which directly or indirectly Controls, is Controlled by, or is under common Control with, an identified Person.

 

“Agreement” means this Agreement, inclusive of all exhibits and attachments, as the same may be modified or amended from time to time.

 

“Applicable Environmental Laws” shall mean any and all Laws concerning protection of the environment, natural resources, or human health and safety or orders pertaining to health or the environment, including, without limitation, common laws, the Clean Air Act, the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”), the Resource Conservation and Recovery Act of 1976, the Toxic Substances Control Act, the Clean Water Act, the Safe Drinking Water Act, the Hazardous Materials Transportation Act, the Oil

 

 

Pollution Act of 1990, Occupational Safety and Health Act of 1970, any and all U.S. Minerals Management Service Laws, all as amended, and any state Laws implementing or analogous to the foregoing federal Laws, and all other Laws relating to or regulating emissions, discharges, releases, or cleanup of Hazardous Substances (as defined in the Applicable Environmental Laws) or wastes, each as amended from time to time.

 

“Arms-Length Sale” means a Sale to a Person who is not an Affiliate of Operator at a time and under circumstances where Operator is under no compulsion to sell.

 

“Assets” means the Leases to the extent that they are included in Projects accepted by IOG and the Earned Wells.

 

“Availability Period” means the period from the date of this Agreement until the earlier of (i) the date on which IOG has expended One Hundred Million Dollars ($100,000,000.00) in respect of all Projects covered by this Agreement; or (ii) December 31, 2016, provided that IOG may terminate the Availability Period earlier by delivery of written notice to Operator, (a) if Operator has not delivered a Well Proposal to IOG by December 31, 2015;  (b) at the end of any consecutive ninety (90) day period after December 31, 2015 during which Operator has not delivered a Well Proposal to IOG, or (c) there is a Change of Control Event as to Operator.

 

“Business Day” means any calendar day except Saturdays, Sundays and federal holidays.

 

“Change of Control Event” means, as to an entity, a merger, acquisition, or other corporate transaction in which Operator is not the surviving entity, or any event that results in the current voting ownership of the entity not controlling the management of the enterprise.

 

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

 

“Complete” and “Completing” means any activity related to preparing a Well drilled to total depth (or to the terminus of a horizontal well) for production, including, without limitation, installation of production casing, perforating, conducting fracture stimulation and drilling out of fracture plugs or, in the event the Well is not completed as a Well capable of producing in paying quantities, plugging such Well, including restoring and reseeding of the Well location and any associated roads as required by regulation, lease, or contract.

 

“Control” means the ability (directly or indirectly through one or more intermediaries) to direct or cause the direction of the management or affairs of an entity, whether through the ownership of voting interests, by contract or otherwise.  An entity that is subject to control by a Person is “Controlled by” that Person.

 

“Cumulative ROI Payout Amount” means the resulting quotient where the dividend equals the aggregate IOG Net Proceeds and the divisor equals the aggregate Maximum Net Capital Deployed.

 

“Development AFE” means any authorization for expenditure for (i) the Drilling, Completing and Equipping of a Well, or (ii) any other activity contemplated by a Joint Operating Agreement.

 

2

 

“Drill” or “Drilling” means any activity related to moving in, rigging up, logging and testing a Well, including, but not limited to, constructing and upgrading access roads, obtaining and preparing the drillsite, obtaining permits and division order or drill site title opinions, obtaining drilling contractor services and consultants necessary for the drilling of a Well, obtaining mud, chemicals, pipe and supplies, and any other activities related to the foregoing.

 

“Drilling Unit” means the acreage associated with a Proposed Well, including acreage subject to Lease and Third Party acreage that may be pooled with Lease acreage to satisfy Lease, and regulatory requirements.

 

“Earned Well” means any Well in which IOG Elects to Participate.  The Earned Well shall include the Well as originally drilled as well as any subsequent rework, recompletion, deepening, or other reconfiguration of the Earned Well, including the lengthening of any lateral or the drilling of new, replacement or additional laterals at any depth in or to the Earned Well.

 

“Elect” means to respond to a Project Proposal or a Well Proposal.

 

“Election” means a written response by IOG to a Project Proposal or a Well Proposal under this Agreement.

 

“Equip” or “Equipping” means any activity related to equipping the Well, including installing tubing and any other equipment or activities required to bring the Well to first sale, including artificial lift.

 

“Existing Operator Interest” means Operator’s (including that of any Affiliate) Working Interest (or the Working Interest it will obtain in the event that the implementation of the Project entails the acquisition of interests) in and to the Leases and Existing Facilities, as applicable, that comprise a Project, as of the date the Project Proposal for that Project is delivered to IOG or as of the date an assignment to IOG becomes due as a result.

 

“Facilities” means all flowlines, pipelines, meters, separators, heater-treaters, vapor recovery units, tanks, and any other associated equipment beyond the wellhead of an Earned Well and used in connection with the handling, treating, processing, gathering, transportation, compression, marketing, or other disposition of any production therefrom, including, without limitation, any gas gathering facilities that are downstream of the site of such production to the point of sale or custody transfer to a Third Party gathering system. Facilities also includes salt water disposal storage and disposal facilities, including salt water disposal wells and any other equipment, fixture or structure that is used in connection with the Operation of the Assets.

 

“Governmental Authority” means any nation or state and any political subdivision thereof and any governmental, regulatory or administrative agency, commission, body or other authority exercising or entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power; and any court or governmental tribunal, including specifically the state oil and gas regulatory agency having jurisdiction over the drilling and operation of the Wells.

 

“Hedging Transaction” means a commodity hedging transaction into which IOG enters in respect of the Assets or any portion thereof.

 

3

 

“Initial Funding Date” means, with respect to each Project, the date on which IOG first remits a payment to Operator or to a Third Party regarding any activity in connection with a Project.

 

“IOG Net Proceeds” means the aggregate of (i) proceeds actually paid to IOG on account of production attributable to IOG’s Working Interest in and to the Earned Wells (net of all lease operating expenses, insurance, marketing and transportation charges, production, severance, ad valorem, property and similar taxes attributable to IOG’s Working Interest in the Earned Wells); (ii) Sale Proceeds paid to IOG in connection with the sale of Earned Wells and (iii) amounts received from or paid under Hedging Transactions related to Earned Wells.  “IOG Net Proceeds” shall not include any proceeds from production attributable to IOG’s Working Interest that are held in suspense until such amounts are actually received by IOG.

 

“IOG Share” means as to an Earned Well the Pre-Development Hurdle WI (as defined in Section 5.2(b)) from the date of IOG’s Election to Participate in that Earned Well until Payout and the Post-Development Hurdle WI (as defined in Section 5.2(c)) thereafter.

 

“IRR Payout Date” means the first day that, based on the XNPV function of Microsoft Excel, the discount rate specified as to the Basic Participation Terms or the Alternate Participation Terms, as the case may be, and all payments made and received by IOG in connection with Earned Wells and in connection with Hedging Transactions relating to Earned Wells, using the dates each payment by IOG was sent by either wire transfer or otherwise and using the dates each payment to IOG was actually received by IOG, upon which the XNPV value calculated equals or exceeds zero dollars ($0.00).

 

“Joint Operating Agreement” or “JOA” means the joint operating agreement entered into by the Parties pursuant to Section 5.5 of this Agreement.

 

“Laws” means all applicable statutes, writs, laws, rules, regulations, ordinances, orders, judgments, injunctions, awards, determinations or decrees of a Governmental Authority, in each case as in effect on and as interpreted on the Effective Date.

 

“Leases” means the oil, gas or other mineral leases or mineral interests owned or acquired by Operator or the contractual right to acquire which is secured by Operator.

 

“Material Percentage” means, as to any Asset five percent of the Existing Operator Interest in the Asset.  If the determination of Material Percentage is being determined in connection with a Transfer, all past and prospective transfers affecting the Asset shall be aggregated.

 

“Maximum Net Capital Deployed” means as of the date of calculation, the greatest Net Capital for the period between the Initial Funding Date and the date of calculation.

 

“Net Capital” means, as of a given date, the difference between the Total Invested Capital as of such date and the IOG Net Proceeds as of such date.

 

“Operations” means all activities of Operator relating to the Drilling, Completing, and Equipping of Wells and to the production, maintenance and repair, testing and evaluation, of

 

4

 

Wells, and any other activities associated with that development and management of the Wells and associated Facilities that are a part of or related to the Assets, including specifically all activities that in ordinary industry usage would be considered operations as to an oil and gas property.

 

“Participate” means, IOG’s act of funding Well Costs for a Well in exchange for an interest in and to such Well.

 

“Payout” means the time at which the applicable Development Hurdle is reached.

 

“Permits” means all authorizations, licenses, permits or certificates issued by a Governmental Authority.

 

“Permitted Pledge” means the pledge, hypothecation or other voluntary encumbrance of a Party’s direct or indirect interest (including the securities of any of its Affiliates) in the Assets; provided that (i) each pledge, hypothecation or encumbrance of a Party’s direct interest in the Assets complies with the Joint Operating Agreement, and (ii) with respect to each pledge, hypothecation or other voluntary encumbrance, any Transfer in connection with a secured party’s exercise of remedies under such pledge, hypothecation or encumbrance is subject to the other Party’s rights under this Agreement.

 

“Person” means any person (acting in any capacity), entity, partnership, joint venture, limited liability company, corporation, trust, or other form of enterprise.

 

“Project” means oil and gas drilling opportunities, and the associated Leases and other rights and interests.

 

“Project Effective Date” means as to a particular Project, the date on which Operator delivers the Project Proposal for such Project to IOG.

 

“Project Proposal” a document and other related materials that describes a Project and that satisfies the requirements set out in Section 3.1(b).

 

“Proposed Well” means the Well that is the subject of a Well Proposal.

 

“Sale” means the entry by Operator directly, or  indirectly through one or more Affiliates, into a definitive written agreement providing for the Transfer for cash consideration of all or a Material Percentage of Operator’s interest in any of the Assets to any Person.

 

“Sale Assets Allocated Purchase Price” means the value of IOG’s Working Interest in the Assets that are included in a Sale, based on the value that is allocated to Operator’s interest in those Assets by the Person that is acquiring the Operator’s interest in those Assets, in the case of an Arms-Length Sale or, otherwise, based on the value as determined in good faith by IOG, after consultation with Operator.

 

“Sale Proceeds” means proceeds from the sale of IOG’s Working Interest in and to the Assets (net of transaction expenses, including attorney’s fees, fees of any consultants or other

 

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representatives of IOG, brokers’ fees and all transfer taxes and recording fees (or portion thereof), in each case that IOG pays in connection with such sales).

 

“Second Year Anniversary” means, for a given date, the date which occurs two (2) years after such date.

 

“Subject Assets” means any Assets jointly held by all Parties.

 

“Taxes” means all income, profits, franchise, sales, use, ad valorem, property, severance, production, excise, stamp, documentary, real property transfer or gain, gross receipts, goods and services, registration, capital, transfer or withholding taxes or other governmental fees or charges imposed by any Governmental Authority, including any interest, penalties or additional amounts that may be imposed with respect thereto, and including any liability for the payment of any amounts of any of the foregoing types as a result of being a member of an affiliated, consolidated, combined or unitary group, or being a party to any agreement or arrangement whereby liability for payment of such amounts was determined or taken into account with reference to the liability of any other Person, or as a transferee or successor or otherwise.

 

“Third Party” means any Person other than a Party or an Affiliate of a Party.

 

“Third Party JOA” means a joint operating agreement as described in Section 5.5(b) of this Agreement.

 

“Total Invested Capital” means the sum of the amounts paid by IOG in respect of any Well Costs, regardless of whether such amounts are actually applied to pay IOG’s Working Interest in any Well, and, to the extent not deducted in the determination of IOG Net Proceeds, all lease operating expenses, insurance, marketing and transportation charges, production, severance, ad valorem, property and similar taxes attributable to IOG’s Working Interest in the Earned Wells.

 

“Transfer” means any sale, assignment, conveyance, transfer or other disposition, voluntary or involuntary, by operation of law (including by merger or other business combination transaction) or otherwise, and whether effected directly by a Party or indirectly by sale or other disposition of equity interests in a Party or a Person that Controls such Party; provided that a Party’s entry into a Permitted Pledge shall not constitute a Transfer.  When used as a verb, the term “Transfer” shall have a correlative meaning.

 

“Well” means any oil or gas well.

 

“Well Costs” means the actual expenses for each item of cost to Drill, Complete and Equip an Earned Well as identified in the Development AFE provided with the Well Proposal for such Earned Well.  The Well Costs shall include the actual expenses, to the extent so identified, relating to artificial lift and any other equipment, facilities and activities necessary to bring a Well to the point of first sale.

 

“Well Proposal” means a document and other related materials that describes a proposal to drill a Well and that satisfies the requirements set out in Section 4.1(b).

 

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“Working Interest” means with respect to any Lease or Well, the percentage or fractional interest in and to such Lease or Well that is burdened with the obligation to bear and pay costs and expenses of Operations on or in connection with such Lease or Well, but without regard to the effect of any royalties, overriding royalties, production payments, net profit interests and other similar burdens upon, measured by, or payable out of production therefrom.

 

ARTICLE 2.
 CAPITAL COMMITMENT

 

2.1.        Capital Commitment.  Subject to the conditions set forth in this Agreement, IOG commits to fund up to One Hundred Million Dollars ($100,000,000.00), which shall be applied within Projects accepted by IOG to the Well Costs for Wells in which, during the Availability Period, IOG Elects to Participate.

 

ARTICLE 3.
 PROJECTS

 

3.1.        Project Proposal.

 

(a)           During the Availability Period, Operator must deliver to IOG a written Project Proposal for any Project that will include the drilling of wells that the Operator reasonably and in good faith believes will yield to the interest owned or to be acquired by Operator (without regard for the Participation of IOG under this Agreement or any costs other than Well Costs) an internal rate of return of **** and which Operator desires to undertake.  In addition, at any time during the Availability Period, Operator may submit to IOG a Project Proposal for any other Project.

 

(b)           A Project Proposal shall:

 

(i)            Define the geographic area included in the Project (the “Project Area”);

 

(ii)           Identify the Leases and Facilities owned by or to be acquired by Operator within the Project Area and, if not then owned by Operator, specify the terms pursuant to which any such acquisition is to occur;

 

(iii)          Specify the interests owned or to be acquired by Operator in each Lease and in any Facilities

 

(iv)          Include all geological, geophysical, engineering, land, contract, and economic data and analysis in Operator’s possession regarding the proposed Project;

 

(v)           Provide a proposed drilling and development schedule for the Project;

 

(vi)          An economic analysis of the expected performance of the Project stated to the interest owned or to be acquired by Operator;

 

(vii)         Specify parameters for limitations of the location of other Wells on the  Leases or on pooled units that include any portion of any of the Leases to provide for the protection of Earned Wells in the Project from drainage; and

 

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(viii)        Operator’s election of either the Basic Participation Terms or the Alternate Participation Terms, as set out below.

 

(c)           Operator and IOG shall consult regarding any Project Proposal delivered by Operator.  Operator shall exercise good faith efforts to respond to questions or objections raised by IOG. Written amendments to a Project Proposal may result from such consultations.

 

3.2.        IOG Election.  If IOG does not deliver to Operator its Election indicating its acceptance of a Project Proposal within thirty (30) days of receipt of the Project Proposal or an amendment to the Project Proposal, then IOG shall be deemed to have rejected such Project Proposal.  Alternatively, IOG may within such time deliver a written request for an additional thirty (30) day period within which to deliver its Election.  Operator shall grant such request by written notice unless there are specific time constraints relating to the Project that make such delay imprudent, in which case Operator shall notify IOG of such time constraints and specify a reasonable deadline for receipt of IOG’s Election.

 

3.3.        Material Change.  If after rejection by IOG Operator continues to pursue involvement in a Project and either the terms of such involvement or the information regarding such Project changes materially and Operator still desires to pursue such involvement then Operator shall submit a revised Project Proposal to IOG regarding such Project.  IOG will then have an additional ten (10) days in which to submit its Election accepting such revised Project Proposal.

 

ARTICLE 4.
 WELL PROPOSAL

 

4.1.        Well Proposals.

 

(a)           From the Project Effective Date until the end of the Availability Period, before commencing Drilling of any Well within the area constituting a Project accepted by IOG, Operator (and Operator as applicable) shall deliver a Well Proposal to IOG.

