Document:

exv4w2

 

Execution Copy

REGISTRATION RIGHTS AGREEMENT

     This REGISTRATION RIGHTS AGREEMENT (“Agreement”), dated as of June 28, 2006, is made
and entered into by and between CanArgo Energy Corporation, a Delaware corporation
(“Company”) and the Purchaser listed on Schedule A attached hereto (collectively, the
“Purchaser”).

RECITALS

     A. Purchaser has acquired and Company has issued (i) US$10,000,000.00 in aggregate principal
amount of its 12% Subordinated Convertible Guaranteed Notes due June 28, 2010 (“Company
Notes”), (ii) warrants to purchase up to 12.5 million shares of the Company’s common stock, par
value $.10 per share (“Common Stock”) expiring on the second anniversary of the date hereof
(“NPA Warrants”) pursuant to the Note and Warrant Purchase Agreement (“Purchase
Agreement”) of even date herewith; and (iii) warrants to purchase up to 5 million shares of
Common Stock (the “Conversion Warrants” and together with the NPA Warrants, the “Warrants”)
pursuant to that certain Conversion Agreement by and among the Company, the Purchaser and the
other parties thereto.

     B. Pursuant to the terms of the Purchase Agreement, the Purchaser acquired rights to convert
the Company Notes into shares of Common Stock in accordance with the terms of the Purchase
Agreement and the Company Notes (a “Conversion”) and pursuant to the terms of the Warrants,
the Purchaser acquired the right to purchase shares of Common Stock upon exercise thereof in
accordance with the terms of the Warrants (an “Exercise”);

     C. Upon the closing of a Conversion or an Exercise, the Company shall authorize and issue to
such Purchaser electing so to convert its Company Notes or to exercise its Warrants, respectively,
one or more certificates representing the applicable number of shares of Common Stock issuable upon
such Conversion of the Company Notes (“Conversion Stock”) or such Exercise of the Warrants
(“Warrant Shares”);

     D. The Company has agreed to provide Purchaser with certain rights with respect to all shares
of Conversion Stock issuable upon Conversion and all Warrant Shares issuable upon Exercise to
register such shares under the Securities Act (as hereinafter defined) for resale. All shares of
Conversion Stock and Warrant Shares issued as of the date of this Agreement or issued or issuable
at any time by the Company to Purchaser upon Conversion of the Company Notes or Exercise of the
Warrants , other than shares which cease to be Restricted Securities (as hereinafter defined),
shall be referred to for the purposes of this Agreement as the “Registrable Securities” ;
and

     E. For the avoidance of doubt, nothing in this Agreement or in the Purchase Agreement or in
the Conversion Agreement or the Company Notes or Warrants shall obligate the Company to register
any securities of Tethys Petroleum Investments Limited under the Securities Act or any other
foreign or domestic securities laws.

     NOW, THEREFORE, in consideration of the premises and other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged and confirmed, the parties, intending to
be legally bound, agree as follows:

 

 

ARTICLE 1

REGISTRATION RIGHTS AND PROCEDURES

     Section 1.1 Definitions.

     (a) As used in this Agreement, the following terms shall have the meanings:

     (i) “Affiliate” of any specified Person means any other Person who directly, or
indirectly through one or more intermediaries, is in control of, is controlled by, or is
under common control with, such specified Person. For purposes of this definition, control
of a Person means the power, directly or indirectly, to direct or cause the direction of the
management and policies of such Person whether by contract, securities, ownership or
otherwise; and the terms “controlling” and “controlled” have the respective meanings
correlative to the foregoing.

     (ii) “Commission” means the United States Securities and Exchange Commission.

     (iii) “Common Stock” has the meaning ascribed thereto in the Recitals.

     (iv) “Conversion” has the meaning ascribed thereto in the Recitals.

     (v) “Conversion Stock” has the meaning ascribed thereto in the Recitals.

     (vi) “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission thereunder, or any similar successor statute.

     (vii) “Exercise” has the meaning ascribed thereto in the Recitals.

     (viii) “Holder” means the Purchaser so long as the Purchaser holds Registrable
Securities and each subsequent holder of Registrable Securities who agrees to become bound
by all of the terms and provisions of this Agreement in accordance with Section 4.2 hereof.

     (ix) “Person” means any individual, partnership, corporation, limited liability
company, joint stock company, association, trust, unincorporated organization, or a
government or agency or political subdivision thereof.

     (x) “Prospectus” means the prospectus (including, without limitation, any preliminary
prospectus and any final prospectus filed pursuant to Rule 424(b) under the Securities Act,
including any prospectus that discloses information previously omitted from a prospectus
filed as part of an effective registration statement in reliance on Rule 430A under the
Securities Act) included in the Registration Statement, as amended or supplemented by any
prospectus supplement with respect to the terms of the offering of any portion of the
Registrable Securities covered by the Registration Statement and by all other amendments and
supplements to such prospectus, including all material incorporated by reference in such
prospectus and all documents filed after the date of such prospectus by the Company under
the Exchange Act and incorporated by reference therein.

     (xi) “Purchase Agreement” has the meaning ascribed thereto in the Recitals.

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     (xii) “Registrable Securities” has the meaning ascribed thereto in the Recitals.

     (xiii) “Registration Statement” means a registration statement of the Company filed on
Form S-1 or S-3 or such other appropriate form under the Securities Act providing for the
registration of, and the sale of Registrable Securities, including without limitation any
Registration Statement providing for the registration of, and sale on a continuous or
delayed basis by the holders of, the Registrable Securities pursuant to Rule 415 under the
Securities Act, including the Prospectus contained therein and forming a part thereof, any
amendments to such registration statement and supplements to such Prospectus, and all
exhibits and other material incorporated by reference in such registration statement and
Prospectus.

     (xiv) “Restricted Security” means any share of Common Stock issued upon Conversion of
the Company Notes or Exercise of the Warrants or held by any Person, except for any such
share that (i) has been registered pursuant to an effective Registration Statement under the
Securities Act and sold in a manner contemplated by the Prospectus included in the
Registration Statement, (ii) has been freely transferred in compliance with the resale
provisions of Rule 144 under the Securities Act (or any successor provision thereto) or is
freely transferable, together with all other Restricted Securities in one transaction,
pursuant to paragraph (k) of Rule 144 under the Securities Act (or any successor provision
thereto), or (iii) otherwise has been transferred and a new share of Common Stock not
subject to any transfer restrictions under the Securities Act has been delivered by or on
behalf of the Company.

     (xv) “Required Majority” means the Holders of a majority of the number of Registrable
Securities then outstanding (for purposes of calculation, Company Notes shall be treated as
if they have been converted into Registrable Securities).

     (xvi) “Securities Act” means the Securities Act of 1933, as amended, and the rules and,
regulations of the Commission thereunder, or any similar successor statute.

     (xvii) “Warrants” has the meaning ascribed thereto in the Recitals.

     (xviii) “Warrant Shares” has the meaning ascribed thereto in the Recitals.

     (b) All capitalized terms used and not defined herein have the respective meaning assigned to
them in the Purchase Agreement.

     Section 1.2 Registration Rights.

          (a) Initial Filing. The Company shall use all commercially reasonable efforts to file
a Registration Statement on Form S-3 with respect to all Registrable Securities by September 30,
2006 and have such Registration Statement declared effective pursuant to this Agreement. In the
event the Company is not eligible to file a Registration Statement on Form S-3, the Company shall
file a Registration Statement on Form S-1 no later than December 31, 2006.

          (b) Piggyback Registration Rights. Subject to the terms and conditions of this
Agreement, if the Company intends to file or desires to file a Registration Statement providing for
the offering or resale of (i) Common Stock or (ii) any Registrable Securities (other than a
registration (A) on Form S-8 or S-4 or any successor or similar forms, (B) relating to Common Stock
or any other shares of capital stock of the Company issuable upon exercise of employee share
options or in connection with any employee benefit or similar plan of the Company or (C) in
connection with a direct or indirect acquisition

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by the Company of another Person or any transaction with respect to which Rule 145 (or any
successor provision) under the Securities Act applies), the Company will notify the Holders of the
proposed filing at least 30 days prior to the filing of the Registration Statement, and will afford
each Holder an opportunity to include in such Registration Statement all or any part of the
Registrable Securities then held by such Holder. If any Holder desires to include in any such
Registration Statement all or part of the Registrable Securities held by such Holder, such Holder
shall, within 15 days after receipt of the above-described notice from the Company, so notify the
Company in writing, and in such notice, if the Holder has not already done so, shall inform the
Company that the Holder has elected to convert some or all of its Company Notes pursuant to
Section 11.7 of the Purchase Agreement, and of the number of Registrable Securities such
Holder wishes to include in such Registration Statement.

          (c) Demand Registration Rights.

               (i) Requests for Registration. Subject to Section 1.2(c)(ii), the Holders may
request registration on a Registration Statement under the Securities Act of all or part of their
Registrable Securities, as the case may be, at any time after December 31, 2006 (a “Demand
Registration”). Within ten days after receipt of any request pursuant to this Section
1.2(c)(i), the Company shall give written notice of such request to all other Holders and will
include in such registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 21 days after the Company’s notice has been
given.

               (ii) Limits on the Number of Demand Registrations. The Holders may request only five
(5) Demand Registrations and not more than one Demand Registration in any twelve month period. A
registration will not count as a Demand Registration hereunder (x) (i) until it has become
effective and (ii) unless the Holders of Registrable Securities requested to be included in such
Demand Registration are able to register and sell all of the Registrable Securities requested to be
included in such registration (provided, if such registration is made on Form S-1, such
Registration Statement need only be effective for a period of 90 consecutive days) or (y) if the
Company shall sell any Common Stock in the registration resulting from such Demand Registration (in
which case the request for a Demand Registration shall be deemed a request for a Piggyback
Registration pursuant to Section 1.2(a)). The Company will pay all registration expenses in
connection with (x) any Demand Registration requested hereunder and (y) any registration initiated
as a Demand Registration requested hereunder which subsequently becomes other than a Demand
Registration.

          (d) Qualification for Form S-3. The Company represents and warrants that it currently
is eligible to use Form S-3 and meets all applicable requirements for its use. The Company shall
use its commercially reasonable efforts not take any willful and discretionary action that will
limit, impair or otherwise prevent it from being able to use Form S-3 or any successor thereto once
eligibility for such use has been established.

          (e) Effectiveness of Registration Statement. The Company shall use all
commercially reasonable efforts to have any Registration Statement filed pursuant to this
Agreement (other than a Registration Statement on Form S-1 or any successor form) declared
effective by the Commission no later than 120 days after the filing thereof. All Registration
Statements filed pursuant to this Agreement, other than any Registration Statement on Form S-1 (or
any successor form thereto), shall be maintained in effect by the Company until the earlier of two
years or the date on which all Registrable Securities cease to be Restricted Securities. The
Company shall maintain the effectiveness of any registration statement on Form S-1 (or any
successor form thereto) for a period of 90 consecutive days.

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     Section 1.3 Information and Copies.

          (a) The Company shall furnish to each Holder electing to include its Common Stock in the
Registration Statement such number of copies of the Registration Statement, each amendment and
supplement thereto, the Prospectus, and such other documents as such Holder may reasonably request
in order to facilitate the disposition of the Registrable Securities owned by it.

          (b) The Company shall promptly notify each Holder whose Registrable Securities are included in
the Registration Statement of the happening of any event as a result of which the Prospectus
contains an untrue statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in light of the
circumstances under which it is made and shall use commercially reasonable efforts to prepare and
file with the Commission, and promptly notify such Holders of the filing of, a supplement to such
Prospectus or an amendment to the Registration Statement so that, as thereafter delivered to the
purchasers of Registrable Securities, such Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances under which they were made and
in the case of an amendment to the Registration Statement, use reasonable best efforts to cause it
to become effective as soon as possible. Each Holder shall promptly notify the Company of the
happening of any event applicable to it, as a result of which the Prospectus contains an untrue
statement of a material fact or omits to state any material fact stated therein or necessary to
make the statements therein in relation to such Holder not misleading in light of the circumstances
under which it is made. Upon receipt of any notice from the Company, or provision of any notice to
the Company by any Holder, of the happening of any event of the kind described above, such Holder
will forthwith discontinue disposition of Registrable Securities pursuant to the Registration
Statement until such Holder’s receipt of the copies of the supplemented or amended Prospectus, or
until such Holder is advised in writing by the Company that the use of the Prospectus may be
resumed.

          (c) The Company shall make available for inspection by each Holder, any underwriter
participating in any disposition pursuant to the Registration Statement, and any attorney,
accountant, or other agent retained by any Holder or any underwriter, all financial and other
records of the Company (reasonably requested), the Company’s applicable corporate documents and
contracts as shall be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company’s officers, directors, employees, and independent accountants
to supply all information reasonably requested by any such Holder, as well as any underwriter,
attorney, accountant, or agent in connection with the Registration Statement; provided, however,
that each Holder agrees that information obtained by such Holder as a result of such inspections
which constitutes confidential information is subject to the confidentiality provisions of
Section 22 of the Purchase Agreement and is deemed confidential shall not be used by such
Holder as the basis for any market transaction in the Company’s securities unless and until such
information is made generally available to the public, and each Holder shall use its best efforts
to cause any attorney, accountant, or agent retained by such Holder to keep confidential any such
information.

          (d) In the event of the issuance of any stop order suspending the effectiveness of the
Registration Statement, or of any order suspending or preventing the use of any related Prospectus
or suspending the qualification of any Common Stock included in the Registration Statement for sale
in any jurisdiction, the Company will promptly notify Holders of such and will use reasonable
efforts to obtain the withdrawal of such order.

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     Section 1.4 Listing of Registrable Securities. The Company shall cause all Registrable
Securities to be listed on each securities exchange or other quotation service on which the Common
Stock is then listed.

     Section 1.5 Underwritten Offering. If the registration of which the Company gives notice is
for a registered public offering involving an underwriting, the Company shall include such
information in the notice given pursuant to Section 1.2. In such event, the right of each
Holder to registration pursuant to Section 1.2 shall be conditioned upon such Holder
agreeing to participate in such underwriting and upon the inclusion of the Registrable Securities
in the underwriting to the extent provided herein. Each Holder electing to include its Registrable
Securities in such registration shall (together with the Company and other participating
shareholders) enter into an underwriting agreement in customary form with the underwriter or
underwriters selected by the Company. Notwithstanding any other provision of this Section
1.5, if the underwriter shall, in good faith, advise the Company in writing that the offering
contemplated thereby will be materially adversely affected by the inclusion of Registrable
Securities, then the Company shall so advise such Holder and the other participating shareholders,
and the number of shares of Registrable Securities and Common Stock (collectively,
“Underwritten Securities”) that may be included in the registration and underwriting shall
be allocated first to the Company, if it is participating in such registration and underwriting,
second, pro rata among such Holders and other parties having registration rights previously granted
by the Company, and, third, pro rata among the other participating shareholders, if any, in each
case in proportion, as nearly as practicable, to the respective amounts of Underwritten Securities
held by such Holder and participating shareholders at the time of filing the Registration
Statement. The Company may only exercise this right once within any twelve-month period without
the consent of the Required Majority.

     If such Holder disapproves of the terms of any such underwriting, it may elect to withdraw
therefrom by written notice to the Company and the underwriter. The Registrable Securities so
withdrawn shall also be withdrawn from registration.

