Document:

exv10w4

 

Exhibit 10.4

EMPLOYMENT AGREEMENT

     This Employment Agreement (the “Agreement”) is entered into as of January 1, 2003 (the
“Effective Date”), by and between APPROACH RESOURCES INC., a Delaware corporation (the “Company”),
and STEVEN SMART, an individual residing in the state of Texas (“Employee”).

RECITALS

     WHEREAS, the Company desires to employ Employee pursuant to the terms of this Agreement;

     WHEREAS, Employee desires to be employed by the Company pursuant to the terms of this
Agreement;

     WHEREAS, both the Company and Employee have read and understood the terms of this Agreement,
and have been afforded a reasonable opportunity to review this Agreement with their respective
legal counsel;

     WHEREAS, Employee acknowledges that in the course of his employment by the Company and
performance of services on behalf of the Company and its subsidiaries, if any (collectively, the
“Related Parties”), he will become privy to various business opportunities of the Related Parties;

     WHEREAS, it is a condition to (i) the sale of the Company’s common stock to Employee occurring
on or about the Effective Date, (ii) the grant to Employee of options to acquire common stock of
the Company occurring on or about the Effective Date, and (iii) the continuing employment of
Employee by the Related Parties, that Employee enter into this Agreement; and

     WHEREAS, in connection with the sale on even date herewith to Employee of shares of the
Company’s common stock, Employee is simultaneously purchasing 3,500 shares of the Company’s common
stock in consideration of a promissory note payable to the Company (and committing to purchase an
additional 5,000 shares of the Company’s common stock) (collectively, the “Note Shares”);

     NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this
Agreement, the parties agree as follows:

AGREEMENT

	1.	 	Employment. The Company will employ Employee subject to the terms of this Agreement.
Employee hereby accepts employment subject to the terms of this Agreement.
	 
	2.	 	Duties. The Employee shall serve as Controller of the Company. The Employee shall
report to the President and Executive Vice President of the Company.

 

 

	3.	 	Place of Performance. In connection with his employment under this Agreement,
Employee shall be based at the Company’s offices maintained in Fort Worth, Texas. The Company
shall provide without cost to Employee such office space, secretarial, and administrative
services, equipment, furniture, and furnishings as are suitable and appropriate to Employee’s
titles and duties.
	 
	4.	 	Term of Agreement. The term of this Agreement shall be defined and determined as
follows:

	 	a.	 	Initial Term. This Agreement shall continue in full force and effect
for two years (the “Initial Term”), commencing on the Effective Date and expiring on
the second anniversary of the Effective Date (the “Expiration Date”), unless terminated
before the Expiration Date in accordance with paragraph 6.
	 
	 	b.	 	Renewal Term. Notwithstanding paragraph 4(a), the term of this
Agreement will automatically be extended for an additional one year term (a “Renewal
Term”) on the Expiration Date and on each successive anniversary of the Expiration
Date, unless and until the Agreement terminated in accordance with paragraph 6.

	5.	 	Compensation and Employment Benefits. The Company agrees to pay Employee the
following compensation and employment benefits during his employment under this Agreement:

	 	a.	 	Base Salary. From the Effective Date until changed as provided in this
paragraph, the Company agrees to pay Employee an annual base salary of $115,000.00 (the
“Base Salary”), pro-rated for any partial period of employment. The Base Salary will
be payable semi-monthly in accordance with the Company’s ordinary payroll policies and
procedures for employee compensation. The Company agrees that during Employee’s
employment under this Agreement, Employee’s Base Salary will be subject to an annual
review and adjustment by the Company’s Board of Directors.
	 
	 	b.	 	Bonus.

	 	(i)	 	In addition to the Base Salary, Employee is eligible to
participate in an annual employee bonus pool (the “Pool”) to be determined
annually, in its discretion, by the Board or a committee of two members of the
Board designated as the Compensation Committee (the “Compensation Committee”),
initially comprised of Bryan H. Lawrence and J. Ross Craft.
	 
	 	(ii)	 	If the Board or the Compensation Committee gives Employee the
option, Employee may choose to receive his bonus in cash or shares of the
Company’s common stock (with the valuation thereof set by the Board or the
Compensation Committee), or any combination thereof.

Employment Agreement — Page 2

 

	 	(iii)	 	The Board, or the Compensation Committee, as the case may be,
in its discretion, will determine Employee’s participation in the Pool based on
the relative contribution of Employee during the year for which the Pool is
determined to the profitability and welfare of the Company.

	 	c.	 	Employment Benefits. The Company agrees to provide Employee with the
employment benefits that the Company ordinarily provides to its employees. Such
employment benefits shall be governed by the applicable plan documents, insurance
policies, and/or employment policies, and may be modified, suspended, or revoked in
accordance with the terms of the applicable documents or policies. In addition to
those benefits, the Company agrees to provide or cause to provide the following
benefits upon satisfaction by Employee of the any eligibility requirements, subject to
the following limitations:

	 	(1)	 	Sick-Leave Benefits and Disability Insurance. To the
extent made available to other employees of the Company, and unless this
Agreement is terminated pursuant to paragraph 6, Employee shall be paid sick
leave benefits at his then prevailing Base Salary rate during his absence due
to illness or other incapacity.
	 