 

(b)           The Well Proposal shall be delivered in writing and shall:

 

(i)            Identify the Drilling Unit associated with the Proposed Well and identify all rights held by Operator in such Drilling Unit;

 

(ii)           Identify all Leases owned by Operator or that Operator has a right to acquire in the Drilling Unit and specify the nature of such ownership or right of acquisition and identify the percentage Working Interest and Net Revenue Interest in the Drilling Unit and the Proposed Well;

 

(iii)          Include a copy of the Assignment (as that term is defined in Section 5.4(b)) to be executed and delivered to IOG pursuant to Section 5.4(b) upon IOG’s delivery of an Election to Participate in the drilling of such Well;

 

(iv)          Include a copy of the drilling permit for the Well;

 

(v)           Include a plat showing Drilling Unit and the Well location;

 

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(vi)          Include a description and schematic showing the Well design;

 

(vii)         Include an AFE for Well Costs;

 

(viii)        Include an engineering, geological, and economic analysis of the expected performance of the Well, including all supporting data held by Operator;

 

(ix)          Include a drilling title opinion for the Drilling Unit and any curative relating to such opinion;

 

(x)           Include any information regarding the environmental condition of the land included in the Drilling Unit or that would otherwise be affected by the drilling and completion of the Well;

 

(xi)          Identify the planned date for commencement of Drilling of the Well;

 

(xii)         Identify any Third Party Right, as that term is defined in Section 6.13(a); and

 

(xiii)        Include any other information held by Operator that is relevant to the decision to drill such Well as proposed.

 

(c)           Operator shall promptly assist IOG in calculating the estimated revenues and costs and expenses for each such Well upon IOG’s request.

 

4.2.        IOG Election.

 

(a)           IOG shall not be obligated to Elect to Participate in a Proposed Well:

 

(i)            If IOG reasonably believes that the Well would not achieve **** internal rate of return on the 8/8th interest in said Well based on market variables and other economic factors reasonably selected in IOG’s discretion;

 

(ii)           if IOG is not satisfied, in its sole discretion, with the title information and condition of the Leases or with the environmental condition of the lands relating to the Well;

 

(iii)          if IOG is reasonably concerned with the financial condition of Operator; or

 

(iv)          if IOG has asserted that Operator has breached this Agreement.

 

(b)           If IOG does not deliver to Operator its Election not to Participate in a Proposed Well within thirty (30) days of receipt of the Well Proposal and all required information IOG shall be deemed to have elected to Participate in such Proposed Well.  Alternatively, IOG may within such time deliver a written request for an additional fifteen (15) day period within which to deliver its Election.  Operator shall grant such request by written notice to IOG unless there are specific time constraints relating to the Project that make such delay imprudent, in which

 

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case Operator shall notify IOG of such time constraints and specify a reasonable deadline for receipt of IOG’s Election.

 

4.3.        Failure to Drill.  If Operator fails to commence Drilling of a Proposed Well within ninety (90) days of the of IOG’s delivery of its Election regarding its Participation in that Proposed Well or if Operator fails to Complete the Proposed Well without unreasonable delay then Operator shall submit to IOG a new Well Proposal regarding such Proposed Well.

 

ARTICLE 5.
 PARTICIPATION TERMS AND PROCEDURES

 

5.1.        Participation Terms Election.

 

(a)           As to each Project, Operator shall elect either the Basic Participation Terms or the Alternate Participation Terms, as set out below.

 

(b)           Such election shall be made in the Project Proposal and may not be changed without the consent, to be determined at its sole discretion, of IOG.

 

(c)           All IOG cost and other interest percentages are stated as percentages of the original interest of Operator in the Leases, including any interest to be earned by Operator as a result of drilling such Well, as for example by a farmout.

 

5.2.        Basic Participation Terms.

 

(a)           IOG’s payment obligation regarding Well Costs for Earned Wells before achieving the Development Hurdle (the “Well Cost Percentage”) shall be ****.

 

(b)           Working Interest in Earned Wells to be assigned by Operator to IOG and to be owned by IOG until the achievement of the Development Hurdle (the “Pre-Development Hurdle WI”) shall be ****.

 

(c)           Working Interest in Earned Wells to be retained by IOG after the achievement of the Development Hurdle (the “Post-Development Hurdle WI”) shall be ****.

 

(d)           The Development Hurdle shall have been reached when:

 

(i)            The IRR Payout Date, calculated based on a **** discount rate has occurred; and

 

(ii)           The Cumulative ROI Payout Amount equals ****.

 

5.3.        Alternate Participation Terms.

 

(a)           The Well Cost Percentage shall be ninety percent (90%).

 

(b)           The Pre-Development Hurdle WI shall be ****.

 

(c)           The Post-Development Hurdle WI shall be ****.

 

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(d)           The Development Hurdle shall have been reached when:

 

(i)            The IRR Payout Date, calculated based on a **** discount rate has occurred; and

 

(ii)           The Cumulative ROI Payout Amount equals ****.

 

5.4.        Earned Interest.

 

(a)           For any Earned Well, IOG shall earn the IOG Share in and to such Earned Well.

 

(b)           Upon delivery by IOG of its Election to Participate in any Earned Well, Operator shall execute, acknowledge and deliver to IOG an assignment substantially in the form attached as Exhibit A (“Assignment”), of the IOG Share in the Earned Well and in all leases and other rights and properties of Operator that are associated with that Earned Well insofar but only insofar as they are related to the ownership and Operation of such Earned Well.  If Operator will earn additional interest in the Earned Well, as for example by a farmout, then Operator shall make such additional Assignment as is necessary as soon as it obtains such additional interest.  The Assignment shall be a wellbore assignment, provided, however, that Assignee shall have the right to participate in any rework, recompletion, deepening, or other reconfiguration of the Earned Well, including the lengthening of any lateral or the drilling of new, replacement or additional laterals in or to the Earned Well and the interest assigned in the wellbore of the Earned Well shall not be subject to any limitation as to depth or otherwise to which the Operator’s interest is not also subject.  The Assignment shall also include any ancillary rights such as easements and rights of way, surface use or access agreements, contract, permits and other rights and properties owned by Operator and held or used or to be used in connection with the ownership or the Operation of that Earned Well.  The Assignment will convey to IOG, effective as of the date of receipt of such Election to Participate, the IOG Share in and to all such Leases and other rights as are associated with and necessary to the Operation of the Earned Well.  If after drilling the Earned Well it becomes apparent, whether as a result of further title work, the application of the terms of leases or regulations, or otherwise that the Assignment contemplated above did not accurately convey the IOG interest in the Well then the Parties shall execute such additional or corrective assignments as are necessary.

 

(c)           If the Well is to be drilled on a pooled unit (whether pooled voluntarily or by order of Governmental Authority) then the leases and other rights associated with the Well shall include all Lease or contractual rights of Operator in the land included in the pooled unit related to the ownership or Operation of the Earned Well, including any rights of Operator in any force pooled properties within that pooled unit related to the ownership or Operation of the Earned Well.

 

(d)           The Parties intend, without limiting IOG’s rights under Section 5.4(e), below, that the Assignment of the IOG Share of each Earned Well shall assign and transfer absolutely and not as collateral or security for a debt, all of Operator’s right, title and interest in the property described in such Assignments.

 

(e)           To the extent Operator is unable to perfect the Assignment set forth in Section 5.4 for any undrilled Wells, then IOG shall have the right to take a mortgage on the unit to which the

 

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undrilled Well has been assigned in the amount of the value attributable to the undrilled Well.  IOG shall release the mortgage within a reasonable time after the recordation of an Assignment from Operator to IOG for the Well in question that complies with Section 5.4.  At IOG’s option, in lieu of taking a mortgage, IOG may defer payments for Well Costs associated with the undrilled Well until Operator has delivered a recorded Assignment for the Well in question that complies with Section 5.4.

 

5.5.        Joint Operating Agreement.

 

(a)           Contemporaneously with the execution and delivery of the Assignment as provided above, Operator shall execute and deliver to IOG a Joint Operating Agreement in the form attached as Exhibit D covering the Earned Well that is the subject of the Assignment.  IOG shall execute same and return it to Operator.

 

(b)           In the event the Leases acquired by Operator are at the time of such acquisition subject to an pre-existing Joint Operating Agreement affecting the rights of Third Parties then such Joint Operating Agreement shall be binding to the extent applicable, provided, however, that as between Operator and IOG, the JOA in the form attached as Exhibit D shall be executed and such JOA and Agreement shall continue, as between the Parties hereto, to supersede any such pre-existing Joint Operating Agreement to the extent of any conflict.

 

5.6.        Reversion.

 

(a)           All calculations necessary for the determination of Payout shall be conducted on an aggregate basis, including all Earned Wells until both Basic Participation Terms and the Alternate Development Terms Development Hurdles have been reached.  Payout as to the Earned Wells included in a Project as to which Operator elected the Basic Participation Terms shall occur when the Development Hurdle specified in Section 5.2(d) is satisfied.  Payout as to the Earned Wells included in a Project as to which Operator elected the Alternate Participation Terms shall occur when the Development Hurdle specified in Section 5.3(d) is satisfied.

 

(b)           Effective as of Payout with respect to the Earned Wells subject to the Basic Terms or the Alternate Terms, as the case may be, IOG shall execute, acknowledge, and deliver to Operator for recordation an acknowledgement that Payout has occurred and the date of such occurrence as provided in the various Assignments relating to the Earned Wells and that, as a result, the reversion referenced in such Assignment has occurred effective as of Payout.

 

(c)           If costs, charges, and expenses such as, lease operating expenses, insurance costs, marketing and transportation charges, production, and severance, ad valorem, property, and similar taxes, in each case, that are attributable to IOG’s ownership in excess of its Post-Development Hurdle WI in the Earned Wells on or before the date that Payout occurs but which are paid by IOG following the date that Payout occurs (such amounts, the “Pre-Payout Costs”) will be excluded in the determination of IOG Net Proceeds for the applicable Project.  Operator shall, within fifteen (15) Business Days of IOG’s written request, remit to IOG such Pre-Payout Costs.

 

(d)           If production proceeds from the sale of oil, gas and natural gas liquids that are attributable to IOG’s Working Interest ownership in excess of its Post-Development Hurdle WI

 

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in the Earned Wells is paid to IOG following the date that Payout occurs (such amounts, the “Pre-Payout Revenues”) will be excluded in the determination of IOG Net Proceeds.  IOG shall, within fifteen (15) Business Days after IOG’s receipt of Operator’s written request, remit to Operator such Pre-Payout Revenues.

 

5.7.        IOG’s Payment Obligations.

 

(a)           Before Payout, IOG shall pay its Well Cost Percentage of all Well Costs associated with Earned Wells.

 

(b)           Before Payout, IOG shall pay its Pre-Development Hurdle WI of all other costs and expenses associated with the ownership and Operation of the Earned Wells, and of the costs associated with any other Well on Leases jointly owned by the Parties, unless otherwise specifically provided herein.

 

(c)           After Payout, IOG shall pay its Post-Development Hurdle WI of all costs and expenses associated with the ownership and Operation of the Earned Wells and of the costs associated with any other Well on Leases jointly owned by the Parties, unless otherwise specifically provided herein.

 

(d)           Billing and payment shall be conducted pursuant to the terms of the Joint Operating Agreement.

 

5.8.        ****.

 

5.9.        Operator Payment Obligations.

 

(a)           During the Availability Period, Operator shall bear and be solely liable for any and all costs incurred during such time relating to exploration activities on a Project such as core sampling, core acquisition, core analysis, fluid analysis, information and analysis, geo-mechanical testing, and other similar exploration well expenditures.

 

(b)           During the Availability Period, Operator shall be responsible for all delay rentals, shut-in or minimum royalty and any other lease renewal or maintenance payments and any other lease payments necessary to renew, maintain or extend the Leases.

 

(c)           Prior to Payout, Operator shall pay all Well Costs for Earned Wells less IOG’s Well Cost Percentage in regard to such Earned Well.

 

(d)           Otherwise, Operator shall pay its retained Working Interest share of all costs associated with the drilling, completion and Operation of Wells on the Drilling Units of Earned Wells or on lands pooled therewith.

 

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ARTICLE 6.
 OPERATIONS AND MARKETING

 

6.1.        JOA.

 

(a)           As provided above, the Parties have entered into a JOA, covering the Earned Well.

 

(b)           Provided that Operator is in material compliance with its obligations under this Agreement, including Section 6.15, IOG agrees to vote for and otherwise take all actions reasonably available to it (without material cost or expense) under any JOA to designate Operator as the “Operator” thereunder.

 

(c)           Operator shall be deemed to have resigned as “Operator” under any applicable JOA upon receipt of written notice from IOG of Good Cause. As used herein, “Good Cause” shall be deemed to exist (i) upon the breach of any material obligation under a JOA or this Agreement, provided that unless such obligation is due to have been performed as of a specific time, Operator shall have the right to cure any such breach within thirty (30) days (or such longer period as expressly provided elsewhere in this Agreement) of receiving written notice of such breach, (ii) Operator has engaged in fraud, willful misconduct or gross negligence in the performance of its duties with respect to this Agreement (without regard for whether that action related to the properties that are subject to the JOA in question) or any applicable JOA.  If IOG elects to remove Operator for Good Cause, then Operator (and any successor transferee of Operator) shall take all actions available to it under such JOA to designate IOG’s designee as the “Operator” thereunder.

 

(d)           During the Term of this Agreement, Operator shall not resign or engage in any transaction that would (if consummated) result in Operator’s deemed removal as “Operator” under any applicable JOA without the prior written consent of IOG; provided that the foregoing provision shall not be construed to restrict Operator from (i) making a “non-consent” election under any applicable JOA or (ii) conveying all or any portion of its interest in any Existing Wells or any Well that is not an Earned Well.  This provision does not preclude Operator from merging into a US entity and no such merger shall not constitute a violation of the covenant contained in this Section 6.1(d).

 

6.2.        Operator’s Financial Responsibilities.

 

(a)           Operator will maintain sufficient immediately available funds, in cash or available borrowing capacity, to pay Operator’s proportionate share of Well Costs that Operator is required to pay under this Agreement, without taking into account any amount paid by IOG in respect of a Development AFE.

 

(b)           Any funds prepaid by IOG to Operator pursuant to this Agreement or any applicable JOA shall be accounted for separately within Operator’s accounting records.  Funds shall be used and accounted for to reimburse Operator for payments of Well Costs or other expenses properly chargeable to IOG that have been paid by Operator or to pay overhead or other obligations to Operator properly chargeable to IOG and due and payable pursuant to the applicable agreement at the time of such removal. No funds advanced to Operator in connection with one Well may be applied to expenses due in connection with another Well without the consent of IOG.

 

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6.3.        Burdens on Leases.  From the Project Effective Date, Operator shall not create any additional burdens on Leases it currently owns that may become part of any Project.  From and after the date of acquisition of any Lease, Operator shall not create any additional burdens on any Lease that may be the subject of a Project Proposal.

 

6.4.        Conflict Between Agreements.  The applicable JOA, in conjunction with and subject to the terms of this Agreement, shall govern all Operations on the Earned Well as between the Parties.  In the event of any conflict or inconsistency between the terms of this Agreement and any applicable JOA, as between the Parties, this Agreement shall prevail to the extent of such conflict or inconsistency.  If either Party acquires the entire interest covered by Third Party JOA, then the Third Party JOA shall be superseded and replaced in its entirety with a JOA between the Parties executed pursuant to this Agreement.  In the event any portion of an acquired interest is or becomes governed by a Third Party JOA, the terms of that Third Party JOA shall control as between each applicable Third Party and the Parties; provided that the terms of this Agreement and of the JOA between the Parties shall apply as between the Parties to the greatest extent possible.

 

6.5.        Payment of Burdens.  If, after the delivery of a Project Proposal for the Project of which a Lease or Well is part, either of the Parties creates additional burdens on any part of the Leases or Earned Wells (including royalties, overriding royalties, net profits interests or other similar burdens on productions (collectively, “Production Burdens”)), then the Party creating such additional Production Burden shall be solely responsible for and shall pay such additional Production Burden.  Without limiting the foregoing sentence, Operator shall be responsible for payment of all Production Burdens affecting the Leases that are created prior to the Project Effective Date to the extent such Production Burdens result in any Lease having a net revenue interest that is less than the net revenue interest set forth for such Lease in the relevant Project Proposal.

 

6.6.        Access to Information.  Operator agrees to provide IOG with access to information related to the Operations conducted on the Leases. The initial contact on any Operations issue shall be ****.

 

6.7.        Quarterly Meetings.  Operator shall host quarterly meetings, which may be conducted live or by teleconference, with IOG to review historical Drilling, Completion and performance results, as well as contemplated Project Proposals and field development and exploration for existing Projects and land management activities (a “Quarterly Meeting”).  IOG may request, upon fifteen (15) days prior written notice, specific agenda topics to be covered during a Quarterly Meeting, including any technical or planning issues related to the Assets.

 

6.8.        Daily Production Reports.  For each Earned Well Operator shall report to IOG the daily production of oil and gas.  Such reports shall be delivered to IOG as they are collected in the field and reported to Operator but no less often than monthly.

 

6.9.        Information Acquired by Operator.  To the extent permitted under Third Party agreements (with consent, if applicable), Operator shall deliver a copy to IOG of any information or report that it receives from a Third Party that could reasonably be considered material to the Assets, including Drilling, Completion and production reports, proposed directional plan,

 

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Drilling surveys, logs, core reports and other similar information, in each case within seven days of receipt of such report or information; provided that Operator shall deliver Drilling, Completion and flowback reports within 24 hours of receipt.