     Section 1.6 Market Stand Off Agreement. By electing to include Registrable Shares in any
registration pursuant to Section 1.2, each Holder so electing shall be deemed to have
agreed, provided such Registrable Securities are included in the Registration Statement, not to
effect any public sale or distribution of securities of the Company of the same or similar class or
classes of the securities included in the Registration Statement or any securities convertible into
or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 or Rule
144A under the Securities Act, following the filing of a Registration Statement by the Company with
the Commission in connection with a public offering of its securities and continuing until 90 days
following the date such registration Statement is declared effective by the Commission and in
connection therewith such Holder agrees to execute and deliver such documents or instruments as the
Company may reasonably request evidencing this agreement.

     Section 1.7 Nature of Sale. Notwithstanding any other provision of this Agreement, Common
Stock shall only be treated as Registrable Securities if and so long as it remains a Restricted
Security.

     Section 1.8 Reports under the Exchange Act. With a view to making available to the Holders
the benefits of Rule 144 promulgated under the Securities Act, or any other similar rule or
regulation of the Commission that may at any time permit the Holders to sell securities of the
Company to the public without registration (“Rule 144”), the Company agrees to use its
commercially reasonable efforts to:

          (a) make and keep public information available, as those terms are understood and defined in
Rule 144;

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          (b) file with the Commission in a timely manner all reports and other documents required of
the Company under the Securities Act and Exchange Act;

          (c) furnish to each Holder, so long as such Holder owns Registrable Securities, promptly upon
request, (i) a written statement by the Company that it has complied with the reporting
requirements of the Securities Act and the Exchange Act, and (ii) a copy of the most recent annual
or periodic report of the Company and such other reports and documents so filed by the Company,
unless such reports and documents are publicly available on EDGAR; and

          (d) such other information as may be reasonably requested to permit such Holder to sell such
securities pursuant to Rule 144 without registration unless such information is publicly available
on EDGAR.

     Section 1.9 Expenses of Registration. The Company agrees to pay any and all expenses of
preparing and filing all Registration Statements under this Agreement, and of having such
Registration Statements declared effective and of maintaining the effectiveness thereof. For the
avoidance of doubt, the Holders shall be responsible for payment of their own fees and expenses
incurred in connection with the preparation, filing, review, declaration of effectiveness and
maintenance of effectiveness of any Registration Statement filed pursuant to this Agreement,
including, without limitation, legal and accounting fees and expenses.

     Section 1.10 Other Securities. Nothing in this Agreement shall prevent the Company from
registering securities other than Common Stock by filing a Registration Statement with the
Commission.

ARTICLE 2

PURCHASER’S RIGHTS AND UNDERTAKINGS

     Section 2.1 Rights. Holders shall have the absolute right to exercise or refrain from
exercising any right or rights they may have by reason of this Agreement, including, without
limitation, the right to consent to the waiver or modification of any obligation under this
Agreement, and Holders shall not incur any liability to any other holder of any of the Company’s
securities as a result of exercising or refraining from exercising any such right or rights.

     Section 2.2 Suspension of Sales. If any Registrable Securities are included in a Registration
Statement pursuant to the terms of this Agreement, Holders will not (until further notice) effect
sales thereof after receipt of written notice from the Company of the occurrence of an event
specified in such notice in order to permit the Company to correct or update the Registration
Statement or Prospectus.

     Section 2.3 Compliance. If any Registrable Securities are being registered in any
registration pursuant to this Agreement, Holders will comply with all anti-stabilization,
manipulation, and similar provisions of Section 10 of the Exchange Act, and any rules
promulgated thereunder by the Commission and, at the Company’s request, will execute and deliver to
the Company and to any underwriter participating in such offering an appropriate agreement to such
effect.

     Section 2.4 Termination of Effectiveness. Following the end of the period during which the
Company is obligated to keep the Registration Statement current and effective as described herein,
to the extent Holders’ Registrable Securities are included in the Registration Statement, Holders
shall discontinue sales thereof pursuant to such Registration Statement, unless Holders have
received written

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notice from the Company of its intention to continue the effectiveness of such Registration
Statement with respect to any of such securities which remain unsold.

     Section 2.5 Furnish Information. It shall be a condition precedent to the Company’s
obligations to take any action pursuant to this Agreement with respect to the Registrable
Securities that Holders shall furnish to the Company such information regarding Holders, the
Registrable Securities held by Holders, and the intended method of disposition of such securities
and such other information as shall be required to effect the registration of Holders’ Registrable
Securities or as the Company shall otherwise reasonably request. The obligations of the Company
under this Agreement with respect to any Holder shall be suspended unless and until such Holder
complies with this Section 2.5. In connection with Holders’ obligation to provide
information the Company may request and the Holders agree to complete, execute and deliver to the
Company a Stockholders Questionnaire providing the information required to register their
Registrable Securities under the Securities Act for resale.

     Section 2.6 Underwritten Registration. Holders may not participate in any registration
hereunder which is underwritten unless Holders: (a) agree to sell their securities on the basis
provided in any customary underwriting arrangements approved by the Company; (b) complete and
execute all customary questionnaires, powers of attorney, indemnities, underwriting agreements, and
other documents reasonably required under the terms of such underwriting arrangements; and (c)
agree to pay their pro rata share of all underwriting discounts and commissions and their own
expenses (including, without limitation, counsel fees).

     Section 2.7 Delay of Registration. Holders shall not have any right to obtain or seek an
injunction restraining or otherwise delaying the preparation of, or declaration of the
effectiveness of, any Registration Statement initiated in accordance with the terms of this
Agreement if such injunction is the result of any controversy that might arise with respect to the
interpretation or implementation of these provisions.

ARTICLE 3

INDEMNIFICATION

     Section 3.1 Indemnification by the Company. The Company shall indemnify and hold harmless,
with respect to any Registration Statement filed by it pursuant to this Agreement, to the fullest
extent permitted by law, each Holder, as well as each Holder’s agents, representatives and
Affiliates (collectively, the “Holder Indemnified Parties”) against all losses, claims,
damages, liabilities, and expenses joint or several (including reasonable fees of counsel and any
amounts paid in settlement effected with the Company’s consent, which consent shall not be
unreasonably withheld) (collectively, “Losses”) to which any such Holder Indemnified Party
may become subject under the Securities Act, the Exchange Act, any other federal law, any state or
common law, any rule or regulation promulgated thereunder, or otherwise, insofar as such Losses (or
actions or proceedings, whether commenced or threatened, in respect thereof) are caused by (a) any
untrue statement or alleged untrue statement of a material fact contained in any Registration
Statement in which such Registrable Securities were included as contemplated hereby or the omission
or alleged omission to state therein a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under which they were made,
not misleading, (b) any untrue statement or alleged untrue statement of a material fact contained
in any Prospectus, together with the documents incorporated by reference therein (as amended or
supplemented if the Company shall have filed with the Commission any amendment thereof or
supplement thereto), or the omission or alleged omission to state therein a material fact required
to be stated therein or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or (c) any violation by the Company of
the Securities Act, the

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Exchange Act, any other federal law, any state or common law, or any rule or regulation
promulgated thereunder in connection with any such registration; provided, however,
that the Company shall not be liable to any such Holder Indemnified Party in any such case to the
extent that any such Loss (or action or proceeding, whether commenced or threatened, in respect
thereof) arises out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in such Registration Statement or amendment thereof or supplement
thereto or in any such Prospectus in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any such Holder Indemnified Party relating to such
Holder Indemnified Party for use in the preparation thereof; and provided further,
that the Company shall not be liable to any such Holder Indemnified Party with respect to any
Prospectus to the extent that any such Loss of such Holder Indemnified Party results from the fact
that such Holder Indemnified Party sold Registrable Securities to a person to whom there was not
sent or given, at or before the written confirmation of such sale, a copy of the Prospectus
(excluding documents incorporated by reference) or of the Prospectus as then amended or
supplemented (excluding documents incorporated by reference) if the Company previously furnished
copies thereof to such Holder Indemnified Party in compliance with this Agreement and the Loss of
such Holder Indemnified Party results from an untrue statement or omission of a material fact
contained in such Prospectus which was subsequently corrected in the Prospectus (or the Prospectus
as amended or supplemented). Such indemnity and reimbursement of expenses and obligations shall
remain in full force and effect regardless of any investigation made by or on behalf of the Holder
Indemnified Parties and shall survive the transfer of such securities by such Holder Indemnified
Parties.

     Section 3.2 Indemnification by Holders. Each Holder shall indemnify and hold harmless, to the
fullest extent permitted by law, the Company, its directors, officers, employees, and agents, and
each person who controls the Company (within the meaning of the Securities Act) (collectively,
“Company Indemnified Parties”) against all Losses to which any Company Indemnified Party
may become subject under the Securities Act, the Exchange Act, any other federal law, any state or
common law, any rule or regulation promulgated thereunder, or otherwise, insofar as such Losses (or
actions or proceedings, whether commenced or threatened, in respect thereof) are caused by (a) any
untrue statement or alleged untrue statement of a material fact contained in any Registration
Statement in which such Registrable Securities were included as contemplated hereby or the omission
or alleged omission to state therein a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under which they were made,
not misleading, (b) any untrue statement or alleged untrue statement of a material fact contained
in any Prospectus, together with the documents expressly incorporated by reference therein (as
amended or supplemented if the Company shall have filed with the Commission any amendment thereof
or supplement thereto), or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and in the cases described in clauses
(a) and (b) of this Section 3.2, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information furnished in writing by or on behalf of such
Holder relating to such Holder for use in the preparation of the documents described in clauses (a)
and (b), (c) any violation by such Holder of the Securities Act, the Exchange Act, any other
federal law, any state or common law, or any rule or regulation promulgated thereunder applicable
to such Holder and relating to action of or inaction by such Holder in connection with any such
registration, and (d) with respect to any Prospectus, the fact that such Holder sold Registrable
Securities to a person to whom there was not sent or given, at or before the written confirmation
of such sale, a copy of any subsequent Prospectus (excluding the documents incorporated by
reference) or of the Prospectus as then amended or supplemented (excluding documents incorporated
by reference) if the Company has previously furnished copies thereof to such Holder in compliance
with this Agreement and the Loss of such Company Indemnified Party results from an untrue statement
or omission of a material fact relating to information provided by such Holder contained in such
Prospectus which was corrected in the Prospectus (or the Prospectus as amended or supplemented).
Such indemnity and reimbursement of expenses and obligations shall remain in full force

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and effect regardless of any investigation made by or on behalf of the Company Indemnified
Parties and shall survive the transfer of securities by such Holder Indemnified Parties.

     Section 3.3 Conduct of Indemnification Proceedings. Promptly after receipt by an identified
party hereunder of written notice of the commencement of any action, suit, proceeding,
investigation, or threat thereof with respect to which a claim for indemnification may be made
pursuant hereto, such indemnified party shall, if a claim in respect thereto is to be made against
an indemnifying party, give written notice to the indemnifying party of the threat or commencement
thereof; provided, however, that the failure to so notify the indemnifying party
shall not relieve it from any liability which it may have to any indemnified party except to the
extent that the indemnifying party is actually prejudiced by such failure to give notice. If any
such claim or action referred to hereunder is brought against any indemnified party and it then
notifies the indemnifying party of the threat or commencement thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it wishes, jointly with any other
indemnifying party similarly notified, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party (which counsel shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party). The indemnifying party shall not be
liable to an indemnified party hereunder for any legal expenses of counsel or any other expenses
incurred by such indemnified party in connection with the defense thereof, unless the indemnifying
party has failed to assume the defense of such claim or action or to employ counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid by the indemnified
party, if representation of such indemnified party by the counsel retained by the indemnifying
party would be inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such action. The indemnifying
party shall not be required to indemnify the indemnified party with respect to any amounts paid in
settlement of any action, proceeding, or investigation entered into without the written consent of
the indemnifying party, which consent shall not be unreasonably withheld. No indemnifying party
shall consent to the entry of any judgment or enter into any settlement without the consent of the
indemnified party unless (a) such judgment or settlement does not impose any obligation or
liability upon the indemnified party other than the execution, delivery, or approval thereof, and
(b) such judgment or settlement includes as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a full release and discharge from all liability
in respect of such claim and a full release of all persons that may be entitled to or obligated to
provide indemnification or contribution under this Article.

     Section 3.4 Contribution. If the indemnification provided for herein is unavailable to or
insufficient to hold harmless an indemnified party hereunder, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result of the Losses (or
actions or proceedings in respect thereof) referred to herein in such proportion as is appropriate
to reflect the relative fault of the indemnifying party on the one hand and the indemnified party
on the other in connection with the statements, omissions, actions, or inactions which resulted in
such Losses. The relative fault of the indemnifying party and the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or the indemnified party, any action or inaction by any such
party, and the parties’ relative intent, knowledge, access to information, and opportunity to
correct or prevent such statement, omission, action, or inaction. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
Promptly after receipt by an indemnified party hereunder of written notice of the commencement of
any action, suit, proceeding, investigation, or threat thereof with respect to which a claim for
contribution may be made against an indemnifying party hereunder, such indemnified party shall, if
a claim for contribution in respect thereto is to be made against an indemnifying party, give
written notice to the indemnifying

- 10 -

 

party of the commencement thereof (if the notice specified herein has not been given with
respect to such action); provided, however, that the failure to so notify the
indemnifying party shall not relieve it from any obligation to provide contribution which it may
have to any indemnified party hereunder, except to the extent that the indemnifying party is
actually prejudiced by the failure to give notice. The parties hereto agree that it would not be
just and equitable if contribution pursuant hereto were determined by pro rata allocation or by any
other method of allocation which does not take account of equitable considerations referred to
herein.

     If indemnification is available hereunder, the indemnifying parties shall indemnify each
indemnified party to the fullest extent provided herein, without regard to the relative fault of
said indemnifying party or indemnified party or any other equitable consideration provided for
herein. The provisions hereof shall be in addition to any other rights to indemnification or
contribution which any indemnified party may have pursuant to law or contract shall remain in full
force and effect regardless of any investigation made by or on behalf of any indemnified party, and
shall survive the transfer of securities by any such party.

ARTICLE 4

MISCELLANEOUS

     Section 4.1 Termination. The obligations under Article 1 shall terminate on the
earlier of the date on which all Registrable Securities have been sold pursuant to a Registration
Statement or all Conversion Stock or Warrant Shares are no longer Restricted Securities. Holders
whose shares of Common Stock are sold pursuant to a Registration Statement shall reasonably inform
the Company of sales of such shares and shall provide all such other information as the Company may
reasonably request in order to comply with the requirements of the Securities Act and the rules and
regulations promulgated thereunder, including, without limitation, Regulation S-K.

     Section 4.2 Assignment; Successors and Assigns. Holders may assign their rights hereunder
with respect to any permitted assignee all or any portion of the Registrable Securities provided
that (a) the Company is furnished with written notice of the name and address of the assignee and
the securities with respect to which such rights are being assigned and all such other information
as may be reasonably requested by the Company in order for the Company to be able to comply with
applicable requirements of the Securities Act and the Exchange Act and the rules and regulations
promulgated thereunder, and (b) the Company shall have the right to require any holder of
Registrable Securities to execute a counterpart of this Agreement as a condition to such holder’s
right to claim any rights hereunder. This Agreement and all provisions thereof shall be binding
upon, inure to the benefit of, and are enforceable by the parties hereto and their respective
successors and permitted assigns.