	 	(2)	 	Vacations. The Company will provide Employee with a
minimum of 20 business days paid vacation per calendar year during his
employment under this Agreement. Such vacation must be utilized in the
calendar year in which it is granted or else it will be forfeited, unless the
Company has adopted a plan pursuant to which some or all of such days of paid
vacation may be rolled over to the next succeeding year. Employee agrees that
the time and duration of any vacation shall be subject to advance notice to the
Board. The Company also agrees to provide Employee with all paid holidays
ordinarily given by the Company to its employees. The Company also agrees to
pay Employee for any accrued unused vacation should this Agreement terminate
pursuant to paragraph 6.

	 	d.	 	Reimbursement of Business Expenses. Employee is authorized to incur
ordinary, necessary, and reasonable business expenses in connection with the
performance of his duties, responsibilities, and authorities under this Agreement and
for the promotion of the Company’s business and activities during this Agreement,
including but not limited to expenses for necessary travel and entertainment and other
items of expenses required in the normal and routine course of Employee’s employment
under this Agreement. The Company will promptly reimburse Employee from time to time
for all such business expenses incurred pursuant to and in conformity with this
paragraph and the policies and practices of the Company then in effect relative to the
reimbursement of business expenses.

Employment Agreement — Page 3

 

	6.	 	Termination of Agreement. This Agreement may be terminated as follows:

	 	a.	 	Death. This Agreement shall terminate immediately in the event of
Employee’s death; provided, however, that Employee’s estate shall be paid the Base
Salary that Employee earned through the date of his death in the time and manner in
which Employee would have been paid such compensation.
	 
	 	b.	 	Disability. This Agreement shall terminate immediately in the event
that Employee becomes “Disabled” as defined below. For purposes of this Agreement,
Employee shall be deemed to have become “Disabled” when (i) he receives disability
benefits under either Social Security or the Company’s disability plan, if any, (ii)
the Board, upon the written report of a qualified physician designated by the Board or
its insurers, shall have determined (after a complete physical examination of Employee
at any time after he has been absent from the Company for a period of at least 120
calendar days since the Effective Date) that Employee has become physically and/or
mentally incapable of performing his essential job functions with or without reasonable
accommodation as required by law, or (iii) Employee is otherwise unable for a
continuous period of 180 calendar days to perform his essential job functions with or
without reasonable accommodation as required by law due to injury, illness, or other
incapacity (physical or mental).
	 
	 	c.	 	With Cause. The Company shall be entitled to terminate this Agreement
immediately, without any further liability to Employee, except as provided otherwise in
this Agreement, for any “Cause” as defined below.

	 	(i)	 	For purposes of this Agreement, “Cause” shall be defined as
follows:

	 	(A)	 	the willful and continued failure by Employee
substantially to perform his duties hereunder (other than any such
failure resulting from Employee becoming Disabled);
	 
	 	(B)	 	the willful engaging by Employee in misconduct
that is materially injurious to the Company;
	 
	 	(C)	 	any misconduct in the course and scope of
Employee’s employment under this Agreement, including but not limited
to dishonesty, disloyalty, disorderly conduct, insubordination,
harassment of other employees or third parties, abuse of alcohol or
controlled substances, or other violations of the Company’s rules; or
	 
	 	(D)	 	any material violation of this Agreement or the
Voting and Stockholders’ Agreement dated even date herewith among the
Company and its stockholders.

Employment Agreement — Page 4

 

	 	 	 	For purposes of this paragraph, no act, or failure to act, on Employee’s
part shall be considered “willful” unless done, or omitted to be done, by
him not in good faith and without reasonable belief that his action or
omission was in the best interest of the Company.

	 	(ii)	 	If the Company believes Cause exists for terminating this
Agreement pursuant to this paragraph, it shall give Employee written notice of
the acts or omissions constituting Cause, and no termination of this Agreement
shall be effective unless and until Employee fails to cure such acts or
omissions within 10 days after receiving such notice.

	 	d.	 	Without Cause. The Company shall be entitled to terminate this
Agreement for any reason other than death, disability, or Cause, at any time during
Employee’s employment by providing 90 days written notice to Employee that the Company
is terminating the Agreement without Cause as defined in this paragraph (a termination
“without Cause”).
	 
	 	e.	 	Expiration of Term. The Employee’s employment shall terminate upon the
expiration of the Initial Term or any successive Renewal Term, provided that the
Company notify Employee at least 60 days before the expiration of the Initial Term or
any successive Renewal Term of its intention not to extend this Agreement pursuant to
paragraph 4(b).