 

6.10.      Information Maintained By Operator.

 

(a)           To the extent the information listed below is within Operator’s existing and customary record keeping and possession thereof or is otherwise obtained by Operator, Operator shall maintain the following records, data and reports (the “Records”), as they are produced or compiled in relation to the Operations:

 

(i)            copies of all logs and surveys;

 

(ii)           daily Drilling, workover or similar Operations reports;

 

(iii)          copies of all plugging reports;

 

(iv)          well tests, Completion and similar Operations reports;

 

(v)           engineering studies, development schedules and annual progress reports on Projects;

 

(vi)          field and well performance reports, including reservoir studies and reserve estimates;

 

(vii)         list of all Persons purchasing hydrocarbons produced from the Earned Wells;

 

(viii)        unaudited reports that set forth a statement of any lease operating expenses, including any Asset Tax liabilities, related to the Operations incurred during the preceding month;

 

(ix)          all title documentation, title opinions, Leases, contracts, permits and authorizations;

 

(x)           evidence of payment of any Persons performing Operations;

 

(xi)          all environmental information applicable to the Leases;

 

(xii)         copies of all drill-stem tests and core analysis reports;

 

(xiii)        core samples; and

 

(xiv)        such additional information related to the Operations that IOG may reasonably request, including any information required to generate semi-annual reserve reports.

 

(b)           By providing **** days prior written notice, IOG may review the Records, including proprietary technology, if allowed by the subject license agreement, to the extent

 

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necessary to assess the merits of the proposed application of such proprietary technology, as reasonably requested during Operator’s normal business hours, and Operator will provide IOG, upon request, with copies of the Records.  Operator will provide IOG or its designees with (i) the Records contemplated by the preceding sentence and (ii) access to individuals essential to IOG’s interests under this Agreement, in each case as reasonably requested by a IOG; provided that IOG will be subject to the confidentiality provisions of Section 14.15.

 

(c)           The Parties shall have full access and rights to the Records required to be maintained by Operator pursuant to this Section 6.10.  To the extent copies of Records, reports or other information are delivered to IOG under this Agreement, such copies of Records, reports or information shall become and remain the property of IOG.

 

6.11.      Access Rights.

 

(a)           Operator shall notify IOG in writing at least **** hours prior to conducting any coring or logging Operations.  Without limiting IOG’ rights under any JOA, upon notice to Operator, IOG shall be permitted reasonable access to the floor of the drilling rig of any Well located on the Leases that is operated by Operator, Operator or their Affiliates.

 

(b)           To the extent allowable under existing seismic licenses, IOG shall be permitted access to any seismic data following reasonable notice to Operator.

 

6.12.      Certain Lease Matters.

 

(a)           Operator shall, at its sole cost and expense, undertake curative work in connection with title to any Lease which is required by any JOA or which a reasonably prudent operator would undertake in a similar situation.

 

(b)           Operator shall make a diligent effort to pay, promptly and timely, for and on behalf of the Parties, each delay rental, shut-in payment, minimum royalty and any other lease renewal or maintenance payment for all Leases that govern IOG’s interest in an Earned Well associated with a prospect accepted by IOG; provided that Operator may determine, in its reasonable discretion as a reasonable prudent operator (after consulting with IOG), not to renew, maintain or extend any such Lease.

 

6.13.      Third Party Rights.

 

(a)           Prior to delivery of any Well Proposal in accordance with Section 4.1(b), Operator shall send to the holder of any preferential purchase right, right of first refusal, right to consent to transfer or other similar right pertaining to a Lease or a Well, including any maintenance of uniform interest requirement (a “Third Party Right”), a notice in form as required by the instrument creating such right.  Prior to assignment by Operator of any Well in which IOG Elects to Participate, Operator shall obtain the express written waiver or consent (as applicable) of all such Third Party Rights with respect to any Transfer of any Well to IOG.  Notwithstanding the foregoing, if IOG Elects to Participate in any Well subject to an unwaived Third Party Right, IOG shall not be obligated to fund the IOG Share of any Well Costs in respect of such Well until such time as Operator has obtained a waiver of such Third Party Right in accordance with this

 

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Section 6.13(a).  In the event that a Third Party Right is exercised, IOG shall have no further interest in or obligation regarding the Earned Well to the extent of the right so exercised.

 

(b)           Not later than the date of delivery of an Assignment as to an Earned Well hereunder, Operator shall obtain recordable mortgage and lien releases, in a form reasonably acceptable to IOG, with respect to any indebtedness of Operator or any of its Affiliates that encumbers interests conveyed in such Assignment.

 

(c)           Prior to Payout, any encumbrance or security interest created by Operator in the Assets (including any Permitted Pledge) shall provide that the lienholder’s rights are expressly subordinated to IOG’s rights under this Agreement.  Promptly following receipt, Operator shall provide IOG a copy of any notification of default under any agreement governing any material funded debt of Operator or any of its Affiliates.

 

6.14.      Marketing.  Without limiting IOG’s rights to take its proportionate share of production from any Earned Well located on the Leases in-kind pursuant to any JOA, Operator shall market (or shall cause to be marketed) IOG’s share of hydrocarbons that are produced from the Leases in good faith for a recurring term of mutually agreed duration that is less than one year and not in excess of the minimum needs of the industry.  Without limitation of the foregoing, Operator shall use commercially reasonable efforts to obtain the best available market price in the area for IOG’s share of hydrocarbons at the time sold, and the weighted average price paid to any IOG for its share of hydrocarbons produced from the Leases shall not be less than the weighted average price paid to Operator for Operator’s share of hydrocarbons produced from the Leases.  IOG shall have the ability to terminate such marketing arrangement upon not less than thirty  (30) days written notice.

 

6.15.      Standard of Care.  Operator shall Drill, Complete and Equip the Earned Wells and otherwise conduct all Operations hereunder as a reasonable and prudent operator, with due diligence and reasonable dispatch in accordance with Laws and the applicable JOA.

 

6.16.      Hedging.  IOG shall during the period until Payout engage in a reasonable and prudent commodity hedging program regarding its interests in the Earned Wells with the goal of limiting volatility in its cash flow from such Wells.  The Parties will consult and agree regarding the specifications and limitations of such program as to each Project prior to the commencement of activities relating to such Project.  To the extent IOG concludes that adjustments to the hedging program are appropriate for the accomplishment of its intended purposes, Operator shall not unreasonably withhold, condition or delay its consent to such adjustments.  ****

 

6.17.      Facilities.  Facilities that are constructed or acquired pursuant to the terms of a JOA and are held by the Operator for the joint account shall be governed by the JOA.  Operator commits to provide IOG with access to the Facilities owned by Operator or any Affiliate of Operator, during the period of such ownership in connection with IOG’s ownership of the Earned Wells.  IOG shall not be obligated to pay any amount in respect of the foregoing access rights that exceeds IOG’s allocated share of the actual Third Party, out-of-pocket costs incurred by Operator in connection with the operation and maintenance of such Facilities and neither Operator nor any of its Affiliates shall be entitled to charge IOG any additional gathering, transportation or capacity fees with respect to IOG’s production from any Earned Wells.  The operating and

 

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maintenance costs of the Facilities shall be allocated among all producing Wells served by such Facilities pro rata based on Wells producing within the previous 6 months of such allocation date.

 

6.18.      Drainage Protection.  Operator shall not at any time propose a Well in violation of the drainage protection standards set out in the Project Proposal affecting any Earned Well.  If a Third Party proposes a Well in violation of such drainage protection standards Operator shall undertake commercially reasonable actions to prevent that occurrence.  If (i) such commercially reasonably efforts fail; (ii) Operator has a right to participate in the drilling of such Well, and (iii) Operator elects to participate in the drilling of such Well then Operator shall provide written notice, including all relevant information held by Operator, to IOG.  If the foregoing occurs during the Availability Period, such proposal shall constitute a Well Proposal.  If the foregoing occurs after the Availability Period then IOG shall have the right, to be exercised by delivery of written notice to Operator, to participate for its Post-Development Hurdle WI in such Well.  Upon receipt of such election Operator shall execute and deliver to IOG an Assignment of IOG’s Post-Development Hurdle WI in such Well.

 

ARTICLE 7.
 ACQUIRED INTERESTS

 

7.1.        Acquired Interest.  Any Lease acquired by Operator covering land within the defined area of a Prospect in which IOG has Elected to Participate (an “Acquired Interest”) shall be subject to the terms and conditions of this Agreement, as if such Acquired Interest was included in the Leases listed in the Project Proposal for the affected Project.

 

ARTICLE 8.
 REPRESENTATIONS, WARRANTIES AND AGREEMENTS

 

8.1.        Representations and Warranties.  Operator hereby represents and warrants to IOG; and IOG hereby represents and warrants to Operator the following:

 

(a)           Organization.  Such Party is duly organized, validly existing and in good standing under the Laws of the State of its incorporation or formation, and is qualified to do business and is in good standing in the State of Texas and in every other jurisdiction where the failure to so qualify would have a material adverse effect on its ability to execute, deliver and perform this Agreement and the other agreements contemplated herein.

 

(b)           Authority; Binding Effect.

 

(i)            Such Party has all requisite power and authority to enter into and perform its obligations under this Agreement and to carry out the transactions contemplated hereby.

 

(ii)           Such Party has taken (or caused to be taken) all acts and other proceedings required to be taken by it to authorize the execution, delivery and performance by such Party of this Agreement and the other agreements contemplated herein.  This Agreement has been duly executed and delivered by such Party and constitutes its valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability

 

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may be limited by applicable bankruptcy, moratorium, reorganization or similar laws affecting the rights of creditors generally and by principles of equity, whether considered in a proceeding at law or in equity.

 

(c)           Noncontravention.  The execution, delivery and performance of this Agreement by such Party does not and will not (i) conflict with, or result in, any violation of or constitute a breach or default (with notice or lapse of time, or both) under (A) any provision of its organizational documents, or (B) any applicable statute, law, rule, regulation, court order, agreement, instrument or license applicable to such Party, or (ii) require the submission of any notice, report, consent or other filing with or from any Governmental Authority or Third Parties, other than such consents as are customarily obtained after assignment of Wells and oil and gas leases in the State of Texas.

 

(d)           Litigation.  There are no actions, suits or proceedings pending or, to such Party’s knowledge, threatened against it which if decided unfavorably to such Party could have a material adverse effect on the ability of such Party to execute, deliver or perform this Agreement or could materially affect its title to, or ownership or operation of the Leases or any Well located on the Leases.

 

(e)           Liability for Brokers’ Fees.  Such Party has not incurred any obligation or liability, contingent or otherwise, for any fee payable to a broker or finder with respect to the matters provided for in this Agreement which could be attributable or charged to such Party.

 

(f)            Survival.  Except for the representations and warranties in clauses (a) and (b) above, which shall survive indefinitely, the foregoing representations and warranties contained in this Section 8.1 shall terminate one year after the Payout and shall thereafter have no further force and effect.

 

8.2.        Representations and Warranties of IOG.  IOG hereby represents and warrants to Operator the following:

 

(a)           Investment Representation.  In acquiring any interest under this Agreement, it is acquiring such interests for its own account for investment purposes only, and not with a view to resale or distribution.

 

(b)           Financial Ability.  IOG has such knowledge and experience in financial and business matters, and in oil and gas exploration projects of the type contemplated in and by this Agreement that it is capable of evaluating the merits and risks of its investment hereunder, and IOG is not in need of the protection afforded investors by the applicable securities laws.  In addition, IOG is an “accredited investor” as defined in Rule 501(a) of Regulation D promulgated by the Securities Act of 1933, as amended.

 

(c)           Survival.  The foregoing representations and warranties contained in this Section 8.2 shall terminate one year after the end of the Availability Period and shall thereafter have no further force and effect.

 

8.3.        Representations, Warranties and Covenants of Operator.  As of the Project Effective Date with respect to the Leases affected by a Well Proposal, at the time Operator presents a Well

 

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Proposal to IOG with respect to the Leases affected by such Proposal, and at the time any Assignment is made to IOG with respect to the Earned Wells and Leases included in such Assignment, the Operator hereby represents and warrants and, where applicable, covenants to IOG the following:

 

(a)           Status.  Operator is not a “foreign person” within the meaning of the Code §1445.  Party will furnish to IOG an affidavit that satisfies the requirements of Code §1445(b)(2).

 

(b)           Special Warranty.  Operator warrants it has or has the right to acquire, as specified in the Project Proposal or Well Proposal, good and defensible title to the Assets or portion thereof, as applicable, and to the net acreage, Working Interests and net revenue interests set forth on in the Project Proposal or Well Proposal and, free and clear of any liens other than Permitted Encumbrances, against all Persons claiming or to claim the same, by, through or under Operator or its Affiliates (the “Special Warranty”).  To Operator’s knowledge (after due inquiry), there are no and there will be no calls on production or contracts for sale of production encumbering the IOG Share of the Assets that will not, following delivery to IOG of an Assignment, also be applicable to Operator’s retained interest in such Assets or that provide for the delivery of hydrocarbons at a price below the prevailing market price.  Prior to commencement of Drilling an Earned Well, Operator shall have obtained (i) the mortgage and lien releases that must be obtained in accordance with Section 6.13(b), and (ii) the waiver of all preferential purchase rights and all consents to assignment that must be obtained from Third Parties in accordance with Section 6.13(a).

 

(c)           Leases.  To Operator’s knowledge (after due inquiry), all Leases related to an Earned Well will be in full force and effect, subject to the Permitted Encumbrances. “Permitted Encumbrances” shall mean:

 

(i)            lessors’ royalties, overriding royalties, reversionary interests and similar burdens that (A) are of record on the Project Effective Date, (B) do not at any time reduce Operator’s net revenue interest in any Lease (or Wells located thereon) below the percentage identified in the Project Proposal, as applicable, for that Lease (or Wells located thereon), and (C) do not at any time increase Operator’s Working Interest in any Lease (or Wells located thereon) without a corresponding increase in Operator’s net revenue interest for that Lease (or Wells located thereon);

 

(ii)           liens for Taxes or governmental assessments that are not yet delinquent or are being contested in good faith by appropriate proceedings which effectively delay any enforcement thereof;

 

(iii)          easements, rights-of-way, servitudes, permits, surface leases and other rights in respect of surface Operations that do not interfere materially with the Operation, value or use of the Assets;

 

(iv)          all rights reserved to or vested in any Governmental Authority to control or regulate any of the Assets in any manner, and all Laws, rules and orders of a Governmental Authority; and

 

(v)           liens which shall be released in accordance with Section 6.13(b).

 

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(d)           Consents of Governmental Authorities.  Prior to commencement of Drilling an Earned Well, Operator will have obtained all consents, approvals, certificates, licenses, permits and other authorizations of the relevant Governmental Authorities and landowners required for any party to own, develop, operate or maintain any Assets in so far as they pertain to such Earned Well.

 

(e)           Material Contracts.  To Operator’s knowledge based on due inquiry, the Project Proposal or Well Proposal contains a true and complete listing of all material agreements and contracts affecting the Assets (the “Material Contracts”) as of the Project Effective Date or as of the date of delivery of a Well Proposal, as the case may be.  To Operator’s knowledge, as of the Project Effective Date or as of the date of delivery of a Well Proposal, as the case may be, (i) all Material Contracts are in full force and effect, (ii) Operator is not in default in any material respect, and no written notice of alleged default has been received by Operator, under any Material Contract, (iii) no other party to a Material Contract is in default thereunder in any material respect, and (iv) there exists no condition or event that, with or without notice or lapse of time or both, would constitute a material default under any Material Contract by Operator or any other party thereto.  In the event that Operator enters into any material agreement or contract affecting the Assets after the Project Effective Date or as of the date of delivery of a Well Proposal, as the case may be, Operator shall promptly deliver a copy of such agreement or contract to IOG., all payments (including all delay rentals, shut-in royalties and valid calls for payment or prepayment under JOAs) owing under any Lease or other agreement relating to the Leases have been and are being made (timely, and before the same becomes delinquent) by Operator, and to Operator’s knowledge, Operator is not in default in any material respect of any obligation under any Lease or other agreement referenced in this Agreement.

 

(f)            Asset Taxes.  Except as provided in the Project Proposal or the Well Proposal, as the case may be,

 

(i)            all ad valorem, property, severance, production, sales, use, excise, transfer, or other Taxes arising out of, based on or measured by the ownership or operation of the Assets or the production of hydrocarbons or the receipt of proceeds therefrom (“Asset Taxes”), which are due and payable by Operator or its Affiliates (whether or not shown on a return filed with respect to Asset Taxes) have been paid, or will be paid timely, or are currently being contested in good faith;

 

(ii)           all Tax returns for Asset Taxes with respect to the Assets that are required to have been filed have been timely and properly filed and such returns are true, correct and complete in all material respects;

 

(iii)          there is no claim, assessment, deficiency, or adjustment pending, asserted, proposed or threatened with respect to any Asset Taxes and no claim has ever been made by any authority in any jurisdiction where Operator does not file Tax returns alleging that Operator or any Affiliate of Operator may be subject to Asset Taxes in that jurisdiction; and

 

(iv)          with respect to Asset Taxes, there is not in force any extension of time with respect to the due date for the filing of any Tax return or any waiver or agreement

 

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for any extension of time for the assessment or payment of any Asset Taxes and no request for any such waiver is pending.