     Section 4.3 Notices. All notices, requests, and other communications hereunder shall be in
writing and will be deemed to have been duly given and received (a) when personally delivered, (b)
when sent by facsimile upon confirmation of receipt, (c) four business days after the day on which
the same has been delivered prepaid to a nationally recognized courier service, or (d) ten business
days after the deposit in the United States mail, registered or certified, return receipt
requested, postage prepaid, in each case addressed as follows:

          (a) if to the Company: then at CanArgo Energy Corporation, P.O. Box 291, St. Peter Port,
Guernsey, Channel Islands, Attn: Corporate Secretary, facsimile number: +44 1481 729982 (with a
copy to McGrigors, Pacific House, 70 Wellington Street, Glasgow G2 6SB, UK, Attn: Rosalie Mackay,
Esq., facsimile number +44 141 204 1351); or

- 11 -

 

          (b) if addressed to a Holder, then at the address set forth on Schedule A attached hereto
opposite such Holder’s name.

     Holders or the Company may agree to accept notices and other communications to it hereunder by
electronic communications pursuant to procedures reasonably approved by it; provided that approval
of such procedures may be limited to particular notices or communications. Any party hereto from
time to time may change its address, facsimile number, or other information for the purpose of
notices to that party by giving notice specifying such change to the other parties hereto.

     Section 4.4 Public Announcements. Except as otherwise required by law, Holders shall not
issue any press release or make any other public announcement with respect to the transactions
contemplated hereby without the approval of the Company, which approval shall not be unreasonably
withheld or delayed.

     Section 4.5 Governing Law; Jurisdiction. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the law of the State of New
York excluding choice of law principles of the law of such State that would require the application
of the laws of a jurisdiction other than such State. For the purposes of any action or proceeding
involving this Agreement or any other agreement or document referred to herein or therein, the
Company hereby, and shall cause its subsidiaries to, expressly submits to the nonexclusive
jurisdiction of all federal and state courts sitting in the Borough of Manhattan, City and State of
New York and consents that any order, process, notice of motion or other application to or by any
of said courts or a judge thereof may be served within or without such court’s jurisdiction by
registered mail or by personal service, provided that a reasonable time for appearance is
allowed. The Company hereby, and shall cause its subsidiaries to, irrevocably waives any objection
that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising
out of or relating to this Agreement or any other agreement or document referred to herein or
therein brought in any federal or state court sitting in the City and State of New York, and hereby
further irrevocably waives any claim that any such suit, action or proceeding brought in any such
court has been brought in an inconvenient forum.

     Section 4.6 No Third Party Beneficiary. This Agreement shall not confer any rights or
remedies upon any person other than the parties hereto and their respective successors and
permitted assigns.

     Section 4.7 Severability. In the event that any provision of this Agreement or the
application of any provision hereof is declared to be illegal, invalid, or otherwise unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not
invalidate or render unenforceable such provision in any other jurisdiction.

     Section 4.8 Headings. The headings in this Agreement are for convenience of reference only
and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction,
or effect.

     Section 4.9 Counterparts. This Agreement may be executed in any number of counterparts, each
of which shall be an original but all of which together shall constitute one instrument. Each
counterpart may consist of a number of copies hereof, each signed by less than all, but together
signed by all, of the parties hereto.

     Section 4.10 Entire Agreement. This Agreement embodies the entire understanding and agreement
between the parties hereto with respect to the subject matter hereof and supersedes all prior
agreements and understandings relating to the subject matter hereof.

- 12 -

 

     Section 4.11 Amendment; Waiver. The provisions of this Agreement, including the provisions of
this sentence, may not be amended, modified or supplemented, and waivers or consents to or
departures from the provisions hereof may not be given, without the written consent of the Company
and a Required Majority of Holders.

     Section 4.12 Further Assurances. Each party shall cooperate and take such action as may be
reasonably requested by another party in order to carry out the provisions and purposes of this
Agreement and the transactions contemplated hereby.

(Signature pages follow)

- 13 -

 

     IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by the undersigned,
thereto duly authorized, as of the date first set forth above.

	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 	 	CanArgo Energy Corporation	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Its	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	PURCHASER:	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	Persistency 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 	 	 
	 	 	 	 	 	 	 

- 14 -

 

SCHEDULE A

	 	 	 
	NAME OF PURCHASER	 	ADDRESS
	PERSISTENCY 
	 	 

- 15 -exv10w1

 

CONVERSION AGREEMENT

This CONVERSION AGREEMENT (this “Agreement”) is made and entered into as of the 28th day
of June, 2006 by and among:

	(1)	 	CANARGO ENERGY CORPORATION, a Delaware Corporation (the “Company”);
	 
	(2)	 	THE PERSONS whose names and addresses are set out in Schedule 1 (the “Subordinated
Noteholders” and individually a “Subordinated Noteholder”); and
	 
	(3)	 	PERSISTENCY, a company incorporated under the laws of the Cayman Islands (“Persistency”).

WHEREAS

	(A)	 	The Company proposes to admit to trading on the AIM Market of the London Stock Exchange plc
(or other recognised national stock exchange) one of its indirect wholly owned subsidiaries,
Tethys Petroleum Investments Limited (“Tethys”), and concurrently undertake a fundraising in
respect of Tethys (the “IPO”).
	 
	(B)	 	On or around the date of this Agreement Persistency and the Subordinated Noteholders have
entered into an agreement pursuant to which the Subordinated Noteholders have sold to
Persistency $5 million of the principal amount of the Subordinated Notes issued under and
pursuant to that certain Note and Warrant Purchase Agreement (the “NWPA”) dated as of 3 March
2006 by and among the Company and the Subordinated Noteholders.
	 
	(C)	 	The Subordinated Noteholders and Persistency have certain rights under the NWPA and the
ancillary documents associated therewith, which rights include, without limitation, the right
pursuant to Section 11.7 of the NWPA to convert the principal amount of each Subordinated Note
from time to time in whole or in part into Tethys Common Stock (as defined in the NWPA).
	 
	(D)	 	The Subordinated Noteholders and Persistency on or around the date of this Agreement have
entered into a letter agreement with the Company pursuant to which the Subordinated
Noteholders and Persistency have conditionally agreed to waive and release certain of their
rights in connection with the NWPA.
	 
	(E)	 	To the extent they hold Subordinated Notes, the Subordinated Noteholders and Persistency are
willing to agree to convert their Subordinated Notes into Tethys Common Stock in accordance
with Section 11.7 of the NWPA on the terms and subject to the conditions set out in this
Agreement.

IT IS AGREED as follows:

	1	 	DEFINITIONS AND INTERPRETATION
	 
	1.1	 	In this Agreement the following words and expressions shall, unless the context otherwise
requires, have the following meanings:

 

 

	 	 	“Admission” means the admission of the Tethys Common Stock to trading on the AIM becoming
effective and a reference to Admission “becoming effective” shall be construed as a
reference to the London Stock Exchange issuing a dealing notice to that effect in
accordance with rule 6 of the AIM Rules;
	 
	 	 	“AIM Rules” means the AIM Rules for Companies issued by the London Stock Exchange;
	 
	 	 	“Business Day” means any day other than a Saturday, a Sunday or a day on which commercial
banks in New York City or London are required or authorized to be closed;
	 
	 	 	“Conversion Date” means the date five Business Days prior to the date of the Tethys
Closing or such other later date prior to the Tethys Closing as notified by the Company to
the Subordinated Noteholders and Persistency;
	 
	 	 	“London Stock Exchange” means the London Stock Exchange plc;
	 
	 	 	“Nominated Adviser” has the meaning given to the expression “nominated adviser” in the AIM
Rules;
	 
	 	 	“Note Purchase Agreement” means the Note Purchase Agreement dated as of 25 July 2005 by
and among the Company, Ingalls & Snyder Value Partners L.P. and the Purchasers (as defined
therein);
	 
	 	 	“Senior Noteholders” means the holders of the Senior Secured Note;
	 
	 	 	“Senior Secured Note” means the Senior Secured Note issued by the Company pursuant to the
Note Purchase Agreement; and
	 
	 	 	“Tethys Closing” means the date of delivery by Tethys’ Nominated Adviser to the London
Stock Exchange of a duly completed and signed application for Admission in the form
prescribed by the London Stock Exchange in accordance with rule 5 of the AIM Rules.
	 
	1.2	 	Words and expressions defined in the NWPA shall have the same meanings herein except in so
far as expressly varied by or inconsistent with the provisions of this Agreement.
	 
	2	 	CONDITIONS PRECEDENT
	 
	2.1	 	The Subordinated Noteholders and Persistency agree that they shall convert the entire
principal amount outstanding under the Subordinated Notes into shares of Tethys Common Stock
pursuant to Section 11.7 of the NWPA conditional upon the prior or contemporaneous
satisfaction or waiver of the following conditions:

	 	(a)	 	The Senior Noteholders and the Company shall have entered into a letter
agreement releasing certain rights and providing certain consents under the Note
Purchase Agreement to permit the IPO and the transactions contemplated thereby in
compliance with the terms of the Note Purchase Agreement, provided, however that a
minimum of $18 million of aggregate gross proceeds are raised by Tethys;
	 
	 	(b)	 	Tethys’ Nominated Adviser or Broker shall have confirmed in writing to
Persistency and the Subordinated Noteholders that the pre-money valuation of Tethys
immediately prior to the IPO is at least $52 million; and

2

 

	 	(c)	 	Tethys shall have confirmed in writing to Persistency and the Subordinated
Noteholders that the aggregate gross proceeds received by Tethys and the Company on
completion of the IPO are intended to be distributed and/or applied as follows,
depending on the total level of funds received:

	 	(i)	 	In the event that the aggregate gross proceeds of the IPO
do not exceed $25 million, all such proceeds shall be retained by Tethys.
	 
	 	(ii)	 	In the event that the aggregate gross proceeds of the IPO
exceed $25 million, then proceeds of the sale by the Company of Tethys
Common Stock, which may represent up to 50% of the aggregate gross proceeds
in excess of $25 million, shall be distributed to the Company and the
balance of the aggregate gross proceeds shall be retained by Tethys.

	 	 	 	All fees and expenses of the IPO shall be allocated to the Company and Tethys in
proportion to the gross proceeds received by them respectively. Fifty percent
(50%) of all net proceeds received by the Company from the IPO shall be used to
prepay in part the principal amount of the Senior Secured Notes then outstanding
(the “Tethys Prepayment Amount”).
	 
	 	(d)	 	Concurrently with the receipt by the Company of any proceeds from the IPO,
the Company shall deposit with Ingalls & Snyder LLC as escrow agent (the “Escrow
Agent”) an amount equal to the Tethys Prepayment Amount (the “Escrow Amount”) to
prepay at the applicable Redemption Price (as defined in Section 9.5 of the Note
Purchase Agreement) all or a portion of the indebtedness outstanding as of the
deposit date represented by Senior Secured Notes, to be held by the Escrow Agent in
an interest bearing account (the “Escrow Account”) pursuant to the terms of an Escrow
Agreement in substantially the form of Schedule 2 attached hereto (the “Escrow
Agreement”) until the earlier of (i) the conversion of the Senior Secured Notes in
accordance with the provisions of Section 10.7 of the Note Purchase Agreement or (ii)
December 31, 2006. In the event the Senior Noteholders elect to convert their Senior
Secured Notes prior to December 31, 2006, then the Escrow Agent shall promptly refund
all amounts held in the Escrow Account to the Company, including all interest earned
on any amounts held in the Escrow Account. In the event, however, that the Senior
Noteholders do not elect so to convert their Senior Secured Notes on or prior to
December 31, 2006, then all amounts held in the Escrow Account shall be used to
prepay the Senior Secured Notes in accordance with the provisions of Section 9 of the
Note Purchase Agreement, including all accrued and unpaid interest.

	2.2	 	The Subordinated Noteholders and Persistency each agree to provide a guaranty in
substantially the form of Schedule 3 attached hereto (each a “Senior Note Guaranty” and
together the “Senior Note Guaranties”) to the Senior Noteholders in an aggregate amount of
$6,500,000, on the terms set forth in the Senior Note Guaranties.
	 
	2.3	 	Notwithstanding Clause 2.1:

	 	(a)	 	Persistency and the Required Holders (as defined in the NWPA) shall be
entitled by notice in writing given to the Company to waive (to such extent as they
may think fit) compliance with the conditions stated in Clauses 2.1(a), (b) and (c);

3

 

	 	(b)	 	The Company shall be entitled by notice in writing given to Persistency and
the Subordinated Noteholders to waive (to such extent as they may think fit)
compliance with the conditions stated in Clause 2.1(a); and
	 
	 	(c)	 	Ingalls & Snyder Value Partners L.P., as a Required Holder (as defined in
the Note Purchase Agreement) on behalf of the Senior Noteholders, shall be entitled
by notice in writing to the Company and Persistency to waive (to such extent as it
may think fit) compliance with the condition stated in Clause 2.1(d).

	2.4	 	If any of the conditions in Clause 2.1 has not been satisfied or waived by 31 December 2006
(or by such later date as may be agreed in writing between Persistency, the Subordinated
Noteholders, Ingalls & Snyder Value Partners L.P. and the Company), then, without prejudice to
any accrued rights of the parties arising in respect of any of the provisions of this
Agreement, this Agreement shall, other than Clause 3.3, thereupon cease to have effect.
	 
	3	 	CONVERSION
	 
	3.1	 	Subject to the terms of Clause 2, on and with effect from the Conversion Date Persistency and
the Subordinated Noteholders shall convert the entire outstanding principal amount of the
Subordinated Notes held by each of them respectively into Tethys Common Stock pursuant to
Clause 11.7 of the NWPA (the “Conversion”). Accrued interest through the Conversion Date in
respect of the Subordinated Notes shall be payable by the Company at the time of the
Conversion.
	 
	3.2	 	The Tethys Common Stock shall be divided amongst Persistency and the Subordinated Noteholders
in the proportions of the Subordinated Notes held by them respectively.
	 
	3.3	 	Pending the Conversion, and from and after the date set forth in Clause 2.3 if the Conversion
has not occurred by such date, the Subordinated Noteholders, Persistency and the Company agree
that, the provisions of Section 19.1 of the NWPA to the contrary notwithstanding, Section 11.7
of the NWPA may not be modified or amended without the written consent of the holders of 65%
Subordinated Notes then outstanding.
	 
	3.4	 	Notwithstanding the provisions of Clause 2.1(b), in the event that the IPO is completed on a
pre-money enterprise valuation of less than $52 million, the Subordinated Noteholders shall be
issued with such number of additional shares of Tethys Common Stock (the “Additional Tethys
Shares”) at the IPO price in pro rata proportion to their interests in the Subordinated Notes
such that the Additional Tethys Shares taken together with the shares received upon conversion
of the outstanding principal amount of the Subordinated Notes held by each of them
respectively (converted pursuant to Clause 11.7 of the NWPA) shall equal $13 million in
aggregate value of Tethys Common Stock.
	 
	4	 	WARRANTS
	 
	4.1	 	The consideration payable to Persistency and the Subordinated Noteholders for the conversion
of their Subordinated Notes into Tethys Common Stock pursuant to Clause 3 shall be the issue
by the Company of warrants to purchase up to an aggregate of 13 million shares, at an exercise
price of $1.00 per share (subject to adjustment), of the Company’s common stock par value
$0.10 per share (the “Compensation Warrants”). The Compensation Warrants issuable to the
Subordinated Noteholders pursuant to this Clause 4.1 shall be issued to the Subordinated

4

 

	 	 	Noteholders on the Conversion Date and the Compensation Warrants issuable to Persistency
pursuant to this Clause 4.1 shall be issued to Persistency on the date of this Agreement.
	 
	4.2	 	The Compensation Warrants to be issued to the Subordinated Noteholders shall be substantially
in the form set out in Schedule 4, with such changes thereto, if any, as may be approved by
the Required Holders (as defined in the NWPA) and the Company in respect of their respective
Compensation Warrants.
	 
	4.3	 	The Compensation Warrants to be issued to Persistency shall be substantially in the form set
out in Schedule 5, with such changes thereto, if any, as may be approved by Persistency and
the Company.
	 
	4.4	 	The Compensation Warrants shall be divided amongst Persistency and the Subordinated
Noteholders in the proportions of the Subordinated Notes held by them respectively.
	 
	5	 	GENERAL
	 
	5.1	 	Further Assurance
	 
	 	 	The parties shall at their own cost do or procure the doing of all such acts and things
and/or execute or procure the execution of all such documents as are reasonably required
to give effect to the provisions of this Agreement.
	 
	5.2	 	Assignment
	 
	 	 	Neither party shall be entitled to assign in whole or in part any rights and/or
obligations arising under this Agreement to a third party without the prior written
consent of the other party.
	 
	5.3	 	Entire Agreement
	 
	 	 	This Agreement together with the Note Purchase Agreement and the NWPA constitute the
entire agreement among the parties with respect to the matters dealt with herein and
supersedes any previous agreement among the parties in relation to such matters.
	 
	5.4	 	Variation
	 
	 	 	No variation of this Agreement shall be valid or effective unless made by an instrument in
writing signed by the parties hereto.
	 
	5.5	 	Waiver
	 
	 	 	No waiver by either party of any of the requirements hereof or of any of its rights
hereunder shall be effective unless given in writing and signed by or on behalf of that
party and no forbearance, delay or indulgence by either party in enforcing the provisions
of this Agreement shall prejudice or restrict the rights of that party nor shall any
waiver by that party of any of the requirements hereof or any of its rights hereunder
release the other from full performance of its remaining obligations stated herein.
	 
	5.6	 	Severability
	 
	 	 	Each provision of this Agreement shall be construed separately and (save as otherwise
expressly provided herein) none of the provisions hereof shall limit or govern the extent,
application or

5

 

	 	 	construction of any other of them and notwithstanding that any provision of this Agreement
may prove to be illegal or unenforceable the remaining provisions of this Agreement shall
continue in full force and effect.
	 
	5.7	 	Counterparts
	 
	 	 	This Agreement may be executed in any number of counterparts and by each of the parties on
separate counterparts each of which when executed and delivered shall be deemed to be an
original, but all the counterparts together shall constitute one and the same agreement.
	 
	5.8	 	Law and Jurisdiction
	 
	5.8.1	 	This Agreement shall be governed by and construed in accordance with the law of the State of
New York.
	 
	5.8.2	 	Each party hereby submits to the non-exclusive jurisdiction of the Courts of New York as
regards any claim, dispute or matter arising out of or in connection with this Agreement and
its implementation and effect.
	 
	5.9	 	Binding Effect
	 
	 	 	This Agreement shall be binding upon the parties hereto and their successors in interest
and assigns.
	 
	5.10	 	Notices
	 
	 	 	All notices, demands, elections, requests and communications provided for hereunder shall
be in writing and sent: (a) by telefacsimile if the sender on the same day sends a
confirming copy of such notice by a recognized overnight delivery service (charges
prepaid), or (b) by registered or certified mail with return receipt requested (postage
prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any
such notice must be sent:

          (i) if to Persistency or to the Subordinated Noteholders, to Persistency or to the
Subordinated Noteholders at their respective addresses as set forth on the books
maintained by the Company, or at such other address as Persistency or any Subordinated
Noteholder shall have specified to the Company in writing,

          (ii) if to the Company, to the Company at its principal executive office to the
attention of Chief Executive Officer, or at such other address as the Company shall have
specified to Persistency and the Subordinated Noteholders in writing.

     Notices under this Section 5.10 will be deemed given only when actually received.

[signature pages follows]

6

 

IN WITNESS of which the parties have executed and delivered this document as a deed on the date
first before written.

SIGNED by

	 	 	 
	 

For and on behalf of CANARGO

	 	 
	ENERGY CORPORATION
	 	 

	 	 	 	 	 
	Name:
	 	 	 	 
	 

	 	 

	 	 
	Title:
	 	 	 	 
	 

	 	 	 	 

	 	 	 
	 
	 	 
	 

	 	 
	For and on behalf of PERSISTENCY

	 	 	 	 	 
	Name:
	 	 	 	 
	 

	 	 

	 	 
	Title:
	 	 	 	 
	 

	 	 	 	 

SIGNED by

	 	 	 
	 

	 	 
	For and on behalf of
	 	 
	PENRITH LTD
	 	 

	 	 	 	 	 
	Name:
	 	 	 	 
	 

	 	 

	 	 
	Title:
	 	 	 	 
	 

	 	 	 	 

SIGNED by

	 	 	 
	 

THOMAS L GIPSON

	 	 

SIGNED by

	 	 	 
	 

ROBERT L GIPSON

	 	 

7

 

	 	 	 	 	 
	AGREED AND ACKNOWLEDGED	 	 
	 
	 	 	 	 
	INGALLS & SNYDER LLC	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

	 	 
	Name:
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	Title:
	 	 	 	 
	 

	 	 	 	 

	 	 	 	 	 
	INGALLS & SNYDER VALUE PARTNERS L.P.
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

	 	 
	Name:
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	Title:
	 	 	 	 
	 

	 	 	 	 

 

 

SCHEDULES

SCHEDULE 1

Subordinated Noteholders

	 	 	 
	 

	 	Name of Subordinated Noteholder
	 
	 	 
	 

	 	Penrith Ltd
	 
	 	 
	 

	 	Thomas L Gipson
	 
	 	 
	 

	 	Robert L Gipson

 

 

SCHEDULE 2

Form of Escrow Agreement

 

 

SCHEDULE 2

FORM OF ESCROW AGREEMENT

     THIS ESCROW AGREEMENT (this “Agreement”) is made and entered into as of ___, 200_, by
CANARGO ENERGY CORPORATION, a Delaware corporation, (the “Company”) and INGALLS & SNYDER
LLC, as Escrow Agent hereunder (the “Escrow Agent”). All capitalized terms not otherwise
expressly defined herein shall have the meanings ascribed thereto in that certain Conversion
Agreement dated as of June 28, 2006 (the “Conversion Agreement”) by and among the Company,
Persistency, a Cayman Islands Company and the holders of the Company’s Senior Subordinated
Convertible Guaranteed Notes due September 1, 2009.

BACKGROUND

     WHEREAS, pursuant to the terms of Section 2.1(d) of the Conversion Agreement the Company has
agreed to deposit the Tethys Prepayment Amount with the Escrow Agent to prepay all or a portion of
the Company’s Senior Secured Notes as contemplated in such Section;

     WHEREAS, the Company has completed the Tethys IPO and desires to deposit the Tethys Prepayment
Amount with the Escrow Agent as contemplated by Section 2.1(d) of the Conversion Agreement;

     WHEREAS, Escrow Agent has agreed to accept, hold, and disburse the funds deposited with it in
accordance with the terms of this Agreement; and

     WHEREAS, in order to establish the escrow of funds and to effect the provisions of Section
2.1(d) of the Conversion Agreement, the parties hereto have entered into this Agreement.

     NOW THEREFORE, in consideration of the foregoing, it is hereby agreed as follows:

          Definitions. The following terms shall have the following meanings when used herein:

               “Escrow Funds” means the funds deposited with Escrow Agent pursuant to this Agreement.

               “Joint Written Direction” means a written direction executed by Ingalls & Snyder Value
Partners LP and the Company directing the Escrow Agent to disburse all or a portion of the Escrow
Funds or to take or refrain from taking any action pursuant to this Agreement.

               “Escrow Period” shall begin with the date hereof and shall terminate upon the earlier
to occur of the following dates:

 

 

                    The date upon which Company confirms that all of the Senior Secured Notes have been converted
in accordance with the provisions of Section 10.7 of the Senior Note Purchase Agreement;

                    December 31, 2006; or

                    The date upon which a determination is made by the Company and Ingalls & Snyder Value Partners
LP to terminate the Escrow Period.

               “Senior Note Purchase Agreement” means that certain Note Purchase Agreement dated as
of July 25, 2005 by and among the Company and the purchasers identified therein pursuant to which
the Company issued the Senior Secured Notes.

               “Senior Secured Notes” means the Company’s Senior Secured Notes due July 25, 2009.

               “Senior Secured Noteholders” means the registered holders of the Senior Secured Notes.

     During the Escrow Period, the Company and the Senior Secured Noteholders are aware that they
are not entitled to any funds received into escrow and no amounts deposited in the Escrow Account
shall become the property of the Company or the Senior Secured Noteholders or any other entity, or
be subject to the debts of the Company or the Senior Secured Noteholders or any other entity.

          Appointment of and Acceptance by Escrow Agent. The Senior Secured Noteholders and the
Company hereby appoint Escrow Agent to serve as Escrow Agent hereunder. Escrow Agent hereby
accepts such appointment and, upon receipt by wire transfer of the Escrow Funds in accordance with
Section 3 below, agrees to hold, invest and disburse the Escrow Funds in accordance with this
Agreement.

          Creation of Escrow Funds. On or prior to the date hereof, the parties shall establish
an escrow account with the Escrow Agent, which escrow account shall be entitled as follows: CanArgo
Energy Corporation/Ingalls & Snyder LLC Escrow Account for the deposit of the Escrow Funds. The
Company will wire good funds to the account of the Escrow Agent as follows:

 

 

	 	 	 
	Bank:
	 	J.P. Morgan Chase
	 
	 	1 Chase Plaza
	 
	 	New York, NY 10005
	Routing #:
	 	021000021
	 
	 	 
	Account #:
	 	A/C 930-4-015689
	 
	 	 
	Name on Account:
	 	Ingalls & Snyder LLC
	 
	 	 
	Name on Sub-Account:
	 	Canargo Energy Corporation/Ingalls & Snyder LLC Escrow Account

          Deposits into the Escrow Account. The Company agrees that it shall promptly deliver
the Tethys Prepayment Amount to Escrow Agent for deposit in the Escrow Account.

          Disbursements from the Escrow Account.

               The Escrow Agent will continue to hold such funds until Ingalls & Snyder Value Partners LP,
acting on behalf of the Senior Secured Noteholders, and the Company execute a Joint Written
Direction directing the Escrow Agent to disburse the Escrow Funds pursuant to Joint Written
Direction signed by the Company and Ingalls & Snyder Value Partners LP. In disbursing such funds,
Escrow Agent is authorized to rely upon such Joint Written Direction from the Company and Ingalls &
Snyder Value Partners LP and may accept any signatory from the Company listed on the signature page
to this Agreement and any signature from Ingalls & Snyder Value Partners LP that the Escrow Agent
already has on file.

               In the event Escrow Agent does not receive the amount of the Escrow Funds from the Company,
Escrow Agent shall promptly notify Ingalls & Snyder Value Partners LP.

               In the event Escrow Agent does receive the amount of the Escrow Funds prior to expiration of
the Escrow Period, in no event will the Escrow Funds be released to the Company or the Senior
Secured Noteholders until such amount is received by Escrow Agent in collected funds. For purposes
of this Agreement, the term “collected funds” shall mean all funds received by Escrow Agent which
have cleared normal banking channels and are in the form of cash.

          Collection Procedure. Escrow Agent is hereby authorized to deposit the proceeds of
each wire in the Escrow Account.

          Suspension of Performance: Disbursement Into Court. If at any time, there shall exist
any dispute between the Company and the Senior Secured Noteholders with respect to holding or
disposition of any portion of the Escrow Funds or any other obligations of Escrow Agent hereunder,
or if at any time Escrow Agent is unable to determine, to Escrow Agent’s sole satisfaction, the
proper disposition of any portion of the Escrow Funds or Escrow Agent’s proper actions with respect
to its obligations hereunder, or if the parties have not within thirty (30) days of the furnishing
by Escrow Agent of a notice of resignation pursuant to Section 9 hereof,

 

 

appointed a successor Escrow Agent to act hereunder, then Escrow Agent may, in its sole
discretion, take either or both of the following actions:

               suspend the performance of any of its obligations (including without limitation any
disbursement obligations) under this Escrow Agreement until such dispute or uncertainty shall be
resolved to the sole satisfaction of Escrow Agent or until a successor Escrow Agent shall be
appointed (as the case may be); provided however, Escrow Agent shall continue to invest the Escrow
Funds in accordance with Section 8 hereof; and/or

               petition (by means of an interpleader action or any other appropriate method) any court of
competent jurisdiction in any venue convenient to Escrow Agent, for instructions with respect to
such dispute or uncertainty, and to the extent required by law, pay into such court, for holding
and disposition in accordance with the instructions of such court, all funds held by it in the
Escrow Funds, after deduction and payment to Escrow Agent of all fees and expenses (including court
costs and attorneys’ fees) payable to, incurred by, or expected to be incurred by Escrow Agent in
connection with performance of its duties and the exercise of its rights hereunder.

               Escrow Agent shall have no liability to the Company, the Senior Secured Noteholders, or any
person with respect to any such suspension of performance or disbursement into court, specifically
including any liability or claimed liability that may arise, or be alleged to have arisen, out of
or as a result of any delay in the disbursement of funds held in the Escrow Funds or any delay in
with respect to any other action required or requested of Escrow Agent except for the Escrow
Agent’s willful misconduct or gross negligence.

          Investment of Escrow Funds. Escrow Agent shall invest the Escrow Funds in: (i) an
interest bearing money market fund or (ii) obligations issued or guaranteed by the United States
Government with a maturity of nine (9) months or less, to be held for the benefit of the Escrow
Account.

     If Escrow Agent has not received a Joint Written Direction at any time that an investment
decision must be made, Escrow Agent shall maintain the Escrow Funds, or such portion thereof, as to
which no Joint Written Direction has been received, in an interest bearing money market fund.

          Resignation and Removal of Escrow Agent. Escrow Agent may resign from the performance
of its duties hereunder at any time by giving thirty (30) days’ prior written notice to the parties
or may be removed, with or without cause, by the parties, acting jointly, by furnishing a Joint
Written Direction to Escrow Agent, at any time by the giving of ten (10) days’ prior written notice
to Escrow Agent as provided herein below. Upon any such notice of resignation or removal, the
representatives of the Senior Secured Noteholders and the Company identified in Sections 13a.(iv)
and 13b.(iv), below, jointly shall appoint a successor Escrow Agent hereunder, which shall be a
commercial bank, trust company or other financial institution with a combined capital and surplus
in excess of $10,000,000.00. Upon the acceptance in writing of any appointment of Escrow Agent
hereunder by a successor Escrow Agent, such successor Escrow Agent shall thereupon succeed to and
become vested with all the rights, powers, privileges and duties of the retiring Escrow Agent, and
the retiring Escrow Agent shall

 

 

be discharged from its duties and obligations under this Escrow Agreement, but shall not be
discharged from any liability for actions taken as Escrow Agent hereunder prior to such succession.
After any retiring Escrow Agent’s resignation or removal, the provisions of this Escrow Agreement
shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Escrow
Agent under this Escrow Agreement. The retiring Escrow Agent shall transmit all records pertaining
to the Escrow Funds and shall pay all funds held by it in the Escrow Funds to the successor Escrow
Agent, after making copies of such records as the retiring Escrow Agent deems advisable and after
deduction and payment to the retiring Escrow Agent of all fees and expenses (including court costs
and attorneys’ fees) payable to, incurred by, or expected to be incurred by the retiring Escrow
Agent in connection with the performance of its duties and the exercise of its rights hereunder.

          Liability of Escrow Agent.