 

(g)           Tax Partnership.  Except as provided herein between the Parties or as specified in the Project Proposal or a Well Proposal, as the case may be, none of the Assets assigned constitutes an equity interest in any corporation, partnership, limited liability company, or any other entity, and none of the Assets are subject to tax partnership reporting requirements for federal income tax purposes.

 

(h)           Insurance Coverage.  Operator has procured and maintained in effect and will procure and maintain in effect insurance coverages in scope and amount not less than the coverages that may be required by Laws, any Governmental Authorities and any JOA by which the Assets are bound.

 

(i)            Third Party Rights.  To Operator’s knowledge (after due inquiry), Each Project Proposal or Well Proposal sets forth all Third Party Rights burdening the affected Assets.

 

(j)            Liquidity.  Operator will have, at the time of IOG’s payment of any Development AFE for the Drilling, Completing and Equipping of an Earned Well sufficient immediately available funds, in cash or available borrowing capacity, to pay all Well Costs that it is required to pay under this Agreement without taking into account any amount paid by IOG in respect of such Development AFE.

 

(k)           Credit Default.  At the time any Assignment is made to IOG with respect to the Earned Wells included in such Assignment, Operator warrants that Operator is not then in default and there are no facts or circumstances reasonably likely to give rise to a future default under any credit agreement or facility.

 

(l)            Solvency.  Operator is solvent and is: (a) be able to pay its debts as they become due; (b) own property that has a fair saleable value greater than the amounts required to pay its debts (including a reasonable estimate of the amount of all contingent liabilities); and (c) have adequate capital to carry on its business. No transfer of property is being made and no obligation is being incurred in connection with the transactions contemplated hereby with the intent to hinder, delay or defraud either present or future creditors of IOG and Operator. In connection with the transactions contemplated hereby, Operator has not incurred, nor plans to incur, debts beyond its ability to pay as they become absolute and matured.

 

(m)          Commitments, Abandonments or Proposals.  As of the Project Effective Date or as of the date of delivery of a Well Proposal, as the case may be, except as set forth in a Project Proposal or a Well Proposal: (a) Operator has not incurred expenses, or made any commitments to make expenditures (Operator has not entered into any agreements that would obligate IOG to make expenditures), in connection with (and no other obligations or liabilities have been incurred which would adversely affect) the ownership or operation of the Earned Well, other than routine expenses incurred in the normal operation of Existing Wells on the Leases and (b) no proposals in excess of $25,000 are currently outstanding (whether made by Operator or by any other party) to drill additional wells.

 

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(n)           Area of Mutual Interest and Other Agreements.  As of the Project Effective Date or as of the date of delivery of a Well Proposal, as the case may be, except as set forth in a Project Proposal or a Well Proposal no Asset is subject to (or has related to it) any area of mutual interest agreements, except for those contained in this Agreement and no Asset is subject to (or has related to it) any farm-out or farm-in agreement under which any party thereto is entitled to receive assignments not yet made, or could earn additional assignments after the date hereof.

 

(o)           Compliance with Laws.

 

(i)            As of the Project Effective Date or as of the date of delivery of a Well Proposal, as the case may be, except as set forth in a Project Proposal or a Well Proposal the Assets are currently, and to Operator’s knowledge, have been, owned and operated in material compliance with all applicable laws, including Applicable Environmental Laws;

 

(ii)           As of the Project Effective Date or as of the date of delivery of a Well Proposal, as the case may be, except as set forth in a Project Proposal or a Well Proposal without in any way limiting the foregoing representations, the properties operated by Operator, and, to Operator’s knowledge, the Assets operated by others, are not in any material violation of (or subject to) (i) any existing, pending or, threatened, judicial, administrative or arbitral proceeding or any investigation or inquiry by any Governmental Authority, or (ii) any investigation, feasibility study, removal or remedial actions under any and all applicable laws (including Applicable Environmental Laws), and (iii) to Operator’s knowledge, there are not facts, circumstances or conditions relating to any of the properties which could require any remediation, investigation, feasibility study, or removal or remedial actions, or which could result in any material costs or liabilities or material non-compliance with Applicable Environmental Laws (material shall mean for the purposes of this Section 8.3(o) **** in value as to any 8/8ths interest in the Affected Assets);

 

(iii)          As of the Project Effective Date or as of the date of delivery of a Well Proposal, as the case may be, except as set forth in a Project Proposal or a Well Proposal Operator undertook, at the times of its acquisitions of the Assets, all appropriate inquiry into the previous ownership and uses of the Assets consistent with good commercial or customary practice, and Operator has taken all steps necessary to determine and has determined that no Hazardous Substances (as defined in the Applicable Environmental Laws) (i) have been disposed of or Released on or onto the Assets, (ii) or, if generated, on the Assets have been disposed of offsite in violation of Applicable Environmental Laws or at any site listed or proposed for listing on the National Priority List (as such term is defined under CERCLA) or similar lists created pursuant to any state analog to CERCLA;

 

(iv)          As of the Project Effective Date or as of the date of delivery of a Well Proposal, as the case may be, except as set forth in a Project Proposal or a Well Proposal without limitation of the foregoing, to Operator’s knowledge, there are no leaking underground storage tanks which are or previously were in operation, surface impoundments, disposal pits or waste ponds or lagoons, or Hazardous Materials on, in or under such Assets;

 

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(v)           As of the Project Effective Date or as of the date of delivery of a Well Proposal, as the case may be, except as set forth in a Project Proposal or a Well Proposal Operator has not received a written notice of any claim that an owner of any Asset is a potentially responsible party at any site included, or proposed for inclusion, on the National Priority List (as such term is defined under CERCLA) or similar lists created pursuant to any state analog to CERCLA.

 

(p)           Survival.  Except for the Special Warranty, which will survive indefinitely, the foregoing representations and warranties contained in this Section 8.3 (other than the representations provided for in clauses (a), (g), and (h) which shall remain in effect until the expiration of the applicable statute of limitations, but not thereafter) shall terminate with respect to an Earned Well two years after the recording of the Assignment to IOG for such Earned Well, and thereafter shall have no further force and effect.

 

8.4.        Compliance Matters.  Operator shall provide prompt written notice to IOG of any environmental matters relating to or affecting the Assets, the development thereof or the Operations conducted thereon, including but not limited to, notices of violation, actions to challenge or revoke necessary permits or authorizations, significant spills or releases or discovery of contamination on, under or from the Leases.  Operator shall at all times comply with all Laws, including without limitation all Laws related to health, safety, the protection of the environment, natural resources or threatened or endangered species, pollution or its impacts on human health, which compliance includes the possession of, and compliance with, all Permits, including any Permit related to air emissions, gas flaring and hydrogen sulfide management.

 

ARTICLE 9.
 TAX PARTNERSHIP

 

9.1.        Tax Partnership Agreement.  Contemporaneously with the execution of this Agreement, each IOG and Operator shall duly execute and deliver counterparts to the Tax Partnership Agreement, in the form attached as Exhibit B (the “Tax Partnership Agreement”).

 

9.2.        Tax Treatment.  Notwithstanding anything to the contrary contained herein, the Parties intend and expect that the transaction contemplated by this Agreement and the Tax Partnership Agreement will result in the creation of a partnership (the “Tax Partnership”) solely for purposes of federal income taxation and for purposes of the income taxation of those states that require the Tax Partnership to be treated as a partnership for income tax purposes (“Tax Purposes”).  Accordingly, solely for Tax Purposes:  (i) the Tax Partnership will be treated as holding 100% of the Subject Assets jointly held by all Parties and engaging in all activities of the Parties with respect thereto; (ii) Operator will be treated as contributing to the Tax Partnership its interest in the Assets and providing its undertaking to fund, when due, the costs and expenses allocable to it under the this Agreement in exchange for an interest in the Tax Partnership;] (iii) IOG will be treated as providing its undertaking to fund, when due, the other costs and expenses allocable to it under this Agreement in exchange for an interest in the Tax Partnership; and (iv) from and after its commencement, the Tax Partnership will be treated as realizing all items of income or gain and incurring all items of cost or expense attributable to the ownership, operation or disposition of interests in the Subject Assets or cash contributed to the Tax Partnership by the Parties, notwithstanding that such items are realized, received, held, paid or incurred by the

 

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Parties individually.  In the event any Asset or other property (including any Acquired Interest) not initially held by all Parties becomes jointly held by all Parties after the Effective Date, the Parties agree to treat the joint acquisition, construction, or development of such property for Tax Purposes as a contribution to the Tax Partnership in exchange for an interest therein and an acquisition, construction, or development by the Tax Partnership.  For these purposes, the Parties agree to be governed by the Tax Partnership Agreement attached as Exhibit B.  In the event of any conflict or inconsistency between the terms and conditions of Exhibit B and the terms and conditions of this Agreement (including this Section 9.2) or any attachment or exhibit hereto (other than Exhibit B), the terms and conditions of Exhibit B shall govern and control.

 

ARTICLE 10.
 INDEMNIFICATION

 

10.1.      Liabilities

 

For purposes of ARTICLE 10, the term “Liabilities” means any and all claims, causes of action, judgments, assessments, liabilities, losses, damages, penalties, fines or costs and expenses, including any attorney’s fees, legal or other expenses incurred in connection therewith and including liabilities, costs, losses and damages for personal injury or death or property damage.  Liabilities should not be read to otherwise modify, subsume, supersede, or negate any of the Party’s obligations to one another under this Agreement.

 

10.2.      Indemnification of IOG by Operator.

 

Operator shall RELEASE, DEFEND, PROTECT, INDEMNIFY and HOLD HARMLESS each IOG, its Affiliates, and all of their respective stockholders, partners, members, managers, officers, employees, directors, agents and representatives (collectively, the “IOG Indemnified Parties”), from any Liabilities arising out of, in connection with, or relating to (i) the Operator, its Affiliates, or any of their officers, employees, directors, or agents’ performance of Operator’s obligations under this Agreement, including but not limited to Operator’s Operation of the Assets; (ii) the actions of Third Party’s hired or retained by Operator to perform any of the obligations set forth under this Agreement; (iii) Operator’s breach of any representation, warranty, covenant or condition contained in this Agreement; (iv) any Wells owned by Operator or operated by Operator on the Leases that are not Earned Wells, (v) the payment of royalties, Taxes, imbalances, liabilities, obligations and other costs and expenses with respect to the Assets in which IOG owns no interest, (vi) the discharge of hydrocarbons, pollutants or other contaminants into or onto any medium such as land, surface water, ground water or air, in each case relating to or arising out of Operator’s ownership or Operator’s Operation of the Assets. and (vii) any actions, suits or proceedings pending or, to the Operator’s knowledge, threatened against the Operator as of the Effective Date. This Section 10.1(a)(iv) specifically includes any and all actions in which Operator’s Operations of the Assets are alleged to have caused earthquakes.

 

10.3.      Indemnification of Operator by IOG.  IOG shall RELEASE, DEFEND, PROTECT, INDEMNIFY and HOLD HARMLESS the Operator, its Affiliates, and all of its stockholders, partners, members, managers, officers, employees, directors, agents and representatives (collectively, the “Operator Indemnified Parties”) from and against any Liabilities arising out of,

 

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in connection with, or relating to IOG’s breach of any representation, warranty, condition, or covenant under this Agreement.

 

10.4.      Indemnification Procedures.  All claims for indemnification under Section 10.2 or Section 10.3 shall be asserted and resolved as follows:

 

(a)           Terms.  For purposes of this Section 10.4, the term “Indemnifying Party” when used in connection with particular Liabilities shall mean the Party having any obligation to indemnify another Party or Person with respect to such Liabilities pursuant to Section 10.2 or Section 10.3, and the term “Indemnified Party” when used in connection with particular Liabilities shall mean the Party or Person having the right to be indemnified with respect to such Liabilities pursuant to Section 10.2 or Section 10.3.

 

(b)           Claim Notice.  To make a claim for indemnification under Section 10.2 or Section 10.3, an Indemnified Party shall notify the Indemnifying Party of its claim under this Section 10.4, including the specific details of and specific basis under this Agreement for its claim (the “Claim Notice”).  In the event that the claim for indemnification is based upon an inaccuracy or breach of a representation, warranty, covenant or condition, the Claim Notice shall specify the representation, warranty, covenant or condition that was inaccurate or breached.  In the event that the claim for indemnification is based upon a lawsuit, arbitration or similar proceeding brought by a Third Party (a “Third Party Action”) the Indemnified Party shall provide its Claim Notice promptly after the Indemnified Party acquires actual notice of the Third Party Claim and shall enclose a copy of all papers (if any) served with respect to the Third Party Claim; provided that the failure of any Indemnified Party to give notice of a Third Party Claim as provided in this Section 10.4 shall not relieve the Indemnified Party of its obligations under Section 10.2 or Section 10.3 (as applicable), except to the extent such failure results in insufficient time being available to permit the Indemnifying Party to effectively defend against the Third Party Claim or otherwise materially prejudices the Indemnifying Party’s ability to defend against the Third Party Claim.

 

(c)           Claim Response. The Indemnifying Party shall have thirty (30) days from its receipt of the Claim Notice to inform the Indemnified Party in writing that the Indemnifying Party (i) cured the Liabilities complained of, (ii) admits its liability for such Liabilities, (iii) disputes the claim for such Liabilities, or (iv) specify the additional time necessary to investigate the Liability and state a reasonable deadline for the Indemnifying Party to provide a response consistent with (i), (ii) or (iii).  If the Indemnifying Party does not provide a written response to the Indemnified Party within such 30-day period, then the amount of such Liabilities shall conclusively be deemed a liability of the Indemnifying Party hereunder.

 

(d)           Assumption of Defense.  In the case of a claim for indemnification based upon a Third Party Action, the Indemnifying Party shall notify the Indemnified Party whether it shall assume the defense of such Third Party Action.  The Indemnified Party is authorized, prior to notice by the Indemnifying Party that it shall assume the defense of such Third Party Action, at the expense of the Indemnifying Party, to file any motion, answer or other pleading that it shall deem necessary or appropriate to protect its interests or those of the Indemnifying Party and that is not prejudicial to the Indemnifying Party. If the Indemnifying Party shall have assumed the defense of the Third Party Action, the Indemnifying Party shall have full control of such defense

 

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and proceedings, including any compromise or settlement thereof.  If requested by the Indemnifying Party, the Indemnified Party shall cooperate in contesting any Third Party Action that the Indemnifying Party elects to contest.  The Indemnified Party may participate in, at its own expense, but subject to the Indemnifying Party’s full control of, any defense or settlement of any Third Party Action controlled by the Indemnifying Party pursuant to this Section 10.4(d); provided that the Indemnified Party shall not be required to bring any counterclaim or cross complaint against any Person.  An Indemnifying Party shall not, without the written consent of the Indemnified Party, (i) settle any Third Party Action or consent to the entry of any judgment with respect thereto that does not include an unconditional release of the Indemnified Party from all Liability in respect of such Third Party Action or (ii) settle any Third Party Action or consent to entry of any judgment with respect thereto in any manner that may materially and adversely affect the Indemnified Party (other than as a result of money damages covered by the indemnity).

 

(e)           No Assumption of Defense.  If the Indemnifying Party does not assume the defense of the Third Party Action, then the Indemnified Party shall have the right to defend against the Third Party Action at the sole cost and expense of the Indemnifying Party, with counsel selected by the Indemnified Party.  Any settlement of the Third Party Action by the Indemnified Party shall require the consent of the Indemnifying Party (which shall not be unreasonably withheld, conditioned or delayed), unless the settlement is solely for money damages and results in a final resolution.

 

ARTICLE 11.
 TRANSFER

 

11.1.      Transfer by Operator.

 

(a)           Other than as permitted in Section 11.3 below, Operator may not Transfer all or any part of its right, title or interest in the Assets without IOG’s prior written consent, such consent not to be unreasonably withheld or delayed; provided that any transferee must agree in writing, for the express benefit of IOG, to be bound by the terms hereof and to assume the obligations of Operator under this Agreement, including Operator’s obligations to purchase IOG’s Working Interest (or portion thereof) in the Assets under this Agreement as described in Section 11.3, in so far as such obligations pertain to the transferred Assets, which shall continue to be burdened by the rights of IOG hereunder.  Operator may not Transfer any of its rights and obligations under this Agreement except in connection with a Transfer of its right, title and interest in the Assets.  No Transfer of Operator’s right, title and interest in the Assets or this Agreement shall relieve Operator of any of its obligations under this Agreement.

 

(b)           Notwithstanding anything to the contrary in this Agreement, Operator shall not Transfer all or any part of an Asset treated as held by the Tax Partnership for federal income tax purposes unless the Transfer complies with the provision of, and the transferee agrees in writing to be bound by the terms of, the Tax Partnership Agreement attached hereto as Exhibit B.

 

11.2.      Transfer by IOG.

 

(a)           Prior to Payout as to the Assets in question IOG may not Transfer all or any part of its right, title or interest in the Assets or its rights and obligations under this Agreement to any

 

28

 

Person without Operator’s prior written consent, such consent not to be unreasonably withheld or delayed.

 

(b)           Notwithstanding anything to the contrary in this Agreement, no Asset or any part thereof Transferred by IOG shall thereafter be treated as held by the Tax Partnership for federal income tax purposes unless the Transfer complies with the provision of, and the transferee agrees in writing to be bound by the terms of, the Tax Partnership Agreement attached hereto as Exhibit B.

 

11.3.      Sale.

 

(a)           If Operator directly, or indirectly through one or more Affiliates, enters into a Sale, then Operator, promptly but in no event later than ten (10) days after doing so, shall deliver written notice of same to IOG which notice shall include all relevant and material documents and information regarding such Sale.

 

(b)           If, at any time after **** after the Effective Date of this Agreement, Operator directly, or indirectly through one or more Affiliates, enters into an Arms-Length Sale of all of Operator’s interest in Assets, then IOG, upon receipt of written request from Operator, shall Transfer to Operator, and Operator shall purchase from IOG, IOG’s Working Interest in the Assets included in such Sale.  Operator shall pay IOG an amount equal to the greater of: (i) ****; or (ii) **** and, upon receipt of such sum, IOG shall convey to Operator its Working Interest in the Assets included in the Sale and its rights and obligations under this Agreement related thereto to Operator, subject only to special warranty of title.

 

(c)           If Operator directly, or indirectly through one or more Affiliates, enters into a Sale, then IOG, by delivery of written notice to Operator, may elect to Transfer to Operator, and Operator shall purchase from IOG, IOG’s Working Interest in the Assets included in such Sale.  Operator shall pay IOG the Sale Assets Allocated Purchase Price and IOG shall convey to Operator its Working Interest in the Assets included in the Sale and its rights and obligations under this Agreement related thereto to Operator, subject only to special warranty of title.  If such a Sale affects less than all of Operator’s interest in the affected Assets, the conveyance by IOG to Operator provided above shall be limited to the same percentage of IOG’s interest in such Assets.  Such right shall be ongoing, without regard for a prior exercise of failure to exercise such right by IOG.

 

(d)           If after a conveyance by IOG to Operator pursuant to (b) or (c) of this Section, the Sale in question is not consummated, then IOG may elect by delivery of written notice to Operator within thirty (30) days of receiving notice from Operator that such Sale was not consummated, to rescind such conveyance.  Upon receipt of such notice Operator shall reconvey the interests conveyed to it by IOG and IOG shall refund the money paid to it by Operator, subject to adjustment and accounting reflecting revenue and expense during the interim period.

 

11.4.      Settlement.  Operator shall be (a) entitled to all revenues attributable to hydrocarbon production from IOG’s Working Interest in the Assets (or portion thereof) that are Transferred to Operator pursuant to Section 11.3 for any period of time following the date of such Transfer and that are received by IOG after such date, and (b) responsible for all costs and expenses

 

29

 

attributable to such Transferred interests that are paid by IOG following the date of Transfer.  If IOG receive any revenues that they are not entitled to following the date of Transfer under Section 11.3, they shall remit same to Operator within fifteen (15) Business Days following receipt.  If IOG pays any costs or expenses that Operator is responsible for following the date of Transfer under Section 11.3, Operator shall, within fifteen (15) Business Days of IOG’s written request, remit to each IOG such costs or expenses.

 

ARTICLE 12.
 NOTICES

 

12.1.      Notices.  All notices and communications required or permitted under this Agreement shall be in writing and addressed as indicated below, and any communication or delivery hereunder shall be deemed to have been duly delivered upon the earliest of: (a) actual receipt by the Party to be notified; (b) three days after deposit with the U.S. Postal Service, certified mail, postage prepaid, return receipt requested; (c) if by facsimile transmission, upon confirmation by the recipient of receipt; or (d) by Federal Express overnight delivery (or other reputable overnight delivery service), two days after deposited with such service.  Addresses for all such notices and communication shall be as follows:

 

	
To IOG:
    	
 
    	
IOG South Texas I, LLC
    
	
 
    	
 
    	
2911 Turtle Creek Blvd., Suite 900
    
	
 
    	
 
    	
Dallas, Texas 75219
    
	
 
    	
 
    	
Attn: Charlie Shufeldt
    
	
 
    	
 
    	
Telephone: (214) 272-2820
    
	
 
    	
 
    	
Facsimile: (214) 614-9203
    
	
 
    	
 
    	
Email: cshufeldt@iogcapital.com
    
	
 
    	
 
    	
 
    
	
With a copy to:
    	
 
    	
Jackson Walker, LLP
    
	
(which shall not
    	
 
    	
901 Main Street, Suite 6000
    
	
constitute notice to IOG)
    	
 
    	
Dallas, Texas 75202
    
	
 
    	
 
    	
Attn: Carl E. Glaze
    
	
 
    	
 
    	
Telephone: (214) 953-5808
    
	
 
    	
 
    	
Facsimile: (214) 661-6818
    
	
 
    	
 
    	
Email: cglaze@jw.com
    
	
 
    	
 
    	
 
    
	
To Operator:
    	
 
    	
Lonestar Resources America, Inc.
    
	
 
    	
 
    	
600 Bailey Avenue, Suite 200
    
	
 
    	
 
    	
Fort Worth, Texas 76107
    
	
 
    	
 
    	
Attn: Frank D. Bracken, III
    
	
 
    	
 
    	
Telephone: (817) 546-6400
    
	
 
    	
 
    	
Facsimile: (817) 546-8641
    
	
 
    	
 
    	
Email: fbracken@lonestarresources.com
    

 

Any Party may, upon written notice to the other Parties, change the address and Person to whom such communications are to be directed.

 

30

 

12.2.                  Daily Notices.  With respect to any notices and communications required or permitted to be given by the Parties pursuant to ARTICLE 1, ARTICLE 3, ARTICLE 4, ARTICLE 5, ARTICLE 6, ARTICLE 8, ARTICLE 10, ARTICLE 11, and ARTICLE 13, such notices and communications shall be sufficient in all respects if given in accordance with Section 12.1 or if such notice is delivered by email return receipt requested to the address specified for a Person in Section 12.1.  Additionally, Operator shall deliver data concerning the Assets under Sections 6.8 and 6.9 by email to: DAILY REPORTS@IOGCAPITAL.COM.  Any notice given by email shall be deemed to have been given on the Business Day such email was sent, if sent during normal business hours, and on the Business Day following such email being sent, if sent at a time other than normal business hours.

 

ARTICLE 13.
 TERMINATION AND REMEDIES

 

13.1.                  Term.

 

(a)                                 The “Term” of this Agreement shall begin on the Effective Date and shall remain in full force and effect until (i) IOG participates in a Sale or Sales under Section 11.3 that includes all of IOG’s interests in the Assets, (ii) **** months after Payout as to all Earned Wells, (iii) election by IOG to terminate, in its sole discretion, in the event that Operator resigns or is removed as Operator under any JOA in violation of Section 6.1(d) (said election to be made pursuant to written notice from IOG to Operator within fifteen (15) days of written notification to IOG of such resignation or removal and such termination is effective at the beginning of the month following such notice), or (iv) terminated by mutual, written agreement of the Parties.  Following the end of the Term of this Agreement the relations of the Parties as to any jointly owned Assets shall be controlled by the applicable JOA.

 

(b)                                 It is not the intent of the Parties hereto that any provisions in this Agreement violate any applicable law regarding the rule against perpetuities, the suspension of the absolute power of alienation, or other rules regarding the vesting or duration of estates, and this Agreement shall be construed as not violating such rule to the extent the same can be so construed consistent with the intent of the parties. In the event however that any provision of this Agreement is determined to violate such rule, then such provision shall nevertheless be effective for the maximum period (but not longer than the maximum period) permitted by such rule that will result in no violation.  To the extent the maximum period is permitted to be determined by reference to “lives in being,” the Parties agree that “lives in being” shall refer to lifetime of the last to die of the living lineal descendants of the late Joseph P. Kennedy, Sr. (father of the late President of the United States of America).

 

13.2.                  Notice of Default; Remedies.  If IOG fails to Elect to Participate in Proposed Wells as to which its Participation is not excused by the terms hereof, Operator may, as its sole remedy, if within thirty (30) days of receipt of notice from Operator, IOG does not agree to so Participate, terminate IOG’s future rights to Participate in Wells in such Project.  Otherwise, the Parties shall have their remedies at law or in equity.

 

31

 

13.3.                  Effect of Termination.  The provisions of this Section 13.3, and Sections 6.4, 6.5, 6.8, 6.9, 6.10, 6.11, 6.14, 6.17, 6.18, 11.2, 11.3, and 11.4; ARTICLE 8; ARTICLE 10; ARTICLE 12 and ARTICLE 14, shall survive the termination of this Agreement.

 

ARTICLE 14.
 MISCELLANEOUS

 

14.1.                  Entire Agreement.  This Agreement and the Exhibits and Schedules attached hereto constitute the entire agreement between the Parties, and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties.

 

14.2.                  Amendments.  No supplement, amendment, alteration, modification, waiver or termination of this Agreement shall be binding unless executed in writing by both Parties.

 

14.3.                  Waiver.  No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver, unless otherwise expressly provided.

 

14.4.                  Applicable Law.  This Agreement and the legal relations between the Parties shall be governed by and construed in accordance with the laws of the State of Texas, USA, without regard to principles of conflicts of law.

 

14.5.                  Jury and Bench Trial Waiver.  TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES TO THIS AGREEMENT HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY AND BENCH TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE RELATIONSHIP THAT IS BEING ESTABLISHED.  EACH PARTY ALSO WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF ANY OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.  EACH PARTY ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS.  EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.  THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTION

 

32

 

CONTEMPLATED HEREBY.  IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

 

14.6.                  Dispute Resolution/Arbitration.

 

(a)                                 The Parties agree to make a diligent, good faith attempt to resolve all disputes arising out of or in connection with this Agreement or the relationship created under this Agreement before either Party commences arbitration with respect to the subject matter of any such dispute.  A Party shall provide written notice of any dispute to the other Party (the “Dispute Notice”).  If the Parties are unable to resolve a dispute within ten (10) days after a Party receives a Dispute Notice, then the Parties sole and exclusive remedy for resolution of all dispute arising out of or in connection with this Agreement or the relationship created under this Agreement shall be binding arbitration before the American Arbitration Association (“AAA”), or a successor organization.  To the extent neither the American Arbitration Association or a successor organization exists before a dispute is initiated or resolved, the Parties shall submit their dispute to a mutually agreeable alternative arbitration forum similar to that of AAA, such as JAMS.

 

(b)                                 The arbitration shall be before 1 (one) arbitrator, unless the amount of the dispute, excluding attorneys’ fees will exceed One Million Dollars ($1,000,000), in which case the arbitration shall be before 3 (three) arbitrators.  All arbitration proceedings shall be conducted in accordance with the most recent version of the Commercial Arbitration Rules for Large, Complex Commercial Disputes of the AAA (the “Rules”), or similar rules to the extent a successor or alternative arbitration forum must be utilized.  As to all disputes arising from the Agreement that are solely between the Parties hereto, the arbitrator(s) shall be appointed through the list process outlined in the Rules by no later than fourteen (14) days after arbitration is requested.  The arbitrator(s) chosen under the Rules shall have at least ten (10) years of experience in the field of the oil and gas industry that is pertinent to the dispute at issue.  By way of example, if the dispute pertains to Operator’s development and completion of the Earned Wells, then the arbitrator must have at least ten (10) years of experience in oil and gas development and completion; whereas if the dispute pertains to Operator’s joint interest billing practices then the arbitrator must have at least ten (10) years of experience in oil and gas accounting.

 

(c)                                  THE SITE OF THE ARBITRATION SHALL BE DALLAS, TEXAS, UNLESS OTHERWISE AGREED BY THE PARTIES, AND TEXAS LAW AND THE TEXAS RULES OF EVIDENCE SHALL APPLY.

 

(d)                                 The Parties shall diligently and expeditiously proceed with arbitration.  For disputes under **** the following shall apply:

 

(i)                                     Discovery:  All discovery, including expert discovery, shall be completed no more than **** days from the appointment of the arbitrator.  Discovery shall be limited to **** depositions per party, including expert depositions, with each deposition not to exceed **** hours, and no more than **** requests for production.  The Parties shall not serve interrogatories or requests for admission.  To the extent necessary, the Parties shall be entitled to requests for inspection.

 

33

 

(ii)                                  No Oral or In-Person Hearing.  There shall be no oral or in-person hearing and the dispute shall be decided upon document submissions, unless otherwise agreed to by the Parties.  The Parties shall create a mutually agreeable briefing schedule for all document submissions.

 

(iii)                               Final, Non-Appealable Award.  A final award shall be entered by the arbitrator by no later than **** days from the date of appointment of the arbitrator.  The final award will not be accompanied by a reasoned opinion but to the extent required, shall include specification of any damages, allocation of costs and attorneys’ fees awarded by the arbitrator, and the Parties waive any rights to appeal or review of such award by any court or tribunal.

 

(iv)                              Costs.  Costs of arbitration, exclusive of attorneys’ fees, shall be equally allocated amongst the Parties.

 

(e)                                  For disputes over ****, the following shall apply:

 

(i)                                     Discovery.  The Parties will establish mutually agreeable deadlines for the completion of discovery, taking into account the nature of the dispute and the reasonable amount of time necessary to adequately undertake discovery.  Unless otherwise agreed in writing, the Parties shall be limited to depositions and requests for production, and shall, establish mutually agreeable limitations on the extent of depositions and requests for production that each Party may pursue, taking into account the nature of the dispute and reasonable limitations to both adequately and efficiently obtain discovery.  The Parties shall not serve interrogatories or requests for admissions.  To the extent necessary, the Parties may serve requests for inspection, and may take expert discovery.

 

(ii)                                  Oral or In-Person Hearing.  The arbitrators shall conduct an oral or in-person hearing.  The Parties shall discuss and agree upon a deadline by which an oral or in-person hearing must occur and any time limitations that will be imposed upon such hearing, taking into account the nature of the dispute and the reasonable amount of time necessary for the Parties to prepare for and present their position at the hearing.

 

(iii)                               Appealable Award.  The arbitrators shall enter a reasoned award and the arbitrators’ award shall be entered by no later than **** days from the completion of the hearing.  The arbitrators shall expressly agree to adhere to this deadline in accepting appointment to the arbitration panel.  The award may be appealed pursuant to the AAA’s Optional Appellate Arbitration Rules (“Appellate Rules”), or similar rules of a successor organization or similar organization should AAA no longer exist.  A party may appeal the award and appeals must be initiated within **** days of receipt of the award by filing a notice of appeal with any AAA office.  An award is final once the time for filing the notice of appeal has expired without the filing of a notice of appeal by either Party.

 

(iv)                              Except to the extent the Parties’ remedies may be limited by the terms of this Agreement, including but not limited to Sections 14.7 and 14.10, the arbitrators shall be empowered to award any remedy available under the Laws of the State of Texas.  The arbitrator shall not have the power to amend or add to this Agreement.

 

34

 

(f)                                   Any final award or decision from the arbitrators may be enforced by any court of law or tribunal having jurisdiction thereof.

 

(g)                                  The costs of such arbitration shall be determined by and allocated between the Parties by the arbitrators in the final award.

 

(h)                                 This Section 14.6 constitutes an independent contract to arbitrate all disputes arising out of or in connection with this Agreement or the relationship created under this Agreement.

 

(i)                                     Unless otherwise agreed in writing, the Parties shall continue to perform their respective obligations hereunder during any arbitration proceeding by the Parties in accordance with this Section 14.6.

 

(j)                                    Except as may be required by Law, neither a Party nor an arbitrator may disclose the existence, contents, documents or testimony filed or presented at any hearing, or results of any arbitration hereunder without the prior written consent of both Parties.

 

14.7.                  Expenses.  Operator shall pay (a) all reasonable legal fees incurred by IOG in connection with the preparation, negotiation, syndication, execution and delivery of this Agreement and any amendments executed in connection therewith, (b) all fees, charges or taxes for the recording or filing of the Assignments and any other instruments required under this Agreement, (c) all reasonable out of pocket expenses of IOG in connection with the administration of this Agreement, (d) all amounts expended, advanced or incurred by IOG to satisfy any obligation of Operator under this Agreement, or to protect, preserve, exercise or enforce the rights of IOG under this Agreement, (e) all reasonable out of pocket costs and expenses (including fees and disbursements of attorneys and other experts employed or retained by such Person) incurred in connection with, arising out of, or in any way related to consulting during a breach of this Agreement with respect to (i) the protection, preservation, exercise or enforcement of any of its rights in, under or related to this Agreement or (ii) the performance of any of its obligations under or related to this Agreement, each of (a) through (e) shall include all court costs, attorneys’ fees (including, without limitation, for trial, appeal or other proceedings), fees of auditors and accountants, and investigation expenses reasonably incurred by IOG in connection with any such matters, together with interest at the maximum rate allowed by Law on each item specified in clause (a) through (e) from thirty (30) days after the date of written demand or request for reimbursement until the date of reimbursement.