               Escrow Agent shall have no liability or obligation with respect to the Escrow Funds except for
Escrow Agent’s willful misconduct or gross negligence. Escrow Agent’s sole responsibility shall be
for the safekeeping, investment, and disbursement of the Escrow Funds in accordance with the terms
of this Agreement. Escrow Agent shall have no implied duties or obligations and shall not be
charged with knowledge or notice or any fact or circumstance not specifically set forth herein.
Escrow Agent may rely upon any instrument, not only as to its due execution, validity and
effectiveness, but also as to the truth and accuracy of any information contained herein, which
Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by the
person or parties purporting to sign the same and conform to the provisions of this Agreement. In
no event shall Escrow Agent be liable for incidental, indirect, special, and consequential or
punitive damages. Escrow Agent shall not be obligated to take any legal action or commence any
proceeding in connection with the Escrow Funds, any account in which Escrow Funds are deposited,
this Agreement or the Conversion Agreement, or to appear in, prosecute or defend any such legal
action or proceeding. Escrow Agent may consult legal counsel selected by it in any event of any
dispute or question as to construction of any of the provisions hereof or of any other agreement or
its duties hereunder, or relating to any dispute involving any party hereto, and shall incur no
liability and shall be fully indemnified from any liability whatsoever in acting in accordance with
the opinion or instructions of such counsel. The Company and the Senior Secured Noteholders
jointly and severally shall promptly pay, upon demand, the reasonable fees and expenses of any such
counsel.

               Escrow Agent is hereby authorized, in its sole discretion, to comply with orders issued or
process entered by any court with respect to the Escrow Funds, without determination by Escrow
Agent of such court’s jurisdiction in the matter. If any portion of the Escrow Funds is at any
time attached, garnished or levied upon under any court order, or in case the payment, assignment,
transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court
order, or in any case any order judgment or decree shall be made or entered by any court affecting
such property or any part thereof, then and in any such event, Escrow Agent is authorized, in its
sole discretion, to rely upon and comply with any such order, writ, judgment or decree which it is
advised by legal counsel selected by it, binding upon it, without the need for appeal or other
action; and if Escrow Agent complies with any such order, writ, judgment, or decree, it shall not
be liable to any of the parties hereto or to any other

 

 

person or entity by reason of such compliance even though such order, writ, judgment, or
decree may be subsequently reversed, modified, annulled, set aside or vacated.

          Indemnification of Escrow Agent. From and at all times after the date of this
Agreement, the parties jointly and severally, shall, to the fullest extent permitted by law and to
the extent provided herein, indemnify and hold harmless Escrow Agent and each director, officer,
employee, attorney, agent and affiliate of Escrow Agent (collectively, the “Indemnified
Parties”) against any and all actions, claims (whether or not valid), losses, damages,
liabilities, costs and expenses of any kind or nature whatsoever (including without limitation
reasonable attorney’s fees, costs and expenses) incurred by or asserted against any of the
Indemnified Parties from and after the date hereof, whether direct, indirect or consequential, as a
result of or arising from or in any way relating to any claim, demand, suit, action, or proceeding
(including any inquiry or investigation) by any person, including without limitation the parties to
this Agreement, whether threatened or initiated, asserting a claim for any legal or equitable
remedy against any person under any statute or regulation, including, but not limited to, any
federal or state securities laws, or under any common law or equitable cause or otherwise, arising
from or in connection with the negotiation, preparation, execution, performance or failure of
performance of this Agreement or any transaction contemplated herein, whether or not any such
Indemnified Party is a party to any such action or proceeding, suit or the target of any such
inquiry or investigation; provided, however, that no Indemnified Party shall have the right to be
indemnified hereunder for liability finally determined by a court of competent jurisdiction,
subject to no further appeal, to have resulted from the gross negligence or willful misconduct of
such Indemnified Party. If any such action or claim shall be brought or asserted against any
Indemnified Party, such Indemnified Party shall promptly notify the Company and the Senior Secured
Noteholders hereunder in writing, and the Senior Secured Noteholders and the Company shall assume
the defense thereof, including the employment of counsel and the payment of all expenses. Such
Indemnified Party shall, in its sole discretion, have the right to employ separate counsel (who may
be selected by such Indemnified Party in its sole discretion) in any such action and to participate
in the defense thereof, and the fees and expenses of such counsel shall be paid by such Indemnified
Party, except that the Senior Secured Noteholders and/or the Company shall be required to pay such
fees and expense if (a) the Senior Secured Noteholders or the Company agree to pay such fees and
expenses, or (b) the Senior Secured Noteholders and/or the Company shall fail to assume the defense
of such action or proceeding or shall fail, in the sole discretion of such Indemnified Party, to
employ counsel reasonably satisfactory to the Indemnified Party in any such action or proceeding,
(c) the Senior Secured Noteholders and the Company are the plaintiff in any such action or
proceeding or (d) the named or potential parties to any such action or proceeding (including any
potentially impleaded parties) include both the Indemnified Party, the Company and/or the Senior
Secured Noteholders and the Indemnified Party shall have been advised by counsel that there may be
one or more legal defenses available to it which are different from or additional to those
available to the Company or the Senior Secured Noteholders. The Senior Secured Noteholders and the
Company shall be jointly and severally liable to pay fees and expenses of counsel pursuant to the
preceding sentence, except that any obligation to pay under clause (a) shall apply only to the
party so agreeing. All such fees and expenses payable by the Company and/or the Senior Secured
Noteholders pursuant to the foregoing sentence shall be paid from time to time as incurred, both in
advance of and after the final disposition of such action or claim. The obligations of the parties
under this section shall

 

 

survive any termination of this Agreement, and resignation or removal of the Escrow Agent
shall be independent of any obligation of Escrow Agent.

     The parties agree that neither payment by the Company or the Senior Secured Noteholders of any
claim by Escrow Agent for indemnification hereunder shall impair, limit, modify, or affect, as
between the Senior Secured Noteholders and the Company, the respective rights and obligations of
Senior Secured Noteholders, on the one hand, and the Company, on the other hand, under the
Securities Purchase Agreement.

          Expenses of Escrow Agent. The Senior Secured Noteholders shall reimburse Escrow Agent
for all of its reasonable out-of-pocket expenses, including attorneys’ fees, travel expenses,
telephone and facsimile transmission costs, postage (including express mail and overnight delivery
charges), copying charges and the like. All of the compensation and reimbursement obligations set
forth in this Section shall be payable by the Senior Secured Noteholders, upon demand by Escrow
Agent. The obligations of the Company under this Section shall survive any termination of this
Agreement and the resignation or removal of Escrow Agent.

          Warranties.

               Ingalls & Snyder Value Partners LP makes the following representations and warranties to
Escrow Agent and the Company:

                    It has the full legal power and authority to execute and deliver this Agreement and to
perform its obligations hereunder.

                    This Agreement has been duly approved by all necessary legal action of Ingalls & Snyder Value
Partners LP, including any necessary partner approval, has been executed by duly authorized
officers of Ingalls & Snyder Value Partners LP, and is enforceable in accordance with its terms.

                    The execution, delivery, and performance of Ingalls & Snyder Value Partners LP of this
Agreement will not violate, conflict with, or cause a default under the limited partnership
agreement of Ingalls & Snyder Value Partners LP, any applicable law or regulation, any court order
or administrative ruling or degree to which Ingalls & Snyder Value Partners LP is a party or any of
its property is subject, or any agreement, contract, indenture, or other binding arrangement.

                    Ingalls & Snyder Value Partners LP, by virtue of its holdings of Senior Secured Notes
qualifies as the Required Holder (as defined in the Senior Note Purchase Agreement) and has full
power and authority to execute, deliver, and perform this Escrow Agreement, to execute and deliver
any Joint Written Direction, to amend, modify, or waive any provision of this Agreement, and to
take any and all other actions under this Agreement, all without further consent or direction form,
or notice to, the remaining Senior Secured Noteholders or any other party.

                    No party other than the parties hereto and the Senior Secured Noteholders have, or shall have,
any lien, claim or security interest in the Escrow Funds or any

 

 

part thereof. No financing statement under the Uniform Commercial Code is on file in any
jurisdiction claiming a security interest in or describing (whether specifically or generally) the
Escrow Funds or any part thereof.

                    All of the representations and warranties of Ingalls & Snyder Value Partners LP contained
herein are true and complete as of the date hereof and will be true and complete at the time of any
disbursement from the Escrow Funds.

               The Company makes the following representations and warranties to the Escrow Agent and Ingalls
& Snyder Value Partners LP

                    The Company is a corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware and has full power and authority to execute and deliver this
Agreement and to perform its obligations hereunder.

                    This Agreement has been duly approved by all necessary corporate action of the Company,
including any necessary shareholder approval, has been executed by duly authorized officers of the
Company, enforceable in accordance with its terms.

                    The execution, delivery, and performance by the Company of this Agreement is in accordance
with the Conversion Agreement and will not violate, conflict with, or cause a default under the
certificate of incorporation or bylaws of the Company, as amended, any applicable law or
regulation, any court order or administrative ruling or decree to which the Company is a party or
any of its property is subject, or any agreement, contract, indenture, or other binding
arrangement, including without limitation to the Conversion Agreement, to which the Company is a
party.

                    Each of Dr. David Robson and Vincent McDonnell has been appointed to act as the representative
of the Company hereunder and has full power and authority to execute, deliver, and perform this
Agreement, to execute and deliver any Joint Written Direction, to amend, modify or waive any
provision of this Agreement and to take all other actions as the Company’s Representative under
this Agreement, all without further consent or direction from, or notice to, the Company or any
other party.

                    No party other than the parties hereto and the Senior Secured Noteholders have, or shall have,
any lien, claim or security interest in the Escrow Funds or any part thereof. No financing
statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security
interest in or describing (whether specifically or generally) the Escrow Funds or any part thereof.

                    All of the representations and warranties of the Company contained herein are true and
complete as of the date hereof and will be true and complete at the time of any disbursement from
the Escrow Funds.

          Consent to Jurisdiction and Venue. In the event that any party hereto commences a
lawsuit or other proceeding relating to or arising from this Agreement, the parties hereto agree
that the United States District Court for the Southern District of New York shall have the sole and
exclusive jurisdiction over any such proceeding. If all such courts lack federal

 

 

subject matter jurisdiction, the parties agree that the Supreme Court of State of New York in
New York County, shall have sole and exclusive jurisdiction. Any of these courts shall be proper
venue for any such lawsuit or judicial proceeding and the parties hereto waive any objection to
such venue. The parties hereto consent to and agree to submit to the jurisdiction of any of the
courts specified herein and agree to accept the service of process to vest personal jurisdiction
over them in any of these courts.

          Notice. All notices and other communications hereunder shall be in writing and shall
be deemed to have been validly served, given or delivered five (5) days after deposit in the United
States mails, by certified mail with return receipt requested and postage prepaid, when delivered
personally, one (1) day delivered to any overnight courier, or when transmitted by facsimile
transmission and upon confirmation of receipt and addressed to the party to be notified as follows:

	 	 	 
	If to Senior Secured
Noteholders, to:

	 	Ingalls & Snyder Value Partners, LP
	 

	 	c/o Ingalls & Snyder LLC
	 

	 	61 Broadway
	 

	 	New York, NY 10006
	 

	 	Attention:       Edward H. Oberst
	 

	 	Telephone:      (212) 269-7897
	 

	 	Facsimile:       (212) 269-4177
	 
	 	 
	If to Escrow Agent, to:

	 	Ingalls & Snyder LLC
	 

	 	61 Broadway
	 

	 	New York, NY 10006
	 

	 	Attention:      Edward H. Oberst
	 

	 	Telephone:      (212) 269-7897
	 

	 	Facsimile:       (212) 269-4177
	 
	 	 
	If to the Company, to:

	 	CanArgo Energy Corporation
	 

	 	P.O. Box 291
	 

	 	St. Peter Port
	 

	 	Guernsey, British Isles GY1 3RR
	 

	 	Attention:       Dr. David Robson/Vincent McDonnell
	 

	 	Telephone:      (44) 1481 729 980
	 

	 	Facsimile:       (44) 1481 729 982
	 
	 	 
	With a copy to:

	 	Satterlee Stephens Burke & Burke LLP
	 

	 	230 Park Avenue, Suite 1130
	 

	 	New York, NY 10169
	 

	 	Attention:       Peter A. Basilevsky, Esq.
	 

	 	Telephone:      (212) 818-9200
	 

	 	Facsimile:       (212) 818-9606

Or to such other address as each party may designate for itself by like notice.

 

 

          Amendments or Waiver. This Agreement may be changed, waived, discharged or terminated
only by a writing signed by the parties hereto. No delay or omission by any party in exercising
any right with respect hereto shall operate as waiver. A waiver on any one occasion shall not be
construed as a bar to, or waiver of, any right or remedy on any future occasion.

          Severability. To the extent any provision of this Agreement is prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent of such
prohibition, or invalidity, without invalidating the remainder of such provision or the remaining
provisions of this Agreement.

          Governing Law. This Agreement shall be construed and interpreted in accordance with
the internal laws of the State of New York .

          Entire Agreement. This Agreement constitutes the entire Agreement between the parties
relating to the holding, investment, and disbursement of the Escrow Funds and sets forth in their
entirety the obligations and duties of the Escrow Agent with respect to the Escrow Funds.

          Binding Effect. All of the terms of this Agreement, as amended from time to time,
shall be binding upon, inure to the benefit of and be enforceable by the respective heirs,
successors and assigns of the Senior Secured Noteholders, the Company, or the Escrow Agent.

          Execution of Counterparts. This Agreement and any Joint Written Direction may be
executed in counter parts, which when so executed shall constitute one and same agreement or
direction.

          Termination. Upon the first to occur of the disbursement of all amounts in the Escrow
Funds pursuant to Joint Written Directions or the disbursement of all amounts in the Escrow Funds
into court pursuant to Section 7 hereof, this Agreement shall terminate and Escrow Agent shall have
no further obligation or liability whatsoever with respect to this Agreement or the Escrow Funds.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

 

     IN WITNESS WHEREOF the parties have hereunto set their hands and seals the day and year above
set forth.

	 	 	 	 	 	 	 
	 	 	CANARGO ENERGY CORPORATION
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	Title:	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	INGALLS & SNYDER VALUE PARTNERS, LP
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 	 	Name:  Thomas Boucher	 	 
	 	 	Its:      General Partner	 	 
	 
	 	 	 	 	 	 
	 	 	ESCROW AGENT	 	 
	 
	 	 	 	 	 	 
	 	 	INGALLS & SNYDER LLC
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 	 	Name:   Edward H. Oberst	 	 
	 

	 	Title:	 	 	 	 

 

 

SCHEDULE 3

Form of Senior Note Guaranty

 

 

SCHEDULE 3

GUARANTY AGREEMENT

     This Guaranty Agreement (the “Agreement”) is made as of the 28 day of June, 2006 by
the persons set forth on the signature pages hereto (the “Subordinated Noteholders”) for
the benefit of the holders of the Notes issued pursuant to that certain Note Purchase Agreement
dated as of 25 July 2005 by and among the Company, Ingalls & Snyder Value Partners L.P. and the
Purchasers (as defined therein, and together with Ingalls & Snyder Value Partners L.P., the
“Senior Noteholders”) (the “Senior Note Purchase Agreement”). Capitalized terms
used but not defined herein shall have the meanings given them in that certain Conversion Agreement
dated as of the 28 day of June, 2006 by and among the persons set forth on the signature pages
there to (the “Conversion Agreement”).