 

14.8.                  Payments.

 

(a)                                 All payments made or to be made under this Agreement to Operator shall be made by electronic transfer of immediately available funds to Operator, at the account set forth opposite Operator’s name on Schedule 14.8 or to another account specified by Operator to the Person making such payment at least **** Business Days prior to such payment.

 

(b)                                 All payments made or to be made under this Agreement to IOG shall be made by electronic transfer or by check of immediately available funds to each IOG, at the account set forth opposite such IOG’s name on Schedule 14.8 or to another account specified by such IOG to the Person making such payment at least **** Business Days prior to such payment.

 

35

 

14.9.                  Limitation on Damages.  Each Party hereby expressly waives, releases and disclaims any and all rights to recover from any other Party any consequential, special, incidental, indirect, punitive or exemplary damages resulting from or arising out of this Agreement or any breach of or failure to perform under this Agreement, including without limitation, lost sales, income, profit, revenue, production, reserves or opportunity.  This provision does not waive and each Party expressly retains a right either to seek specific performance of this Agreement or to recover direct damages arising out of or resulting from this Agreement or any breach or failure to perform under this Agreement beyond those damages expressly waived, released and disclaimed herein.

 

14.10.           Injunctive Relief and Lien Foreclosure.  Section 14.5, 14.6, and 14.9 above shall not preclude a party from seeking injunctive relief, whether temporary, preliminary or permanent, nor shall it preclude a party from pursuing foreclosure of liens before a court of law having jurisdiction thereof.

 

14.11.           Relationship of Parties.  This Agreement is not intended to create, and shall not be construed to create, an association for profit, a trust, a joint venture, a mining partnership or other relationship of partnership, or entity of any kind between the Parties, except as set forth in Article 9.

 

14.12.           Severability.  It is the intent of the Parties that the provisions contained in this Agreement shall be severable.  If any provisions of this Agreement, in whole or in part, are held invalid as a matter of law, such holding shall not affect the other portions of this Agreement, and such portions that are not invalid shall be given effect without the invalid portion.

 

14.13.           Covenants Running with Lands.  This Agreement and the terms, conditions and covenants hereof shall be deemed to be covenants running with the lands, and a burden upon a Party’s interest in the Assets, for the benefit of Operator’s (with respect to the burden on IOG) or IOG’s (with respect to the burden on Operator) interest in the Leases.

 

14.14.           Timing.  This Agreement contains a number of dates and times by which performance or the exercise of rights is due, and the Parties intend that each and every such date and time be the firm and final date and time, as agreed.  For this reason, each Party hereby waives and relinquishes any right it might otherwise have to challenge its failure to meet any performance or rights election date applicable to it on the basis that its late action constitutes substantial performance, to require the other Party to show prejudice, or on any equitable grounds.  Without limiting the foregoing, time is of the essence in this Agreement.  If the date specified in this Agreement for giving any notice or taking any action is not a Business Day (or if the period during which any notice is required to be given or any action taken expires on a date which is not a Business Day), then the date for giving such notice or taking such action (and the expiration date of such period during which notice is required to be given or action taken) shall be the next day which is a Business Day.

 

14.15.           Successors and Assigns.  This Agreement shall be binding upon and shall inure to the benefit of the Parties, and their respective successors and assigns.  Any purported Transfer not made in accordance with the terms and conditions of this Agreement shall be null and void.

 

36

 

14.16.           Announcements.  The Parties shall consult with each other with regard to all press releases and other announcements concerning (i) this Agreement or (ii) the Operations within the Leases to the extent such press releases or announcements make reference to the name of the other Party and, except as may be required by Laws or the applicable rules and regulations of any governmental agency or stock exchange, neither Party shall issue any such press release or make any other announcement without the prior written consent of the other Party, which consent shall not be unreasonably withheld.

 

14.17.           Confidentiality.  The Parties shall keep the terms of this Agreement and all Exhibits and Schedules hereto confidential and not disclose the same to any other Person without the prior written consent of the other Party; provided that the foregoing shall not apply to (i) disclosures required by law, regulation, securities exchange rules or order or decree of any Governmental Authority, or (ii) disclosures to a Party’s partners, members, directors, officers, employees, financial advisors, accountants, consultants, attorneys, banks and other potential financing sources, institutional investors, agents, nominees, representatives, Persons to which a Party may Transfer its rights and obligations under this Agreement and prospective purchasers of property, as well as their respective representatives, advisors, attorneys and consultants (provided that such Persons (other than IOG or its Affiliates’ prospective investors) likewise agree in writing to keep this Agreement and all Exhibits and Schedules hereto confidential).

 

14.18.           Further Assurances.  From time to time after the Execution Date, the Parties shall each execute, acknowledge and deliver to the other such further instruments and take such other action as may be reasonably requested in order to more effectively assure the other of the benefits and enjoyment intended to be conveyed under this Agreement, and otherwise to accomplish the purposes of the transactions contemplated hereby.

 

14.19.           Counterpart Execution.  This Agreement may be executed in counterparts, each of which shall be deemed an original, and both of which taken together shall constitute one agreement.

 

14.20.           Memorandum of Agreement.  Contemporaneously with the execution hereof, the Parties shall execute a Memorandum of Agreement in the form attached hereto as Exhibit C to be recorded by IOG in the Real Property Records of the applicable County in the State of Texas.

 

14.21.           References and Construction.  In this Agreement:

 

(a)                                 References to any gender includes a reference to all other genders;

 

(b)                                 References to the singular includes the plural, and vice versa;

 

(c)                                  References to any Article or Section means an Article or Section of this Agreement;

 

(d)                                 References to any Exhibit or Schedule means an Exhibit or Schedule to this Agreement, all of which are incorporated into and made a part of this Agreement;

 

(e)                                  Unless expressly provided to the contrary, “hereunder”, “hereof”, “herein” and words of similar import are references to this Agreement as a whole and not any particular Section or other provision of this Agreement;

 

37

 

(f)                                   “Include” and “including” shall mean include or including without limiting the generality of the description preceding such term and are used in an illustrative sense and not a limiting sense;

 

(g)                                  The headings contained in this Agreement are for guidance and convenience of reference only, and shall not limit or otherwise affect any of the terms or provisions of this Agreement.

 

(h)                                 “Or” is not exclusive unless the context requires otherwise; and

 

(i)                                     No consideration shall be given to the fact or presumption that one Party had a greater or lesser hand in drafting this Agreement.

 

[Remainder of page intentionally blank.]

 

38

 

IN WITNESS WHEREOF, this Agreement is executed by the Parties on the Execution Date.

 

 

	
 
    	
LONESTAR RESOURCES   AMERICA, INC.
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ Frank D. Bracken, III
    
	
 
    	
Name:
    	
Frank D. Bracken, III
    
	
 
    	
Title:
    	
Chief   Executive Officer
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
IOG SOUTH TEXAS I,   LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ Charles F. Shufeldt
    
	
 
    	
Name:
    	
Charles   F. Shufeldt
    
	
 
    	
Title 
    	
Manager
    

 

39Exhibit

Colfax Corporation                
Nonqualified Deferred Compensation Plan
Master Plan Document

Effective January 1, 2016

Colfax Corporation
Nonqualified Deferred Compensation Plan
Master Plan Document

TABLE OF CONTENTS
Page
		
	ARTICLE 1 Definitions
	1

		
	1.1
	“Account Balance”                                1

		
	1.2
	“Annual Account”                                1

		
	1.3
	“Annual Deferral Amount”                            1

		
	1.4
	“Quarterly Installment Method”                        2

		
	1.5
	“Base Salary”                                    2

		
	1.6
	“Beneficiary”                                    2

		
	1.7
	“Beneficiary Designation Form”                        2

		
	1.8
	“Benefit Distribution Date”                            2

		
	1.9
	“Board”                                    2

		
	1.10
	“Bonus”                                    3

		
	1.11
	“Change in Control”                                3

		
	1.12
	“Claimant”                                    3

		
	1.13
	“Code”                                        3

		
	1.14
	“Committee”                                    3

		
	1.15
	“Company”                                    3

		
	1.16
	“Company Discretionary Contribution Amount”                3

		
	1.17
	“Company 401(k) Plan”                            3

		
	1.18
	“Disability” or “Disabled”                            3

		
	1.19
	“Disability Benefit”                                3

		
	1.20
	“Election Form”                                3

		
	1.21
	“Employee”                                    3

		
	1.22
	“Employer(s)                                    4

		
	1.23
	“ERISA”                                    4

		
	1.24
	“Measurement Funds”                            4

		
	1.25
	“Participant”                                    4

		
	1.26
	“Plan”                                        4

		
	1.27
	“Plan Year”                                    4

		
	1.28
	“Retirement Date”                                4

		
	1.29
	“Scheduled Distribution”                            4

		
	1.30
	“Separation Benefit”                                4

		
	1.31
	“Separation from Service”                            4

		
	1.32
	“Specified Employee”                                4

		
	1.33
	“Survivor Benefit”                                4

		
	1.34
	“Terminate the Plan,” “Termination of the Plan”                4

		
	1.35
	“Trust”                                        4

		
	1.36
	“Unforeseeable Financial Emergency”                    4

		
	ARTICLE 2 Selection, Enrollment, Eligibility
	5

		
	2.1
	Selection by Committee                            5

i

Colfax Corporation
Nonqualified Deferred Compensation Plan
Master Plan Document

		
	2.2
	Enrollment and Eligibility Requirements; Commencement of Participation    5

		
	2.3
	Termination of a Participant’s Eligibility                    5

		
	ARTICLE 3 Deferral Commitments / Contribution Amounts / Vesting / Crediting / Taxes
	6

		
	3.1
	Maximum Deferral                                6

		
	3.2
	Election to Defer; Effect of Election Form                    6

		
	3.3
	Withholding and Crediting of Annual Deferral Amounts            7

		
	3.4
	Company Discretionary Contribution Amount                7

		
	3.5
	Vesting                                    7

		
	3.6
	Crediting/Debiting of Account Balances                    7

		
	3.7
	FICA and Other Taxes                                9

		
	ARTICLE 4 Scheduled Distribution; Unforeseeable Financial Emergencies
	9

		
	4.1
	Scheduled Distribution                            9

		
	4.2
	Postponing Scheduled Distributions.                        9

		
	4.3
	Other Benefits Take Precedence Over Scheduled Distributions        10

		
	4.4
	Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies    10

		
	ARTICLE 5 Separation Benefit
	11

		
	5.1
	Separation Benefit                                11

		
	5.2
	Payment of Separation Benefit                        11

		
	5.3
	Small Plan Benefit                                12

		
	ARTICLE 6 Disability Benefit
	12

		
	6.1
	Disability Benefit                                12

		
	6.2
	Payment of Disability Benefit                            12

		
	ARTICLE 7 Survivor Benefit
	13

		
	7.1
	Survivor Benefit                                13

		
	7.2
	Payment of Survivor Benefit                            13

		
	ARTICLE 8 Beneficiary Designation
	13

		
	8.1
	Beneficiary                                    13

		
	8.2
	Beneficiary Designation; Change; Spousal Consent                13

		
	8.3
	Acknowledgment                                13

		
	8.4
	No Beneficiary Designation                            13

		
	8.5
	Doubt as to Beneficiary                            13

		
	8.6
	Discharge of Obligations                            14

		
	ARTICLE 9 Leave of Absence
	14

ii

Colfax Corporation
Nonqualified Deferred Compensation Plan
Master Plan Document

		
	9.1
	Paid Leave of Absence                            14

		
	9.2
	Unpaid Leave of Absence                            14

		
	ARTICLE 10 Termination of Plan, Amendment or Modification
	14

		
	10.1
	Termination of Plan                                14

		
	10.2
	Amendment                                    15

		
	10.3
	Effect of Payment                                15

		
	ARTICLE 11 Administration
	15

		
	11.1
	Committee Duties                                15

		
	11.2
	Administration Upon Change in Control                    15

		
	11.3
	Agents                                        16

		
	11.4
	Binding Effect of Decisions                            16

		
	11.5
	Indemnity of Committee                            16

		
	11.6
	Employer Information                                16

		
	ARTICLE 12 Other Benefits and Agreements
	17

		
	12.1
	Coordination with Other Benefits                        17

		
	ARTICLE 13 Claims Procedures
	17

		
	13.1
	Presentation of Claim                                17

		
	13.2
	Notification of Decision                            17

		
	13.3
	Review of a Denied Claim                            18

		
	13.4
	Decision on Review                                18

		
	13.5
	Controlling Law                                18

		
	ARTICLE 14 Trust
	19

		
	14.1
	Establishment of the Trust                            19

		
	14.2
	Interrelationship of the Plan and the Trust                    19

		
	14.3
	Distributions From the Trust                            19

		
	ARTICLE 15 Miscellaneous
	19

		
	15.1
	Status of Plan                                    19

		
	15.2
	Unsecured General Creditor                            19

		
	15.3
	Employer’s Liability                                19

		
	15.4
	Nonassignability                                20

		
	15.5
	Not a Contract of Employment                        20

		
	15.6
	Furnishing Information                            20

		
	15.7
	Terms                                        20

		
	15.8
	Captions                                    20

		
	15.9
	Governing Law                                20

iii

Colfax Corporation
Nonqualified Deferred Compensation Plan
Master Plan Document

		
	15.10
	Notice                                        21

		
	15.11
	Successors                                    21

		
	15.12
	Spouse’s Interest                                21

		
	15.13
	Validity                                    21

		
	15.14
	Incompetent                                    21

		
	15.15
	Court Order                                    21

		
	15.16
	Insurance                                    22

		
	15.17
	Deduction Limitation on Benefit Payments                    22

		
	15.18
	No Acceleration of Benefits                            22

iv

Colfax Corporation
Nonqualified Deferred Compensation Plan
Master Plan Document
        

COLFAX CORPORATION
NONQUALIFIED DEFERRED COMPENSATION PLAN
Effective January 1, 2016
Purpose
The purpose of this Colfax Corporation Nonqualified Deferred Compensation Plan (the “Plan”) is to provide specified benefits to a select group of management or highly compensated Employees who contribute materially to the continued growth, development and future business success of Colfax Corporation and its subsidiaries, if any, that sponsor this Plan.  This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.  
The Plan is intended to comply with all applicable law, including Code Section 409A and related Treasury guidance and Regulations, and shall be operated and interpreted in accordance with this intention. 
ARTICLE 1      
Definitions
For the purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:
		
	1.1
	“Account Balance” shall mean, with respect to a Participant, an entry on the records of the Employer equal to the sum of (i) the Participant’s Annual Accounts, less (ii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan.  The Account Balance shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.

		
	1.2
	“Annual Account” shall mean, with respect to a Participant, an entry on the records of the Employer equal to the following amount: (i) the sum of the Participant’s Annual Deferral Amount and Company Discretionary Contribution Amount for any one Plan Year, plus (ii) amounts credited or debited to such amounts pursuant to this Plan, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Annual Account for such Plan Year.  The Annual Account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.

		
	1.3
	“Annual Deferral Amount” shall mean that portion of a Participant’s Base Salary and/or Bonus that a Participant defers in accordance with Article 3 for any one Plan Year, without regard to whether such amounts are withheld and credited during such Plan Year.  In the event of a Participant’s Separation from Service, Disability or death prior to the end of a Plan Year, such year’s Annual Deferral Amount shall be the actual amount withheld prior to such event. 

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

		
	1.4
	“Quarterly Installment Method” shall be a quarterly installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: (i) for the first quarterly installment, the vested portion of each Annual Account shall be calculated as of the close of business on or around the Participant’s Benefit Distribution Date or Scheduled Distribution Date, as applicable, as determined by the Committee in its sole discretion, and (ii) for remaining quarterly installments, the vested portion of each applicable Annual Account shall be calculated on or around the first business day of each fiscal quarter of the Company following the initial installment payment.  Each quarterly installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one and the denominator of which is the remaining number of quarterly payments due to the Participant.  

		
	1.5
	“Base Salary” shall mean an Employee’s regular base salary paid by any Employer.

		
	1.6
	“Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 8, that are entitled to receive benefits under this Plan upon the death of a Participant.

		
	1.7
	“Beneficiary Designation Form” shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries.

		
	1.8
	“Benefit Distribution Date” shall mean a date that automatically triggers distribution of a Participant’s vested benefits.  A Benefit Distribution Date for a Participant shall be determined upon the occurrence of any one of the following:

		
	(a)
	If the Participant experiences a Separation from Service, the Benefit Distribution Date for his or her vested Account Balance shall be the date on which the Participant experiences a Separation from Service; provided, however, in the event the Participant changes the Separation Benefit election for one or more Annual Accounts in accordance with Section 5.2(b), the Benefit Distribution Date for such Annual Account(s) shall be postponed in accordance with such Section 5.2(b); or 

		
	(b)
	If the Participant dies prior to the complete distribution of his or her vested Account Balance, the Participant’s Benefit Distribution Date shall be the date on which the Committee is provided with proof that is satisfactory to the Committee of the Participant’s death; or

		
	(c)
	If the Participant becomes Disabled, the Participant’s Benefit Distribution Date shall be the date on which the Participant becomes Disabled.