RECITALS

     WHEREAS, the Company, Persistency, and certain other parties set forth on Schedule 1 thereto
have entered into the Conversion Agreement, pursuant to which the Subordinated Noteholders have
agreed to convert all of their outstanding interest in the Subordinated Notes to Tethys Common
Stock on the consummation of the Tethys IPO; and

     WHEREAS, the Senior Noteholders have a secured interest in all of the shares of Tethys Common
Stock, and partial release of that secured interest is required in order for the Subordinated Notes
to convert into Tethys shares; and

     WHEREAS, the Senior Noteholders have agreed to release certain rights and provide certain
consent to permit the occurrence of the Tethys IPO and related transactions; and

     WHEREAS, the Subordinated Noteholders desire to induce the Senior Noteholders to convert their
shares outstanding under the Senior Notes to Tethys Common Stock prior to the Tethys IPO; and

     WHEREAS, the Senior Noteholders desire to gain assurance that the Senior Notes will be paid
off in full for at least one-half of their aggregate face value; and

     WHEREAS, each of the Subordinated Noteholders acknowledges that it will derive substantial
benefits from the release of certain rights by the Senior Noteholders;

     NOW, THEREFORE, in consideration of the previous recitals and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged and confirmed, and to
induce the Senior Noteholders to release as much of their interest as is necessary to allow the
Subordinated Notes to convert into Tethys shares, each of the Subordinated Noteholders, intending
to be legally bound, hereby agrees for the benefit of the Senior Noteholders as follows:

 

 

Section 1: Guaranty

	1.1	 	Each Subordinated Noteholder hereby agrees to issue a guaranty to the Senior
Noteholders for an amount equal to one-half of the principal amount of Subordinated Notes
held by such Subordinated Noteholder, as set forth below the name of each Subordinated
Noteholder on the signature pages hereto, which guaranty shall last for as long as the
Senior notes shall remain outstanding (each a “Senior Note Guaranty,” and together
the “Senior Note Guaranties”). The aggregate amount of the Senior Note Guaranties
shall be $6,500,000.
	 
	1.2	 	The Senior Note Guaranties shall take effect on the release by the Senior Noteholders
of their interest in Tethys Common Stock in the amount contemplated by this Agreement.
	 
	1.3	 	The Senior Note Guaranties shall be drawn on by the Senior Noteholders, or Ingalls &
Snyder LLC as agent for the Senior Noteholders, only in the case of an event of default as
defined in the Senior Note Purchase Agreement.
	 
	1.4	 	The Senior Note Guaranties shall be allocated to the Senior Noteholders on a pro rata
basis according to the percentage of Senior Notes held by each Senior Noteholder.
	 
	1.5	 	The Senior Note Guaranties shall be transferable or assignable only in connection with
a transfer or assignment of the Senior Notes or any portion thereof, and any such transfer
or assignment of the Senior Note Guaranties shall be limited to the amount of Senior Notes
thereby transferred or assigned.
	 
	1.6	 	This Agreement shall be executed in concert and contemporaneously with the Conversion
Agreement to which it is attached.
	 
	1.7	 	Each Subordinated Noteholder hereby represents and warrants that is financially capable
of fulfilling any Senior Note Guaranty given by it under this Agreement, and agrees to take
steps to maintain such capability for so long as such Senior Note Guaranty shall remain
effective.

Section 2: General

	2.1	 	Neither party shall be entitled to assign in whole or in part any rights and/or
obligations arising under this Agreement to a third party without the prior written consent
of the other party, except as set forth in Section 1 of this Agreement.
	 
	2.2	 	Each provision of this Agreement shall be construed separately and (save as otherwise
expressly provided herein) none of the provisions hereof shall limit or govern the extent,
application or construction of any other of them and notwithstanding that any provision of
this Agreement may prove to be illegal or unenforceable the remaining provisions of this
Agreement shall continue in full force and effect.

 

 

	2.3	 	This Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, and together which shall constitute one and the same instrument.
	 
	2.4	 	This Agreement shall be governed by and construed in accordance with the laws of the
State of New York.

[signature pages follow]

 

 

     IN WITNESS WHEREOF, the parties have executed and delivered this Agreement on the date first above
written.

	 	 	 	 	 	 	 
	 	 	SENIOR SUBORDINATED NOTEHOLDERS
	 
	 	 	 	 	 	 
	 	 	PERSISTENCY	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 

	 	 	 	 	 	 	 
	 

	 	Guaranty Amount: $	 	 	 	 
	 

	 	 	 	 

	 	 

	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	PENRITH LTD	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 

	 	 	 	 	 	 	 
	 

	 	Guaranty Amount: $
	 	 
 

	 	 

	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	THOMAS L GIPSON	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Guaranty Amount: $
	 	 
 

	 	 

	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	ROBERT L GIPSON	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Guaranty Amount: $
	 	 
 

	 	 
	 
	 	 	 	 	 	 

SIGNATURE PAGE TO THE SENIOR NOTE GUARANTY

 

 

AGREED AND ACKNOWLEDGED

	 	 	 	 	 	 	 
	 	 	SENIOR NOTEHOLDERS
	 
	 	 	 	 	 	 
	 	 	INGALLS & SNYDER LLC
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	INGALLS & SNYDER VALUE PARTNERS L.P.
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 

 

 

SCHEDULE 4

Form of Warrant Certificate

(Subordinated Noteholders)

 

 

SCHEDULE 4

FORM OF WARRANT

(Subordinated Noteholders)

THE WARRANTS REPRESENTED HEREBY AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS
(COLLECTIVELY, THE “WARRANT SECURITIES”), HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “ACT”), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY OTHER
JURISDICTION IN RELIANCE UPON EXEMPTIONS FROM SUCH REGISTRATION AFFORDED UNDER THE ACT AND
APPLICABLE SECURITIES LAWS OF OTHER JURISDICTIONS. THE WARRANT SECURITIES REPRESENTED HEREBY MAY
NOT BE OFFERED, SOLD, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER THE ACT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT IS APPLICABLE (IN WHICH CASE THE ISSUER
SHALL HAVE RECEIVED AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE
ISSUER TO SUCH EFFECT) AND THE PROVISIONS OF ALL OTHER APPLICABLE SECURITIES LAWS ARE OBSERVED.

CANARGO ENERGY CORPORATION

Incorporated Under the Laws of the State of Delaware

     No. ___                         
                                                  
                                                       
________Common Stock Purchase Warrants

CERTIFICATE FOR COMMON STOCK

PURCHASE WARRANTS

1. Warrant, This Warrant Certificate certifies that                                         , or registered assigns (the “Registered Holder”), is the registered owner of the above
indicated number of Warrants expiring on the Expiration Date, as hereinafter defined. One (1)
Warrant entitles the Registered Holder to purchase one (1) share of the common stock, $.10 par
value (a “Share”), of CanArgo Energy Corporation, a Delaware corporation (the “Company”), from the
Company at a purchase price of One Dollar ($1.00) (the “Exercise Price”) at any time during the
Exercise Period, as hereinafter defined, upon surrender of this Warrant Certificate with the
exercise form hereon duly completed and executed and accompanied by payment of the Exercise Price
at the principal office of the Company.

Upon due presentment for transfer or exchange of this Warrant Certificate at the principal
office of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and
evidencing in the aggregate a like number of Warrants shall be issued in exchange for this Warrant
Certificate, subject to the limitations provided herein, upon payment of any tax or

 

 

governmental charge imposed in connection with such transfer. Subject to the terms hereof the
Company shall deliver Warrant Certificates in required whole number denominations to Registered
Holders in connection with any transfer or exchange permitted hereunder.

     This Warrant is one of several warrants in substantially identical form issued pursuant to the
provisions of that certain Conversion Agreement dated June 28, 2006 by and among the Company,
Pesistency, a company incorporated under the laws of the Cayman Islands, and the persons whose
names and addresses are set out in Schedule 1 attached thereto (the “Subordinated Noteholders” and
individually a “Subordinated Noteholder”)(the “Conversion Agreement”). Any capitalized terms not
otherwise expressly defined herein shall have the meaning ascribed thereto in the Conversion
Agreement.

2. Restrictive Legends. Each Warrant Certificate shall bear legends substantially in the
form of the legends that appear at the beginning of this Warrant Certificate. Each certificate
representing Shares issued upon exercise of a Warrant, unless such Shares are then registered under
the Securities Act of 1933, as amended (the “Act”), shall bear a legend in substantially the
following form:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITES ACT OF
1933, AS AMENDED (THE“ACT”) OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY OTHER
JURISDICTION IN RELIANCE UPON EXEMPTIONS FROM SUCH REGISTRATION AFFORDED UNDER THE ACT AND SUCH
APPLICABLE LAWS OF OTHER JURISDICTIONS. THE SHARES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD,
HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER THE ACT OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE ACT IS APPLICABLE (IN WHICH CASE THE ISSUER SHALL HAVE RECEIVED
AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO SUCH EFFECT)
AND THE PROVISIONS OF ALL OTHER APPLICABLE SECURITIES LAWS ARE OBSERVED.”

Each such certificate representing Shares may also bear such legend relating to the issuance of
such Shares pursuant to any applicable securities laws as counsel for the Company shall reasonably
deem appropriate.

3. Exercise. Subject to the terms hereof: the Warrants, evidenced by this Warrant
Certificate, may be exercised at the Exercise Price in whole or in part at any time during the
period (the “Exercise Period”) commencing on the next Business Day after the Conversion Date as
contemplated by Section 4 of the Conversion Agreement and terminating at the close of business on
the earlier of: (i) September 1, 2009; (ii) or shall be exercised on such sooner date at the
election of the Company and upon at least thirty (30) days prior written notice to the Registered
Holder in the event that: (a) the Manavi M12 well indicates, by way of an independent engineering
report, sustainable production, if developed, in excess of 7,500 barrels of oil per day or (b) all
the warrants originally issued under that certain Note and Warrant Purchase Agreement dated as of
March 3, 2006 by and among the Company and the purchasers listed therein are exercised by the
holders thereof and the average closing price for the

 

 

Company’s Common Stock on the American Stock Exchange or, if the Common Stock is not then listed
for trading on the American Stock Exchange (“AMEX”) then the Oslo Stock Exchange, is above U.S.
$2.00 (or its equivalent in NOK, and in any case adjusted for any stock dividends, stock split, its
reverse split, recapitalization or reorganization) for a period of five consecutive trading days;
or (iii) in the event the Tethys IPO does not occur on or prior to December 31, 2006, then December
31, 2006 (the “Expiration Date”). The Exercise Period may also be extended by the Company’s Board
of Directors.

     A Warrant shall be deemed to have been exercised in immediately prior to the close of business
on the date (the “Exercise Date”) of the surrender to the Company at its principal offices of this
Warrant Certificate with the exercise form attached hereto executed by the Registered Holder and
accompanied by payment to the Company, in cash or by official bank or certified check, of an amount
equal to the aggregate Exercise Price, in lawful money of the United States of America.

     The person entitled to receive the Shares issuable upon exercise of a Warrant or Warrants
(“Warrant Shares”) shall be treated for all purposes as the holder of such Warrant Shares as of the
close of business on the Exercise Date. The Company shall not be obligated to issue any fractional
share interests in Warrant Shares issuable or deliverable on the exercise of any Warrant or script
or cash with respect thereto, but, if Company elects not to issue a fractional share, the Company
will pay a cash adjustment in respect of any fraction of a Warrant Share which would otherwise be
issuable in an amount equal to the same fraction of the amount by which the market price of a Share
on the date of exercise exceeds the Exercise Price, such market price to be determined in good
faith by the Board of Directors of the Company. If more than one Warrant shall be exercised at one
time by the same Registered Holder, the number of full Shares which shall be issuable on exercise
thereof shall be computed on the basis of the aggregate number of full shares issuable on such
exercise.

     Promptly, and in any event within ten business days after the Exercise Date, the Company shall
cause to be issued and delivered to the person or persons entitled to receive the same, a
certificate or certificates for the number of Warrant Shares deliverable on such exercise.

     The Company may deem and treat the Registered Holder of the Warrants at any time as the
absolute owner thereof for all purposes, and the Company shall not be affected by any notice to the
contrary. The Warrants shall not entitle the Registered Holder thereof to any of the rights of
shareholders or to any dividend declared on the Shares unless the Registered Holder shall have
exercised the Warrants and thereby purchased the Warrant Shares prior to the record date for the
determination of holders of Shares entitled to such dividend or other right.

4. Net Issue Conversion. Notwithstanding anything in this Warrant to the contrary, the
Registered Holder hereof may, subject to the prior concurrence of the Company, in lieu of
exercising this Warrant in the manner provided above in Section 3, elect to convert this Warrant
into Warrant Shares equal in number to the value of the exercised Warrants by so indicating on the
Form of Election to Purchase attached hereto, in which event the Registered Holder shall receive a
number of Warrant Shares equal to following shall occur.

 

 

[(X multiplied by (Y minus Z)] divided by Y;

where:

X = Number of Warrants Converted

Y = Fair Market Value of one share of Common Stock

Z = Exercise Price

For purposes of the above, “Fair Market Value” shall equal the closing price for the Company’s
Common Stock on the Exercise Date, as reported on the AMEX or, if the Common Stock is not then
listed for trading on the AMEX, then the dollar equivalent of such closing price as reported on the
Oslo Stock Exchange on the Exercise Date.

5. Reservation of Shares and Payment of Taxes. The Company covenants that it will at all
times reserve and have available from its authorized Common Stock such number of shares as shall
then be issuable on the exercise of outstanding Warrants. The Company covenants that all Warrant
Shares which shall be so issuable shall be duly and validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof.

     The Registered Holder shall pay all documentary, stamp or similar taxes and other government
charges that may be imposed with respect to the issuance, transfer or delivery of any Warrants and
Warrant Shares on exercise of the Warrants. In the event the Warrants or Warrant Shares are to be
delivered in a name other than the name of the Registered Holder of the Warrant Certificate, no
such delivery shall be made unless the person requesting the same has paid the amount of any such
taxes or charges incident thereto.

6. Registration of Transfer. The Warrant Certificates may be transferred in whole or
in part, provided any such transfer complies with all applicable foreign and United States federal
and state securities laws and, if requested by the Company, the Registered Holder delivers to the
Company an opinion of counsel to that effect, in form and substance reasonably acceptable to the
Company. Warrant Certificates to be transferred shall be surrendered to the Company at its
principal office. The Company shall execute, issue and deliver in exchange therefore the Warrant
Certificate or Certificates which the Registered Holder making the transfer shall be entitled to
receive.

     The Company shall keep transfer books at its principal office which shall register Warrant
Certificates and the transfer thereof. On due presentment of any Warrant Certificate for
registration of transfer at such office, the Company shall execute, issue and deliver to the
transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate
number of Warrants. All Warrant Certificates presented for registration of transfer or exercise
shall be duly endorsed or be accompanied by a written instrument or instruments of transfer in form
and substance satisfactory to the Company. The Company may require payment of a sum sufficient to
cover any tax or other government charge that may be imposed in connection therewith.

 

 

     All Warrant Certificates so surrendered, or surrendered for exercise, or for exchange in case
of mutilated Warrant Certificates, shall be promptly canceled by the Company and thereafter
retained by the Company until the Expiration Date. Prior to due presentment for registration of
transfer thereof the Company may treat the Registered Holder of any Warrant Certificate as the
absolute owner thereof (notwithstanding any notations of ownership or writing thereon made by
anyone other than the Company), and the Company shall not be affected by any notice to the
contrary.

7. Loss or Mutilation. On receipt by the Company of evidence satisfactory as to the
ownership of and the loss, theft, destruction or mutilation of this Warrant Certificate, the
Company shall execute and deliver, in lieu thereof a new Warrant Certificate representing an equal
aggregate number of Warrants. In the case of loss, theft or destruction of any Warrant Certificate,
the individual requesting issuance of a new Warrant Certificate shall be required to indemnify the
Company in an amount satisfactory to the Company. In the event a Warrant Certificate is mutilated,
such Certificate shall be surrendered and canceled by the Company prior to delivery of a new
Warrant Certificate. Applicants for a new Warrant Certificate shall also comply with such other
reasonable regulations as the Company may prescribe.

8. Adjustment of Shares. The number and kind of securities issuable upon exercise of a
Warrant or to be delivered upon the redemption of Warrants hereunder shall be subject to adjustment
from time to time upon the happening of certain events (“Adjustment Event”), as follows:

     (a) If the Company shall, at any time prior to the complete exercise of the Warrants evidenced
hereby, declare or pay to the holders of its outstanding Shares, a dividend payable in any kind of
shares of stock or other securities of the Company, or in property, or otherwise than in cash, the
Registered Holder upon thereafter exercising the Warrants evidenced hereby as herein provided shall
be entitled to receive for the Exercise Price, in addition to one Warrant Share, such additional
share or shares of stock or scrip representing fractions of a share or other securities or property
as the Registered Holder would have received in the form of such dividend if he had been the holder
of record of such Warrant Share on the record date for the determination of common stockholders
entitled to receive such dividend.

     (b) If the Company shall, while any Warrants evidenced hereby remain in force, effect a
recapitalization of such character that the Shares covered hereby shall be changed into or become
exchangeable for a larger or smaller number of shares, then thereafter, the number of Shares which
the Registered Holder shall be entitled to purchase hereunder, shall be increased or decreased, as
the case may be, in direct proportion to the increase or decrease in the number of Shares of the
Company by reason of such recapitalization, and the Exercise Price (per Share) shall in the case of
an increase in the number of Shares be proportionately reduced, and in the case of a decrease in
the number of shares be proportionately increased.

     (c) In case of any reorganization of the Company (or any other corporation the stock or other
securities of which are at the time receivable upon exercise of a Warrant) or in case the Company
(or any such other corporation) shall merge into or with or consolidate with another corporation or
convey all or substantially all of its assets to another corporation or enter into a

 

 

business combination of any form as a result of which the Shares or other securities receivable
upon exercise of a Warrant are converted into other stock or securities of the same or another
corporation, then and in each such case, the Registered Holder of a Warrant, upon exercise of the
purchase right at any time after the consummation of such reorganization, consolidation, merger,
conveyance or combination, shall be entitled to receive, in lieu of the Shares or other securities
to which such Registered Holder would have been entitled had he exercised the purchase right
immediately prior thereto, such stock and securities which such Registered Holder would have owned
immediately after such event with respect to the Shares and other securities for which a Warrant
may have been exercised immediately before such event had the Registered Holder exercised the
Warrant immediately prior to such event.

     (d) In case the Company shall at any time prior to the exercise of a Warrant evidenced hereby
make any distribution of its assets to holders of its Shares by way of a liquidating or partial
liquidating dividend or by way of a return of capital, or other than as a dividend payable out of
earnings or any surplus legally available for dividends under the laws of the state of its
incorporation, then the Registered Holder upon thereafter exercising such Warrant as herein
provided after the date of record for the determination of those holders of Shares entitled to such
distribution of assets, shall be entitled to receive for the Exercise Price, in addition to a
Warrant Share, the amount of such assets (or at the option of the Company, a sum equal to the value
thereof at the time of such distribution to holders of Shares as such value is determined by the
Board of Directors of the Company in good faith) which would have been payable to the Registered
Holder had he been the holder of record of such Warrant Share receivable upon exercise of such
Warrant on the record date for the determination of those entitled to such distribution.

     The Company shall mail to the holder of this Certificate at least twenty (20) days prior to
any Adjustment Event a notice specifying the date on which any such Adjustment Event is to occur
together with a description thereof.

     In each case of an adjustment in the Shares or other securities receivable upon the exercise
of a Warrant, the Company shall promptly notify the Registered Holder of such adjustment. Such
notice shall set forth the facts upon which such adjustment is based.

9. Reduction in Exercise Price .

     (a) The Company’s Board of Directors may, at its sole discretion, reduce the Exercise Price of
the Warrants in effect at any time either for the life of the Warrants or any shorter period of
time determined by the Company’s Board of Directors. The Company shall promptly notify the
Registered Holders of any such reduction in the Exercise Price.

     (b) In the event the Company issues equity securities during the life of the Warrant (other
than pursuant to the granting of stock options pursuant to employee stock option plans approved by
the Company’s stockholders; or the exercise or conversion of outstanding warrants, stock options or
convertible securities, including without limitation the conversion of the Senior Secured Notes due
July 25, 2009 or the Senior Subordinated Convertible Guaranteed Notes due September 1, 2009) at a
price per share of Common Stock or common stock equivalent less than

 

 

the Exercise Price then in effect, such price per share determined net of all discounts, fees,
costs and expenses incurred in connection with such issuance, then the Exercise Price shall be
automatically reset to the lowest net effective price per share, without any further action of the
holder of the Warrant. Notwithstanding the foregoing, in no event shall the number of Shares
issuable to the holders of the Warrants pursuant to this Section 8 cause the holders of the
Warrants collectively to own in excess of 19.9% of the outstanding Common Stock of the Company as
at the date of the Note Purchase Agreement unless the Company has obtained the prior approval of
its stockholders as required by Section 713 of the AMEX Company Guide as in effect from time to
time, provided, however, that the Company shall use commercially reasonable efforts to diligently
seek to obtain such approval of its stockholders.

10. Notices. All notices, demands, elections, requests and communications provided for
hereunder shall be in writing and sent

     (a) by telefacsimile if the sender on the same day sends a confirming copy of such notice by a
recognized overnight delivery service (charges prepaid), or

     (b) by registered or certified mail with return receipt requested (postage prepaid), or

     (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must
be sent:

          (i) if to the Registered Holder or its nominee, to the Registered Holder or its nominee at the
address of the Registered Holder as set forth on the books maintained by the Company, or at such
other address as such Registered Holder or nominee shall have specified to the Company in writing,

          (ii) if to the Company, to the Company at its principal executive office to the attention of
Chief Executive Officer, or at such other address as the Company shall have specified to the holder
of each Warrant in writing.

     Notices under this Section 10 will be deemed given only when actually received.

11. General Provisions. This Warrant Certificate shall be construed and enforced in
accordance with, and governed by, the laws of the State of Delaware, where the Company maintains
its registered offices. Except as otherwise expressly stated herein, time is of the essence in
performing hereunder. The headings of this Warrant Certificate are for convenience in reference
only and shall not limit or otherwise affect the meaning hereof.

     IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed as of
the ___day of ___, 2006.

	 	 	 	 	 	 	 
	 	 	CanArgo Energy Corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	Title:
	 	 

	 	 
	 

	 	 	 	 	 	 

 

 

CanArgo Energy Corporation

     The following abbreviations, when used in the inscription on the face of this instrument,
shall be construed as though they were written out in full according to applicable laws or
regulations:

	 	 	 	 	 
	TEN COM — as tenants in common

	 	UNIF GIFT MIN ACT- Custodian	 	 
	TEN ENT — as tenants by the entireties
	 	 	 	 
	JR TEN — as joint tenants with right

	 	 

(Cust)          (Minor)
	 	 
	of survivorship and not as tenants in

	 	under
Uniform Gifts
	 	 
	common	 	to
Minor
Act                    .

	 	 
	 

	 	                    (State)	 	 

Additional abbreviations may also be used though not in the above list.

FORM OF ASSIGNMENT

(To be Executed by the Registered Holder if He

Desires to Assign Warrants Evidenced by the

Within Warrant Certificate)

     FOR
VALUE RECEIVED
           
              
               
 hereby sells,
assigns and transfers
(                    ) Warrants, evidenced by the within Warrant Certificate, and does
hereby irrevocably constitute and
appoint                                         Attorney to transfer the said
Warrants evidenced by the within Warrant Certificates on the books of the Company, with full power
of substitution.

	 	 	 	 	 	 	 
	Dated:

	 	                                                            .
	 	 	 	                                                            .
	 

	 	 	 	 	 	Signature

Notice: The above signature must correspond with the name as written upon the Face of the
Warrant Certificate in every particular, without alteration or enlargement or any change
whatsoever.

Signature Guaranteed:

SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE FOLLOWING STOCK
EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR
MIDWEST STOCK EXCHANGE.

 

 

FORM OF ELECTION TO PURCHASE

(To be Executed by the Holder if he Desires to Exercise

the Warrants Evidenced by the Warrant Certificate)

To CanArgo Energy Corporation:

     [The undersigned hereby irrevocably elects to exercise                    
(                    ) Warrants, evidenced by the within
Warrant Certificate for, and to purchase thereunder,                                        
(                    ) full shares of Common Stock issuable upon exercise of said
Warrants and delivery of
$                     and payment of any applicable taxes.

   OR

     [The undersigned hereby irrevocably elects to convert                    
(                    ) Warrants, evidenced by the within
Warrant Certificate, and to acquire Warrant Shares pursuant to the “Net Issue Conversion” provision
in Section 4 thereof, and, upon payment of any applicable taxes, to acquire Warrant Shares
thereunder.]

     The undersigned hereby warrants and represents that he/it is an “accredited investor” as
defined under Rule 501(a) of the Securities Act of 1933, as amended and accordingly the Warrants
being exercised and the securities deliverable upon exercise thereof have been registered under the
Act or are exempt from registration thereunder.

     Please register the certificates for such share as follows:

Please insert taxpayer identification

Or social security number (if any)                                                            .

 

(Please print name)

 

(Please print address)

     If said number of Warrants shall not be all the Warrants evidenced by the within Warrant
Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so
exercised be registered in the name of the undersigned at the following address and deliver the
Certificate to that address:

 

(Please print address)

(SIGNATURES CONTINUED ON FOLLOWING PAGE)

 

 

	 	 	 	 	 	 	 	 	 	 	 
	Dated:

	 	 	 	 	 	Signature:	 	 	 	 
	 

	 	 

	 	 	 	 	 	 

	 	 

NOTICE: The above signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or enlargement or any change
whatsoever. If the certificate representing the shares is to be registered in a name other than
that in which the within Warrant Certificate is registered, the signature of the holder hereof must
be guaranteed.

Signature
Guaranteed:          
                                                                                           .

SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE FOLLOWING STOCK
EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR
MIDWEST STOCK EXCHANGE.

 

 

SCHEDULE 5

Form of Warrant Certificate

(Persistency)

 

 

SCHEDULE 5

FORM OF WARRANT

(Persistency)

THE WARRANTS REPRESENTED HEREBY AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS
(COLLECTIVELY, THE “WARRANT SECURITIES”), HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “ACT”), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY OTHER
JURISDICTION IN RELIANCE UPON EXEMPTIONS FROM SUCH REGISTRATION AFFORDED UNDER THE ACT AND
APPLICABLE SECURITIES LAWS OF OTHER JURISDICTIONS. THE WARRANT SECURITIES REPRESENTED HEREBY MAY
NOT BE OFFERED, SOLD, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER THE ACT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT IS APPLICABLE (IN WHICH CASE THE ISSUER
SHALL HAVE RECEIVED AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE
ISSUER TO SUCH EFFECT) AND THE PROVISIONS OF ALL OTHER APPLICABLE SECURITIES LAWS ARE OBSERVED.

CANARGO ENERGY CORPORATION

Incorporated Under the Laws of the State of Delaware

	 	 	 
	No.                    

	 	                     Common
	 

	 	Stock Purchase Warrants

CERTIFICATE FOR COMMON STOCK

PURCHASE WARRANTS

1. Warrant, This Warrant Certificate certifies that Persistency, a company incorporated
under the laws of the Cayman Islands (“Persistency”), or registered assigns (the “Registered
Holder”), is the registered owner of the above indicated number of Warrants expiring on the
Expiration Date, as hereinafter defined. One (1) Warrant entitles the Registered Holder to purchase
one (1) share of the common stock, $.10 par value (a “Share”), of CanArgo Energy Corporation, a
Delaware corporation (the “Company”), from the Company at a purchase price of One Dollar ($1.00)
(the “Exercise Price”) at any time during the Exercise Period, as hereinafter defined, upon
surrender of this Warrant Certificate with the exercise form hereon duly completed and executed and
accompanied by payment of the Exercise Price at the principal office of the Company.

     Upon due presentment for transfer or exchange of this Warrant Certificate at the principal
office of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and
evidencing in the aggregate a like number of Warrants shall be issued in exchange for this

 

 

Warrant Certificate, subject to the limitations provided herein, upon payment of any tax or
governmental charge imposed in connection with such transfer. Subject to the terms hereof the
Company shall deliver Warrant Certificates in required whole number denominations to Registered
Holders in connection with any transfer or exchange permitted hereunder.

     This Warrant is issued pursuant to the provisions of that certain Conversion Agreement dated
June 28, 2006 by and among the Company, Persistency and the persons whose names and addresses are
set out in Schedule 1 attached thereto (the “Subordinated Noteholders” and individually a
“Subordinated Noteholder”)(the “Conversion Agreement”). Any capitalized terms not otherwise
expressly defined herein shall have the meaning ascribed thereto in the Conversion Agreement.

2. Restrictive Legends. Each Warrant Certificate shall bear legends substantially in the
form of the legends that appear at the beginning of this Warrant Certificate. Each certificate
representing Shares issued upon exercise of a Warrant, unless such Shares are then registered under
the Securities Act of 1933, as amended (the “Act”), shall bear a legend in substantially the
following form:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITES ACT OF
1933, AS AMENDED (THE“ACT”) OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY OTHER
JURISDICTION IN RELIANCE UPON EXEMPTIONS FROM SUCH REGISTRATION AFFORDED UNDER THE ACT AND SUCH
APPLICABLE LAWS OF OTHER JURISDICTIONS. THE SHARES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD,
HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER THE ACT OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE ACT IS APPLICABLE (IN WHICH CASE THE ISSUER SHALL HAVE RECEIVED
AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO SUCH EFFECT)
AND THE PROVISIONS OF ALL OTHER APPLICABLE SECURITIES LAWS ARE OBSERVED.”

Each such certificate representing Shares may also bear such legend relating to the issuance of
such Shares pursuant to any applicable securities laws as counsel for the Company shall reasonably
deem appropriate.

3. Exercise. Subject to the terms hereof this Warrant Certificate, may be exercised at the
Exercise Price in whole or in part at any time during the period (the “Exercise Period”) commencing
on the next Business Day after the date hereof as contemplated by Section 4 of the Conversion
Agreement and terminating at the close of business on the earlier of: (i) September 1, 2009; (ii)
or shall be exercised on such sooner date at the election of the Company and upon at least thirty
(30) days prior written notice to the Registered Holder in the event that: (a) the Manavi M12 well
indicates, by way of an independent engineering report, sustainable production, if developed, in
excess of 7,500 barrels of oil per day or (b) all the warrants originally issued under that certain
Note and Warrant Purchase Agreement dated as of March 3, 2006 by and among the Company and the
purchasers listed therein are exercised by the holders thereof and the average closing price for
the Company’s Common Stock on the American Stock

 

 

Exchange or, if the Common Stock is not then listed for trading on the American Stock Exchange
(“AMEX”) then the Oslo Stock Exchange, is above U.S. $2.00 (or its equivalent in NOK, and in any
case adjusted for any stock dividends, stock split, its reverse split, recapitalization or
reorganization) for a period of five consecutive trading days; or (iii) in the event the Tethys IPO
does not occur on or prior to December 31, 2006, then December 31, 2006 (the “Expiration Date”).
The Exercise Period may also be extended by the Company’s Board of Directors.