		
	1.9
	“Board” shall mean the board of directors of the Company.

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

		
	1.10
	“Bonus” shall mean one or more cash bonuses designated from time to time by the Committee as eligible for deferral under this Plan, including the Colfax Corporation Annual Incentive Plan.

		
	1.11
	“Change in Control” shall mean any “change in control event” as defined in accordance with Treasury guidance and Regulations related to Code Section 409A, including but not limited to IRS Notice 2005-1 and such other Treasury guidance or Regulations issued after the effective date of this Plan.

		
	1.12
	“Claimant” shall have the meaning set forth in Section 13.1.

		
	1.13
	“Code” shall mean the Internal Revenue Code of 1986, as it may be amended from time to time.

		
	1.14
	“Committee” shall mean the committee described in Article 11.

		
	1.15
	“Company” shall mean Colfax Corporation and any successor to all or substantially all of the Company’s assets or business.

		
	1.16
	“Company Discretionary Contribution Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.4.

		
	1.17
	“Company 401(k) Plan” shall mean the Colfax Corporation 401(k) Savings Plan Plus, as it may be amended from time to time.

		
	1.18
	“Disability” or “Disabled” shall mean that a Participant is (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident or health plan covering employees of the Participant’s Employer.  

		
	1.19
	“Disability Benefit” shall mean the benefit set forth in Article 6.

		
	1.20
	“Election Form” shall mean the form, which may be in electronic format, established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan.

		
	1.21
	“Employee” shall mean a person who is an employee of any Employer.

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

		
	1.22
	“Employer(s) shall mean the Company and/or any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor.

		
	1.23
	“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.

		
	1.24
	“Measurement Funds” shall have the definition set forth in Section 3.6(a). 

		
	1.25
	“Participant” shall mean any Employee who is selected to participate in the Plan by the Committee, who submits an executed Election Form and Beneficiary Designation Form, which are accepted by the Committee.  

		
	1.26
	“Plan” shall mean the Colfax Corporation Nonqualified Deferred Compensation Plan, which shall be evidenced by this instrument, as it may be amended from time to time.

		
	1.27
	“Plan Year” shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year. 

		
	1.28
	“Retirement Date” shall mean a Participants Separation from Service upon reaching age sixty-five (65) with five (5) years of Vesting Service (as defined for purposes of the Company 401(k) Plan) or age fifty-five (55) with ten (10) years of Vesting Service (as defined for purposes of the Company 401(k) Plan).

		
	1.29
	“Scheduled Distribution” shall mean the distribution set forth in Section 4.1.

		
	1.30
	“Separation Benefit” shall mean the benefit set forth in Article 5.

		
	1.31
	“Separation from Service” shall mean the separation from service with all Employers, voluntarily or involuntarily, for any reason other than death, Disability, or an authorized leave of absence, as determined in accordance with Code Section 409A and related Treasury guidance and Regulations.  

		
	1.32
	“Specified Employee” shall mean “specified employee” as defined under Code Section 409A.

		
	1.33
	“Survivor Benefit” shall mean the benefit set forth in Article 7.

		
	1.34
	“Terminate the Plan,” “Termination of the Plan” shall mean a determination by an Employer’s board of directors that (i) all of its Participants shall no longer be eligible to participate in the Plan, (ii) all deferral elections for such Participants shall terminate, and (iii) such Participants shall no longer be eligible to receive Company contributions under this Plan.

		
	1.35
	“Trust” shall mean one or more trusts established by the Company in accordance with Article 14. 

		
	1.36
	“Unforeseeable Financial Emergency” shall mean an unforeseeable emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the 

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

Participant resulting from (i) a sudden and unexpected illness or accident of the Participant, the Participant’s spouse, or a dependent (as defined in Code Section 152(a)) of the Participant, (ii) a loss of the Participant’s property due to casualty, or (iii) such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee.
ARTICLE 2     
Selection, Enrollment, Eligibility
2.1    Selection by Committee.  Participation in the Plan shall be limited to those Employees who (i) are officers or other select managerial employees and (ii) are, upon recommendation of the Company, approved for such participation by the Company, in its sole discretion.
		
	2.2
	Enrollment and Eligibility Requirements; Commencement of Participation.  

		
	(a)
	As a condition to participation, each selected Employee or Employee who otherwise is eligible to participate in the Plan as of the first day of a Plan Year shall complete, execute and return to the Committee an Election Form and a Beneficiary Designation Form, prior to the first day of such Plan Year, or such other deadline as may be established by the Committee in its sole discretion.  In addition, the Committee shall establish from time to time such other enrollment requirements as it determines, in its sole discretion, are necessary.  

		
	(b)
	An Employee who first becomes eligible to participate in this Plan after the first day of a Plan Year must complete these requirements within thirty (30) days after he or she first becomes eligible to participate in the Plan, or within such other earlier deadline as may be established by the Committee, in its sole discretion, in order to participate for that Plan Year.  In such event, such Employee’s participation in this Plan shall not commence earlier than the date determined by the Committee pursuant to Section 2.2(c) and such Employee shall not be permitted to defer under this Plan any amount earned with respect to services performed prior to his or her participation commencement date.  

		
	(c)
	Each selected Employee who is eligible to participate in the Plan shall commence participation in the Plan on the date that the Committee determines, in its sole discretion, that the Employee has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period.  Notwithstanding the foregoing, the Committee shall process such Participant’s deferral election as soon as administratively practicable after such deferral election is submitted to and accepted by the Committee.  

		
	(d)
	If an Employee fails to meet all requirements contained in this Section 2.2 within the period required, that Employee shall not be eligible to participate in the Plan during such Plan Year.

2.3    Termination of a Participant’s Eligibility.  If the Committee determines that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to prevent the Participant 

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

from making future deferral elections and/or take further action that the Committee deems appropriate.  Notwithstanding the foregoing, in the event of a Termination of the Plan, the termination of the affected Participants’ eligibility for participation in the Plan shall not be governed by this Section 2.3, but rather shall be governed by Section 10.1.  In the event that a Participant is no longer eligible to defer compensation under this Plan, the Participant’s Account Balance shall continue to be governed by the terms of this Plan until such time as the Participant’s Account Balance is paid in accordance with the terms of this Plan.
ARTICLE 3     
Deferral Commitments / Contribution Amounts / Vesting / Crediting / Taxes
3.1    Maximum Deferral.  
		
	(e)
	Annual Deferral Amount.  For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, a maximum of up to 75% of his or her Bonus and up to 50% of Base Salary.

		
	(f)
	Short Plan Year.  Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, the maximum Annual Deferral Amount shall be limited to the amount of compensation not yet earned by the Participant as of the date the Participant submits an Election Form to the Committee for acceptance. 

3.2    Election to Defer; Effect of Election Form.  
		
	(a)
	First Plan Year.  In connection with a Participant’s commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan.  For these elections to be valid, the Election Form must be completed and executed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee. 

		
	(b)
	Subsequent Plan Years.  For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering a new Election Form to the Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year for which the election is made.  

		
	(c)
	Performance-Based Compensation.  Notwithstanding the foregoing, the Committee may, in its sole discretion, determine that an irrevocable deferral election pertaining to performance-based compensation may be made by timely delivering an Election Form to the Committee, in accordance with its rules and procedures, no later than six (6) months before the end of the performance service period.  “Performance-based compensation” shall be compensation based on services performed over a period of at least twelve (12) months, in accordance with Code Section 409A and related Treasury Regulations.

		
	(d)
	Improper Election.  If the Committee determines, in its sole discretion, prior to the beginning of a Plan Year that a Participant has made an election for less than the stated minimum amounts, or if 

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

no election is made, the amount deferred shall be zero.  If the Committee determines, in its sole discretion, at any time after the beginning of a Plan Year that a Participant has deferred less than the stated minimum amounts for that Plan Year, any amount credited to the Participant’s applicable Annual Account as the Annual Deferral Amount for that Plan Year shall be distributed to the Participant within sixty (60) days after the last day of the Plan Year in which the Committee determination was made.
3.3    Withholding and Crediting of Annual Deferral Amounts.  For each Plan Year, the Annual Deferral Amount shall be withheld at the time the Bonus and/or Base Salary, as the case may be, is or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself.  The Annual Deferral Amount shall be credited to the Participant’s Annual Account for such Plan Year at the time such amounts would otherwise have been paid to the Participant.  
3.4    Company Discretionary Contribution Amount.  For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Participant’s Annual Account under this Plan, which amount shall be part of the Participant’s Company Discretionary Contribution Amount for that Plan Year.  The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive a Company Discretionary Contribution Amount for that Plan Year.  The Company Discretionary Contribution Amount described in this Section 3.4, if any, shall be credited to the Participant’s Annual Account for the applicable Plan Year on a date or dates to be determined by the Committee, in its sole discretion.  
3.5    Vesting.  A Participant shall at all times be 100% vested in his or her deferrals of Bonus and Base Salary.  A Participant shall be vested in the portion of his or her Account Balance attributable to any Company Discretionary Contribution Amount, upon such vesting schedule as may be established by the Committee, in its sole discretion. 
3.6    Crediting/Debiting of Account Balances.  In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant’s Account Balance in accordance with the following rules:
		
	(d)
	Measurement Funds.  The Committee shall select from time to time certain mutual funds, insurance company separate accounts, indexed rates or other methods (the “Measurement Funds”) for purposes of crediting or debiting additional amounts to Participants’ Account Balances.  The Committee may discontinue, substitute or add a Measurement Fund, in its sole discretion.

		
	(e)
	Election of Measurement Funds.  A Participant, in connection with each Plan Year deferral election made in accordance with Section 3.2 above, shall elect, on the Election Form, one or more Measurement Fund(s) (as described in Section 3.6(a) above) to be used to determine the amounts to be credited or debited to his or her Account Balance.  If a Participant does not elect any of the Measurement Funds as described in the previous sentence, the Participant’s Account Balance shall automatically be allocated by the Committee, in its sole discretion.  A Participant may (but is not 

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the amounts to be credited or debited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund.  If an election is made in accordance with the previous sentence, it shall apply as of the first business day deemed reasonably practicable by the Committee, in its sole discretion, and shall continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence.  Notwithstanding the foregoing, the Committee, in its sole discretion, may impose limitations on the frequency with which one or more of the Measurement Funds elected in accordance with this Section 3.6(b) may be added or deleted by such Participant; furthermore, the Committee, in its sole discretion, may impose limitations on the frequency with which the Participant may change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund.
		
	(f)
	Proportionate Allocation.  In making any election described in Section 3.6(b) above, the Participant shall specify on the Election Form, in increments of one percent (1%), the percentage of his or her Account Balance or Measurement Fund, as applicable, to be allocated/reallocated.

		
	(g)
	Crediting or Debiting Method.  The performance of each Measurement Fund (either positive or negative) will be determined on a daily basis based on the manner in which such Participant’s Account Balance has been hypothetically allocated among the Measurement Funds by the Participant.

		
	(h)
	No Actual Investment.  Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant’s election of any such Measurement Fund, the allocation of his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant’s Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Measurement Fund.  In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the investments on which the Measurement Funds are based, no Participant shall have any rights in or to such investments themselves.  Without limiting the foregoing, a Participant’s Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust.

-8-

Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

3.7    FICA and Other Taxes.  
		
	(a)
	Deferrals and Contributions.  With respect to deferrals and other contributions to the Plan, a Participant’s Employer(s) either shall withhold from that portion of the Participant’s Bonus, Base Salary or other compensation that is not being deferred, or shall reduce the amounts contributed to the Participant’s Annual Account by, the Participant’s share of FICA and other employment taxes on such deferrals and contributions.  Withholdings and reductions pursuant to this Section 3.8(a) shall be undertaken in a manner determined by the Employer(s).

		
	(b)
	Distributions.  The Participant’s Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust. 

ARTICLE 4     
Scheduled Distribution; Unforeseeable Financial Emergencies
4.1    Scheduled Distribution.  In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a Scheduled Distribution, in the form of a lump sum payment or pursuant to a Quarterly Installment Method to be paid quarterly over one (1) to ten (10) years, from the Plan with respect to his or her Annual Account for such Plan Year.  The Scheduled Distribution shall be in an amount that is equal to the portion of the Annual Account the Participant elected to have distributed as a Scheduled Distribution, plus amounts credited or debited in the manner provided in Section 3.6 above on that amount, calculated as of the close of business on or around the date on which the Scheduled Distribution becomes payable (or calculated in accordance with the Quarterly Installment Method, if selected), as determined by the Committee in its sole discretion.  Subject to the other terms and conditions of this Plan, each Scheduled Distribution elected shall be paid out (or shall commence, with respect to a Quarterly Installment Method) during a sixty (60) day period commencing immediately after the first day of any Plan Year designated by the Participant (the “Scheduled Distribution Date”).  Remaining installments, if any, shall be paid in accordance with the Quarterly Installment Method.  The Plan Year designated by the Participant must be at least one (1) Plan Year after the end of the Plan Year to which the Participant’s deferral election described in Section 3.2 relates.  
4.2    Postponing Scheduled Distributions.  A Participant may elect to postpone a Scheduled Distribution described in Section 4.1 above, and have such amount paid out during a sixty (60) day period commencing immediately after an allowable alternative distribution date designated by the Participant in accordance with this Section 4.2.  In order to make this election, the Participant must submit a new Scheduled Distribution Election Form to the Committee in accordance with the following criteria:

-9-

Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

		
	(a)
	Such Scheduled Distribution Election Form must be submitted to and accepted by the Committee in its sole discretion at least twelve (12) months prior to the Participant’s previously designated Scheduled Distribution Date; 

		
	(b)
	Either (X) the lump sum payment or the entire series of installment payments, as the case may be, shall be delayed at least five (5) years from the original Scheduled Distribution Date (provided, however, that the number of installments may be changed), or (Y) the entire series of installment payments shall be converted into a lump sum payable not sooner than five (5) years after the original Scheduled Distribution Date; and

		
	(c)
	The election of the new Scheduled Distribution Date shall have no effect until at least twelve (12) months after the date on which the election is made.

4.3    Other Benefits Take Precedence Over Scheduled Distributions.  Should a Benefit Distribution Date occur that triggers a benefit under Articles 5, 6 or 7, any Annual Deferral Amount that is subject to a Scheduled Distribution election under Section 4.1 shall not be paid in accordance with Section 4.1, but shall be paid in accordance with the other applicable Article. Notwithstanding the foregoing, the Committee shall interpret this Section 4.3 in a manner that is consistent with Code Section 409A and other applicable tax law, including but not limited to Treasury guidance and Regulations issued after the effective date of this Plan.
4.4    Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies.  
		
	(a)
	If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to suspend deferrals of Bonus and Base Salary to the extent deemed necessary by the Committee to satisfy the Unforeseeable Financial Emergency. If suspension of deferrals is not sufficient to satisfy the Participant’s Unforeseeable Financial Emergency, or if suspension of deferrals is not required or permitted under Code Section 409A and other applicable tax law, the Participant may further petition the Committee to receive a partial or full payout from the Plan.  The Participant shall only receive a payout from the Plan to the extent such payout is deemed necessary by the Committee to satisfy the Participant’s Unforeseeable Financial Emergency, plus amounts reasonably necessary to pay taxes reasonably anticipated as a result of the distribution.  

		
	(b)
	The payout shall not exceed the lesser of (i) the Participant’s Account Balance, calculated as of the close of business on or around the date on which the amount becomes payable, as determined by the Committee in its sole discretion, or (ii) the amount necessary to satisfy the Unforeseeable Financial Emergency, plus amounts reasonably necessary to pay taxes reasonably anticipated as a result of the distribution.  Notwithstanding the foregoing, a Participant may not receive a payout from the Plan to the extent that the Unforeseeable Financial Emergency is or may be relieved (A) through reimbursement or compensation by insurance or otherwise, (B) by liquidation of the Participant’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship or (C) by suspension of deferrals under this Plan, if the Committee, in its sole discretion, determines that suspension is required by Code Section 409A and other applicable tax law.  

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

		
	(c)
	If the Committee, in its sole discretion, approves a Participant’s petition for suspension, the Participant’s deferrals under this Plan shall be suspended as of the date of such approval.  If the Committee, in its sole discretion, approves a Participant’s petition for suspension and payout, the Participant’s deferrals under this Plan shall be suspended as of the date of such approval and the Participant shall receive a payout from the Plan within sixty (60) days of the date of such approval.

		
	(d)
	Notwithstanding the foregoing, the Committee shall interpret all provisions relating to suspension and/or payout under this Section 4.4 in a manner that is consistent with Code Section 409A and other applicable tax law, including but not limited to Treasury guidance and Regulations issued after the effective date of this Plan.

ARTICLE 5     
Separation Benefit
5.1    Separation Benefit.  A Participant who experiences a Separation from Service shall receive, as a Separation Benefit, his or her vested Account Balance, calculated as of the close of business on or around the Participant’s Benefit Distribution Date.
5.2    Payment of Separation Benefit.  
		