     A Warrant shall be deemed to have been exercised immediately prior to the close of business on
the date (the “Exercise Date”) of the surrender to the Company at its principal offices of this
Warrant Certificate with the exercise form attached hereto executed by the Registered Holder and
accompanied by payment to the Company, in cash or by official bank or certified check, of an amount
equal to the aggregate Exercise Price, in lawful money of the United States of America.

     The person entitled to receive the Shares issuable upon exercise of a Warrant or Warrants
(“Warrant Shares”) shall be treated for all purposes as the holder of such Warrant Shares as of the
close of business on the Exercise Date. The Company shall not be obligated to issue any fractional
share interests in Warrant Shares issuable or deliverable on the exercise of any Warrant or script
or cash with respect thereto, but, if Company elects not to issue a fractional share, the Company
will pay a cash adjustment in respect of any fraction of a Warrant Share which would otherwise be
issuable in an amount equal to the same fraction of the amount by which the market price of a Share
on the date of exercise exceeds the Exercise Price, such market price to be determined in good
faith by the Board of Directors of the Company. If more than one Warrant shall be exercised at one
time by the same Registered Holder, the number of full Shares which shall be issuable on exercise
thereof shall be computed on the basis of the aggregate number of full shares issuable on such
exercise.

     Promptly, and in any event within ten business days after the Exercise Date, the Company shall
cause to be issued and delivered to the person or persons entitled to receive the same, a
certificate or certificates for the number of Warrant Shares deliverable on such exercise.

     The Company may deem and treat the Registered Holder of the Warrants at any time as the
absolute owner thereof for all purposes, and the Company shall not be affected by any notice to the
contrary. The Warrants shall not entitle the Registered Holder thereof to any of the rights of
shareholders or to any dividend declared on the Shares unless the Registered Holder shall have
exercised the Warrants and thereby purchased the Warrant Shares prior to the record date for the
determination of holders of Shares entitled to such dividend or other right.

4. Net Issue Conversion. Notwithstanding anything in this Warrant to the contrary, the
Registered Holder hereof may, subject to the prior concurrence of the Company, in lieu of
exercising this Warrant in the manner provided above in Section 3, elect to convert this Warrant
into Warrant Shares equal in number to the value of the exercised Warrants by so indicating on the
Form of Election to Purchase attached hereto, in which event the Registered Holder shall receive a
number of Warrant Shares equal to following shall occur.

 

 

     [(X multiplied by (Y minus Z)] divided by Y;

     where:

     X = Number of Warrants Converted

     Y = Fair Market Value of one share of Common Stock

     Z = Exercise Price

For purposes of the above, “Fair Market Value” shall equal the closing price for the Company’s
Common Stock on the Exercise Date, as reported on the AMEX or, if the Common Stock is not then
listed for trading on the AMEX, then the dollar equivalent of such closing price as reported on the
Oslo Stock Exchange on the Exercise Date.

5. Reservation of Shares and Payment of Taxes. The Company covenants that it will at all
times reserve and have available from its authorized Common Stock such number of shares as shall
then be issuable on the exercise of outstanding Warrants. The Company covenants that all Warrant
Shares which shall be so issuable shall be duly and validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof.

     The Registered Holder shall pay all documentary, stamp or similar taxes and other government
charges that may be imposed with respect to the issuance, transfer or delivery of any Warrants and
Warrant Shares on exercise of the Warrants. In the event the Warrants or Warrant Shares are to be
delivered in a name other than the name of the Registered Holder of the Warrant Certificate, no
such delivery shall be made unless the person requesting the same has paid the amount of any such
taxes or charges incident thereto.

6. Registration of Transfer. The Warrant Certificates may be transferred in whole or in
part, provided any such transfer complies with all applicable foreign and United States federal and
state securities laws and, if requested by the Company, the Registered Holder delivers to the
Company an opinion of counsel to that effect, in form and substance reasonably acceptable to the
Company. Warrant Certificates to be transferred shall be surrendered to the Company at its
principal office. The Company shall execute, issue and deliver in exchange therefore the Warrant
Certificate or Certificates which the Registered Holder making the transfer shall be entitled to
receive.

     The Company shall keep transfer books at its principal office which shall register Warrant
Certificates and the transfer thereof. On due presentment of any Warrant Certificate for
registration of transfer at such office, the Company shall execute, issue and deliver to the
transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate
number of Warrants. All Warrant Certificates presented for registration of transfer or exercise
shall be duly endorsed or be accompanied by a written instrument or instruments of transfer in form
and substance satisfactory to the Company. The Company may require payment of a sum sufficient to
cover any tax or other government charge that may be imposed in connection therewith.

 

 

     All Warrant Certificates so surrendered, or surrendered for exercise, or for exchange in case
of mutilated Warrant Certificates, shall be promptly canceled by the Company and thereafter
retained by the Company until the Expiration Date. Prior to due presentment for registration of
transfer thereof the Company may treat the Registered Holder of any Warrant Certificate as the
absolute owner thereof (notwithstanding any notations of ownership or writing thereon made by
anyone other than the Company), and the Company shall not be affected by any notice to the
contrary.

7. Loss or Mutilation. On receipt by the Company of evidence satisfactory as to the
ownership of and the loss, theft, destruction or mutilation of this Warrant Certificate, the
Company shall execute and deliver, in lieu thereof a new Warrant Certificate representing an equal
aggregate number of Warrants. In the case of loss, theft or destruction of any Warrant Certificate,
the individual requesting issuance of a new Warrant Certificate shall be required to indemnify the
Company in an amount satisfactory to the Company. In the event a Warrant Certificate is mutilated,
such Certificate shall be surrendered and canceled by the Company prior to delivery of a new
Warrant Certificate. Applicants for a new Warrant Certificate shall also comply with such other
reasonable regulations as the Company may prescribe.

8. Adjustment of Shares. The number and kind of securities issuable upon exercise of a
Warrant or to be delivered upon the redemption of Warrants hereunder shall be subject to adjustment
from time to time upon the happening of certain events (“Adjustment Event”), as follows:

     (a) If the Company shall, at any time prior to the complete exercise of the Warrants evidenced
hereby, declare or pay to the holders of its outstanding Shares, a dividend payable in any kind of
shares of stock or other securities of the Company, or in property, or otherwise than in cash, the
Registered Holder upon thereafter exercising the Warrants evidenced hereby as herein provided shall
be entitled to receive for the Exercise Price, in addition to one Warrant Share, such additional
share or shares of stock or scrip representing fractions of a share or other securities or property
as the Registered Holder would have received in the form of such dividend if he had been the holder
of record of such Warrant Share on the record date for the determination of common stockholders
entitled to receive such dividend.

     (b) If the Company shall, while any Warrants evidenced hereby remain in force, effect a
recapitalization of such character that the Shares covered hereby shall be changed into or become
exchangeable for a larger or smaller number of shares, then thereafter, the number of Shares which
the Registered Holder shall be entitled to purchase hereunder, shall be increased or decreased, as
the case may be, in direct proportion to the increase or decrease in the number of Shares of the
Company by reason of such recapitalization, and the Exercise Price (per Share) shall in the case of
an increase in the number of Shares be proportionately reduced, and in the case of a decrease in
the number of shares be proportionately increased.

     (c) In case of any reorganization of the Company (or any other corporation the stock or other
securities of which are at the time receivable upon exercise of a Warrant) or in case the Company
(or any such other corporation) shall merge into or with or consolidate with another corporation or
convey all or substantially all of its assets to another corporation or enter into a

 

 

business combination of any form as a result of which the Shares or other securities receivable
upon exercise of a Warrant are converted into other stock or securities of the same or another
corporation, then and in each such case, the Registered Holder of a Warrant, upon exercise of the
purchase right at any time after the consummation of such reorganization, consolidation, merger,
conveyance or combination, shall be entitled to receive, in lieu of the Shares or other securities
to which such Registered Holder would have been entitled had he exercised the purchase right
immediately prior thereto, such stock and securities which such Registered Holder would have owned
immediately after such event with respect to the Shares and other securities for which a Warrant
may have been exercised immediately before such event had the Registered Holder exercised the
Warrant immediately prior to such event.

     (d) In case the Company shall at any time prior to the exercise of a Warrant evidenced hereby
make any distribution of its assets to holders of its Shares by way of a liquidating or partial
liquidating dividend or by way of a return of capital, or other than as a dividend payable out of
earnings or any surplus legally available for dividends under the laws of the state of its
incorporation, then the Registered Holder upon thereafter exercising such Warrant as herein
provided after the date of record for the determination of those holders of Shares entitled to such
distribution of assets, shall be entitled to receive for the Exercise Price, in addition to a
Warrant Share, the amount of such assets (or at the option of the Company, a sum equal to the value
thereof at the time of such distribution to holders of Shares as such value is determined by the
Board of Directors of the Company in good faith) which would have been payable to the Registered
Holder had he been the holder of record of such Warrant Share receivable upon exercise of such
Warrant on the record date for the determination of those entitled to such distribution.

     The Company shall mail to the holder of this Certificate at least twenty (20) days prior to
any Adjustment Event a notice specifying the date on which any such Adjustment Event is to occur
together with a description thereof.

     In each case of an adjustment in the Shares or other securities receivable upon the exercise
of a Warrant, the Company shall promptly notify the Registered Holder of such adjustment. Such
notice shall set forth the facts upon which such adjustment is based.

9. Reduction in Exercise Price.

     (a) The Company’s Board of Directors may, at its sole discretion, reduce the Exercise Price of
the Warrants in effect at any time either for the life of the Warrants or any shorter period of
time determined by the Company’s Board of Directors. The Company shall promptly notify the
Registered Holders of any such reduction in the Exercise Price.

     (b) In the event the Company issues equity securities during the life of the Warrant (other
than pursuant to the granting of stock options pursuant to employee stock option plans approved by
the Company’s stockholders; or the exercise or conversion of outstanding warrants, stock options or
convertible securities, including without limitation the conversion of the Senior Secured Notes due
July 25, 2009 or the Senior Subordinated Convertible Guaranteed Notes due September 1, 2009) at a
price per share of Common Stock or common stock equivalent less than

 

 

the Exercise Price then in effect, such price per share determined net of all discounts, fees,
costs and expenses incurred in connection with such issuance, then the Exercise Price shall be
automatically reset to the lowest net effective price per share, without any further action of the
holder of the Warrant. Notwithstanding the foregoing, in no event shall the number of Shares
issuable to the holders of the Warrants pursuant to this Section 8 cause the holders of the
Warrants collectively to own in excess of 19.9% of the outstanding Common Stock of the Company as
at the date of the Note Purchase Agreement unless the Company has obtained the prior approval of
its stockholders as required by Section 713 of the AMEX Company Guide as in effect from time to
time, provided, however, that the Company shall use commercially reasonable efforts to diligently
seek to obtain such approval of its stockholders.

10. Notices. All notices, demands, elections, requests and communications provided for
hereunder shall be in writing and sent

     (a) by telefacsimile if the sender on the same day sends a confirming copy of such notice by a
recognized overnight delivery service (charges prepaid), or

     (b) by registered or certified mail with return receipt requested (postage prepaid), or

     (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must
be sent:

          (i) if to the Registered Holder or its nominee, to the Registered Holder or its nominee at the
address of the Registered Holder as set forth on the books maintained by the Company, or at such
other address as such Registered Holder or nominee shall have specified to the Company in writing,

          (ii) if to the Company, to the Company at its principal executive office to the attention of
Chief Executive Officer, or at such other address as the Company shall have specified to the holder
of each Warrant in writing.

     Notices under this Section 10 will be deemed given only when actually received.

11. General Provisions. This Warrant Certificate shall be construed and enforced in
accordance with, and governed by, the laws of the State of Delaware, where the Company maintains
its registered offices. Except as otherwise expressly stated herein, time is of the essence in
performing hereunder. The headings of this Warrant Certificate are for convenience in reference
only and shall not limit or otherwise affect the meaning hereof.

     IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed as of
the ___ day of ___, 2006.

	 	 	 	 	 	 	 
	 	 	CanArgo Energy Corporation
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 	 	 	 	 
	 	 	Title:	 	 
	 

	 	 	 	 	 	 

 

 

CanArgo Energy Corporation

     The following abbreviations, when used in the inscription on the face of this instrument,
shall be construed as though they were written out in full according to applicable laws or
regulations:

	 	 	 	 	 
	TEN COM — as tenants in common

	 	UNIF GIFT MIN ACT- Custodian	 	 
	TEN ENT — as tenants by the entireties
	 	 	 	 
	JR TEN — as joint tenants with right

	 	 

(Cust)          (Minor)
	 	 
	of survivorship and not as tenants in

	 	under
Uniform Gifts
	 	 
	common	 	to
Minor
Act                    .

	 	 
	 

	 	                    (State)	 	 

Additional abbreviations may also be used though not in the above list.

FORM OF ASSIGNMENT

(To be Executed by the Registered Holder if He

Desires to Assign Warrants Evidenced by the

Within Warrant Certificate)

     FOR VALUE RECEIVED                                                              hereby sells,
assigns and transfers
(                    ) Warrants, evidenced by the within Warrant Certificate, and does
hereby irrevocably constitute and appoint                                                              Attorney to transfer the said
Warrants evidenced by the within Warrant Certificates on the books of the Company, with full power
of substitution.

	 	 	 
	Dated:                                                             .

	 	                                                            .
	 

	 	Signature

Notice: The above signature must correspond with the name as written upon the Face of the
Warrant Certificate in every particular, without alteration or enlargement or any change
whatsoever.

Signature Guaranteed:

SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE FOLLOWING STOCK
EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR
MIDWEST STOCK EXCHANGE.

 

 

FORM OF ELECTION TO PURCHASE

(To be Executed by the Holder if he Desires to Exercise

the Warrants Evidenced by the Warrant Certificate)

To CanArgo Energy Corporation:

     [The undersigned hereby irrevocably elects to exercise                     
(                     ) Warrants, evidenced by the within
Warrant Certificate for, and to purchase thereunder,                                         
(                     ) full shares of Common Stock issuable upon exercise of said
Warrants and delivery of $                     and payment of any applicable taxes.

   OR

     [The undersigned hereby irrevocably elects to convert                     
(                      ) Warrants, evidenced by the within
Warrant Certificate, and to acquire Warrant Shares pursuant to the “Net Issue Conversion” provision
in Section 4 thereof, and, upon payment of any applicable taxes, to acquire Warrant Shares
thereunder.]

     The undersigned hereby warrants and represents that he/it is an “accredited investor” as
defined under Rule 501(a) of the Securities Act of 1933, as amended and accordingly the Warrants
being exercised and the securities deliverable upon exercise thereof have been registered under the
Act or are exempt from registration thereunder.

     Please register the certificates for such share as follows:

Please insert taxpayer identification

Or social security number (if any)                                        .

 

(Please print name)

 

(Please print address)

     If said number of Warrants shall not be all the Warrants evidenced by the within Warrant
Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so
exercised be registered in the name of the undersigned at the following address and deliver the
Certificate to that address:

 

(Please print address)

(SIGNATURES CONTINUED ON FOLLOWING PAGE)

 

 

Dated:                                                    Signature:          
                                                  .

NOTICE:           The above signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or enlargement or any change
whatsoever. If the certificate representing the shares is to be registered in a name other than
that in which the within Warrant Certificate is registered, the signature of the holder hereof must
be guaranteed.

Signature Guaranteed:   
                                                                              .

SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE FOLLOWING STOCK
EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR
MIDWEST STOCK EXCHANGE.

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