	(a)
	In connection with a Participant’s election to defer an Annual Deferral Amount, the Participant shall elect (regardless of whether the Participant also has elected a Scheduled Distribution pursuant to Section 4.1) the form in which his or her Annual Account for such Plan Year will be paid upon Separation from Service.  The Participant may elect to receive each Annual Account in the form of a lump sum or pursuant to a Quarterly Installment Method payable quarterly over one(1) to ten (10) years.  If a Participant does not make any election with respect to the payment of an Annual Account, then the Participant shall be deemed to have elected to receive such Annual Account as a lump sum at Separation of Service.  

		
	(b)
	A Participant may change the form of payment (including the number of installments) for an Annual Account by submitting an Election Form to the Committee (which the Committee may accept, in its sole discretion) in accordance with the following criteria:  

		
	(i)
	The election to modify the form of payment must be made at least twelve (12) months before a Participant experiences a Separation from Service;

		
	(ii)
	The election to modify the form of payment shall have no effect until at least twelve (12) months after the date on which the election is made; and 

		
	(iii)
	Either (X) the lump sum payment or the entire series of installment payments, as the case may be, shall be delayed at least five (5) years from the original Benefit Distribution Date (provided, however, that the number of installments may be changed), or (Y) the entire series of installment payments shall be converted into a lump sum payable not sooner than five (5) years after the original Benefit Distribution Date. 

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

The Election Form most recently accepted by the Plan committee in accordance with the criteria set forth above shall govern the payout of the applicable Annual Account.  For avoidance of doubt, a Participant may not make changes to his or her Separation Benefit election after a Separation from Service.
		
	(c)
	Subject to Section 5.2(d), the lump sum payment shall be made, or the first installment payment shall be made, no later than sixty (60) days after the Benefit Distribution Date.  Remaining installments, if any, shall be paid in accordance with the Quarterly Installment Method. 

		
	(d)
	Notwithstanding any other provision of this Plan to the contrary, if the Participant is a Specified Employee, the lump sum payment or any installment payment that would have been paid within six (6) months after the Participant’s Separation from Service shall be delayed until six (6) months after the Participant’s Separation from Service, and shall be paid on or as soon as administratively practicable after the first day of the seventh month. If the Participant has elected a Quarterly Installment Method, subsequent installments will be made pursuant to the original installment schedule pursuant to Section 5.2(c).

5.3    Small Plan Benefit.  Notwithstanding any provision to the contrary in this Plan, if a Participant’s vested Account Balance at the time of his or her Separation from Service is less than $15,000, payment of his or her vested Account Balance shall be paid in a lump sum on or before the later of (i) December 31 of the calendar year in which occurs the Participant’s Separation from Service or (ii) the date 2-1/2 months after the Participant’s Separation from Service.
ARTICLE 6     
Disability Benefit
6.1    Disability Benefit.  Upon a Participant’s Disability, the Participant shall receive a Disability Benefit, which shall be equal to the Participant’s vested Account Balance, calculated as of the close of business on or around the Participant’s Benefit Distribution Date.
6.2    Payment of Disability Benefit.  The Disability Benefit shall be paid to the Participant in a lump sum payment no later than sixty (60) days after the Participant’s Benefit Distribution Date. 

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

ARTICLE 7     
Survivor Benefit
7.1    Survivor Benefit.  The Participant’s Beneficiary(ies) shall receive a Survivor Benefit upon the Participant’s death which will be equal to the Participant’s vested Account Balance, calculated as of the close of business on or around the Participant’s Benefit Distribution Date.
7.2    Payment of Survivor Benefit.  The Survivor Benefit shall be paid to the Participant’s Beneficiary(ies) in a lump sum payment no later than sixty (60) days after the Participant’s Benefit Distribution Date.
ARTICLE 8     
Beneficiary Designation
8.1    Beneficiary.  Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant.  The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates.
8.2    Beneficiary Designation; Change; Spousal Consent.  A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent.  A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee’s rules and procedures, as in effect from time to time.  If the Participant names someone other than his or her spouse as a Beneficiary, the Committee may, in its sole discretion, determine that spousal consent is required to be provided in a form designated by the Committee, executed by such Participant’s spouse and returned to the Committee.  Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled.  The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death.
8.3    Acknowledgment.  No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent.
8.4    No Beneficiary Designation.  If a Participant fails to designate a Beneficiary as provided in Sections 8.1, 8.2 and 8.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant’s benefits, then the Participant’s designated Beneficiary shall be deemed to be his or her surviving spouse.  If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant’s estate.
8.5    Doubt as to Beneficiary.  If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its 

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

discretion, to cause the Participant’s Employer to withhold such payments until this matter is resolved to the Committee’s satisfaction.
8.6    Discharge of Obligations.  The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant.
ARTICLE 9     
Leave of Absence
9.1    Paid Leave of Absence.  If a Participant is authorized by the Participant’s Employer to take a paid leave of absence from the employment of the Employer, (i) the Participant shall continue to be considered eligible for the benefits provided in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles, and (ii) the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3.
9.2    Unpaid Leave of Absence.  If a Participant is authorized by the Participant’s Employer to take an unpaid leave of absence from the employment of the Employer for any reason, such Participant shall continue to be eligible for the benefits provided in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles.  In addition, such Participant’s deferral elections will remain in effect for the Plan Year that includes the commencement date of such unpaid leave, to the extent that his or her Annual Deferral Amount is actually earned for the Plan Year that includes the commencement date of such unpaid leave. 
ARTICLE 10     
Termination of Plan, Amendment or Modification
10.1    Termination of Plan.  Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future.  Accordingly, each Employer reserves the right to Terminate the Plan.  In the event of a Termination of the Plan, the Measurement Funds available to Participants following the Termination of the Plan shall be comparable in number and type to those Measurement Funds available to Participants in the Plan Year preceding the Plan Year in which the Termination of the Plan is effective.  Following a Termination of the Plan, Participant Account Balances shall remain in the Plan until the Participant becomes eligible for the benefits provided in Articles 4, 5, 6, or 7 in accordance with the provisions of those Articles.  The Termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination.  Notwithstanding the foregoing, to the extent permissible under Code Section 409A and other applicable tax law, including but not limited to applicable IRS Notices and such other Treasury guidance or Regulations issued after the effective date of this Plan, following a Change in Control the Employer shall be permitted to (i) terminate the Plan by action of its board of directors, and (ii) distribute the vested Account Balances to Participants in a lump sum no later than twelve (12) months after the Change in Control.  

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

10.2    Amendment.  
		
	(a)
	Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer.  Notwithstanding the foregoing, (i) no amendment or modification shall be effective to decrease the value of a Participant’s vested Account Balance in existence at the time the amendment or modification is made, and (ii) no amendment or modification of this Section 10.2 or Section 11.2 of the Plan shall be effective. 

		
	(b)
	Notwithstanding any provision of the Plan to the contrary, in the event that the Company determines that any provision of the Plan may cause amounts deferred under the Plan to become immediately taxable to any Participant under Code Section 409A and related Treasury guidance or Regulations, the Company may (i) adopt such amendments to the Plan and appropriate policies and procedures, including amendments and policies with retroactive effect, that the Company determines necessary or appropriate to preserve the intended tax treatment of the Plan benefits provided by the Plan and/or (ii) take such other actions as the Company determines necessary or appropriate to comply with the requirements of Code Section 409A and related Treasury guidance or Regulations.

10.3    Effect of Payment.  The full payment of the Participant’s vested Account Balance under Articles 4, 5, 6 or 7 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan.
ARTICLE 11     
Administration
11.1    Committee Duties.  Except as otherwise provided in this Article 11, this Plan shall be administered by a Committee, which shall consist of the Board, or such committee as the Board shall appoint.  Members of the Committee may be Participants under this Plan.  The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan, and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan.  The Committee is authorized to delegate the day-to-day administration of the Plan to one or more officers or employees of the Company.  Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself.  When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company.
11.2    Administration Upon Change in Control.  For purposes of this Plan, the Committee shall be the “Administrator” at all times prior to the occurrence of a Change in Control.  Within one hundred and twenty (120) days following a Change in Control, an independent third-party “Administrator” may be selected by the individual who, immediately prior to the Change in Control, was the Company’s Chief Executive Officer or, if not so identified, the Company’s highest ranking officer (the “Ex-CEO”), and approved by the Trustee.  The Committee, as constituted prior to the Change in Control, shall continue to be the Administrator until the earlier of (i) the date on which such independent third party is selected and approved, or (ii) the expiration of the one hundred and twenty (120) day period following the Change in Control.  If an independent third party is not 

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

selected within one hundred and twenty (120) days of such Change in Control, the Committee, as described in Section 11.1 above, shall be the Administrator.  The Administrator shall have the discretionary power to determine all questions arising in connection with the administration of the Plan and the interpretation of the Plan and Trust including, but not limited to benefit entitlement determinations; provided, however, upon and after the occurrence of a Change in Control, the Administrator shall have no power to direct the investment of Plan or Trust assets or select any investment manager or custodial firm for the Plan or Trust.  Upon and after the occurrence of a Change in Control, the Company must: (1) pay all reasonable administrative expenses and fees of the Administrator; (2) indemnify the Administrator against any costs, expenses and liabilities including, without limitation, attorney’s fees and expenses arising in connection with the performance of the Administrator hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the Administrator or its employees or agents; and (3) supply full and timely information to the Administrator on all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the date and circumstances of the Separation from Service, Disability or death of the Participants, and such other pertinent information as the Administrator may reasonably require.  Upon and after a Change in Control, the Administrator may be terminated (and a replacement appointed) by the Trustee only with the approval of the Ex-CEO.  Upon and after a Change in Control, the Administrator may not be terminated by the Company.
11.3    Agents.  In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer.
11.4    Binding Effect of Decisions.  The decision or action of the Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.
11.5    Indemnity of Committee.  All Employers shall indemnify and hold harmless the members of the Committee, any Employee to whom the duties of the Committee may be delegated, and the Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee or the Administrator.
11.6    Employer Information.  To enable the Committee and/or Administrator to perform its functions, the Company and each Employer shall supply full and timely information to the Committee and/or Administrator, as the case may be, on all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the compensation of its Participants, the date and circumstances of the Separation from Service, Disability or death of its Participants, and such other pertinent information as the Committee or Administrator may reasonably require.

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

ARTICLE 12     
Other Benefits and Agreements
12.1    Coordination with Other Benefits.  The benefits provided for a Participant and Participant’s Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant’s Employer.  The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.
ARTICLE 13     
Claims Procedures
13.1    Presentation of Claim.  Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a “Claimant”) may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan.  If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant.  All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred.  The claim must state with particularity the determination desired by the Claimant.
13.2    Notification of Decision.  The Committee shall consider a Claimant’s claim within a reasonable time, but no later than ninety (90) days after receiving the claim.  If the Committee determines that special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial ninety (90) day period.  In no event shall such extension exceed a period of ninety (90) days from the end of the initial period.  The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the benefit determination.  The Committee shall notify the Claimant in writing:
		
	(a)
	that the Claimant’s requested determination has been made, and that the claim has been allowed in full; or

		
	(b)
	that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant:

		
	(i)
	the specific reason(s) for the denial of the claim, or any part of it;

		
	(ii)
	specific reference(s) to pertinent provisions of the Plan upon which such denial was based;

		
	(iii)
	a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary;

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

		
	(iv)
	an explanation of the claim review procedure set forth in Section 13.3 below; and

		
	(v)
	a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

13.3    Review of a Denied Claim.  On or before sixty (60) days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant’s duly authorized representative) may file with the Committee a written request for a review of the denial of the claim.  The Claimant (or the Claimant’s duly authorized representative):
		
	(a)
	may, upon request and free of charge, have reasonable access to, and copies of, all documents, records and other information relevant to the claim for benefits;

		
	(b)
	may submit written comments or other documents; and/or

		
	(c)
	may request a hearing, which the Committee, in its sole discretion, may grant.

13.4    Decision on Review.  The Committee shall render its decision on review promptly, and no later than sixty (60) days after the Committee receives the Claimant’s written request for a review of the denial of the claim.  If the Committee determines that special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial sixty (60) day period.  In no event shall such extension exceed a period of sixty (60) days from the end of the initial period.  The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the benefit determination.  In rendering its decision, the Committee shall take into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.  The decision must be written in a manner calculated to be understood by the Claimant, and it must contain:
		
	(a)
	specific reasons for the decision;

		
	(b)
	specific reference(s) to the pertinent Plan provisions upon which the decision was based; 

		
	(c)
	a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits; and

		
	(d)
	a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).

13.5    Controlling Law.  The provisions of this Plan shall be construed, interpreted, administered, and enforced according to applicable federal law and the laws of the State of Maryland, without giving effect to conflict of laws principles thereunder and to the extent not preempted by federal law.

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

ARTICLE 14     
Trust
14.1    Establishment of the Trust.  In order to provide assets from which to fulfill the obligations of the Participants and their beneficiaries under the Plan, the Company may establish a trust by a trust agreement with a third party, the trustee, to which each Employer may, in its discretion, contribute cash or other property, including securities issued by the Company, to provide for the benefit payments under the Plan (the “Trust”).  
14.2    Interrelationship of the Plan and the Trust.  The provisions of the Plan shall govern the rights of a Participant to receive distributions pursuant to the Plan.  The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust.  Each Employer shall at all times remain liable to carry out its obligations under the Plan.
14.3    Distributions From the Trust.  Each Employer’s obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer’s obligations under this Plan.
ARTICLE 15     
Miscellaneous
15.1    Status of Plan.  The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that “is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1).  The Plan shall be administered and interpreted (i) to the extent possible in a manner consistent with the intent described in the preceding sentence, and (ii) in accordance with Code Section 409A and related Treasury guidance and Regulations.  
15.2    Unsecured General Creditor.  Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer.  For purposes of the payment of benefits under this Plan, any and all of an Employer’s assets shall be, and remain, the general, unpledged unrestricted assets of the Employer.  An Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.
15.3    Employer’s Liability.  An Employer’s liability for the payment of benefits shall be defined only by the Plan.  An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan.

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

15.4    Assignment.  
(a)    Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable.  No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise.
(b)    The procedures established by the Company for the determination of the qualified status of domestic relations orders and for making distributions under qualified domestic relations orders, as provided in Section 206(d) of ERISA, shall apply to the Plan, to the extent pertinent.  Amounts awarded to an alternate payee under a qualified domestic relations order shall be distributed in the form of a lump sum distribution as soon as administratively feasible following the determination of the qualified status of the domestic relations order; provided, however, that no portion of a Participant’s Account Balance may be awarded to an alternate payee to the extent such Account Balance is not yet vested in accordance with Section 3.5.
15.5    Not a Contract of Employment.  The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant.  Such employment is hereby acknowledged to be an “at will” employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement.  Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, or to interfere with the right of any Employer to discipline or discharge the Participant at any time.
15.6    Furnishing Information.  A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary.
15.7    Terms.  Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.
15.8    Captions.  The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

15.9    Governing Law.  Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Maryland without regard to its conflict of laws principles.
15.10    Notice.  Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: 
Colfax Corporation            
Attn: Director, Global Compensation & Benefits    
420 National Business Parkway
Annapolis Junction, MD 20701        
Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.
Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.
15.11    Successors.  The provisions of this Plan shall bind and inure to the benefit of the Participant’s Employer and its successors and assigns and the Participant and the Participant’s designated Beneficiaries.
15.12    Spouse’s Interest.  The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse’s will, nor shall such interest pass under the laws of intestate succession.
15.13    Validity.  In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.
15.14    Incompetent.  If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person’s property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person.  The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit.  Any payment of a benefit shall be a payment for the account of the Participant and the Participant’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.
15.15    Court Order.  The Committee is authorized to comply with any court order in any action in which the Plan or the Committee has been named as a party, including any action involving a determination of the rights or interests in a Participant’s benefits under the Plan.  Notwithstanding 

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

the foregoing, the Committee shall interpret this provision in a manner that is consistent with Code Section 409A and other applicable tax law, including but not limited to guidance issued after the effective date of this Plan. 
15.16    Insurance.  The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose.  The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance.  The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance.
15.17    Deduction Limitation on Benefit Payments.  If the Committee reasonably anticipates that the Company’s deduction with respect to any distribution from this Plan would be limited or eliminated by application of Code Section 162(m), then to the extent permitted by Treasury Regulations §1.409A-2(b)(7)(i), payment shall be delayed as deemed necessary to ensure that the entire amount of any distribution from this Plan is deductible. Any amounts for which distribution is delayed pursuant to this Section shall continue to be credited/debited with additional amounts in accordance with Section 3.6. The delayed amounts (and any amounts credited thereon) shall be distributed to the Participant (or his or her Beneficiary in the event of the Participant’s death) at the earliest date the Committee reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by application of Code Section 162(m).  
15.18    No Acceleration of Benefits.  The acceleration of the time or schedule of any payment under the Plan is not permitted, except as provided in regulations by the Secretary of the Treasury.  

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Colfax Corporation 
Deferred Compensation Plan
Master Plan Document
        

IN WITNESS WHEREOF, the Company has signed this Plan document as of December 9, 2015.
“Company”

Colfax Corporation

By:   /s/ C. Scott Brannan  
Title:  SVP, Finance & CFO 

-23-

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