	7.	 	Compensation Upon Termination. Upon termination of Employee’s employment for one of
the following reasons, Employee shall be entitled to the following compensation:

	 	a.	 	Cause. If Employee’s employment shall be terminated for Cause, the
Company shall pay Employee his Base Salary then in effect through the Date of
Termination, prorated as provided in paragraph 5(a), and the Company shall have no
further obligations to Employee under this Agreement.
	 
	 	b.	 	Breach by the Company. If in breach of this Agreement the Company
shall terminate Employee’s employment (it being understood that a purported termination
of Employee’s employment by the Company pursuant to any provision of this Agreement
that is disputed and finally determined not to have been proper shall be a termination
by the Company in breach of this Agreement), then the Company shall pay or provide
Employee, in lieu of any further salary payments to Employee for any remaining portion
of the Term of this Agreement following the Date of Termination:

	 	(A)	 	on or before the 20th day following the Date of Termination, a
lump sum in cash equal to 25% of his Base Salary in effect as of the Date of
Termination;
	 
	 	(B)	 	on or before the 90th day following the Date of Termination, a
lump sum in cash equal to 25% of Employee’s Base Salary in effect as of the
Date of Termination; and

Employment Agreement — Page 5

 

	 	(C)	 	all benefits Employee may be entitled to receive pursuant to
any pension or employee benefit plan or other arrangement or life insurance
policy maintained by the Company.

	 	c.	 	Without Cause or Expiration of Term of Agreement. If Employee’s
employment shall be terminated without Cause as provided in paragraph 6(d) or if the
Company elects not to extend this Agreement as provided in paragraph 6(e), the Company
shall continue to pay Employee his Base Salary plus benefits for the period of 6 months
from the date of termination. Such Base Salary and benefits shall be paid from time to
time during such 6 month period in accordance with the time periods set forth in
paragraph 5(a). Additionally, upon a termination of Employee’s employment without
Cause or if the Company elects not to extend this Agreement, within 60 days after such
event, the Company hereby agrees to purchase from Employee, and Employee hereby agrees
to sell to the Company, all of the Note Shares in consideration for the forgiveness of
the outstanding indebtedness under any promissory note made to purchase the Note
Shares. The acquisition of the Note Shares by the Company shall be at a price no less
than the price paid by the Employee for the Note Shares; provided that to the extent
such purchase price is below the fair market value of the common stock of the Company
at the time of such purchase, Employee shall be responsible for any taxes associated
with the Company’s purchase of the Note Shares. Notwithstanding the preceding two
sentences, Employee shall have the right to pay off the indebtedness in full under any
promissory note made to purchase the Note Shares within 30 days after the notice of
termination without Cause.

	8.	 	Intentionally Omitted.
	 
	9.	 	Other Provisions Relating to Termination.

	 	a.	 	Notice of Termination. Any termination of Employee’s employment by the
Company or by Employee (other than termination because of Death) shall be communicated
by written Notice of Termination to the other party thereto. For purposes of this
Agreement, a “Notice of Termination” shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon, and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Employee’s employment under the provision so indicated.
	 
	 	b.	 	Date of Termination. For purposes of this Agreement, “Date of
Termination” shall mean (i) if Employee’s employment is terminated by Death, the date
of Death; (ii) if Employee’s employment is terminated because of Employee becoming
Disabled, then 60 days after
Notice of Termination is given (provided that Employee shall not have returned to
the performance of his duties on a full-time basis during such 60 day period); (iii)
if (a) Employee’s employment is terminated by the Company for Cause or (b)
Employee’s employment is terminated by Employee, then in each case the date
specified in the Notice of Termination; (iv) if this Agreement is not renewed, the
last

Employment Agreement — Page 6

 

	 	 	 	date of the Initial Term or the Renewal Term as the case may be; and (v) if
Employee’s employment is terminated for any other reason, the date on which a Notice
of Termination is given; provided that if within 30 days after any Notice of
Termination is given (other than with respect to a termination without Cause) the
party receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined, either by mutual written agreement of the
parties, by a binding and final arbitration award, or by a final judgment order or
decree of a court of competent jurisdiction (the time for appeal therefrom having
expired and no appeal having been perfected), as applicable.

	 	c.	 	Mitigation. Employee shall not be required to mitigate the amount of
any payment provided for in paragraph 7 by seeking other employment or otherwise, nor
shall the amount of any payment provided for therein be reduced by any compensation
earned by Employee as the result of employment by another employer after the Date of
Termination, or otherwise.
	 
	 	d.	 	Interest. Until paid, all past due amounts required to be paid by the
Company under any provision of this Agreement shall bear interest at 8% per annum
compounded daily.

	10.	 	Business Opportunities and Intellectual Property; Personal Investments; Confidentiality;
Covenant not to Compete.

	 	a.	 	Employee shall promptly disclose to the Company all “Business Opportunities”
and “Intellectual Property” (as defined below).
	 
	 	b.	 	For purposes hereof “Business Opportunities” shall mean all business ideas,
prospects, proposals or other opportunities pertaining to the lease, acquisition,
exploration, production, gathering or marketing of hydrocarbons and related products
and the exploration potential of geographical areas on which hydrocarbon exploration
prospects are located, that are developed by Employee during the period that Employee
is employed by any of the Related Parties (the “Employment Term”) or originated by any
third party and brought to the attention of Employee during the Employment Term,
together with information relating thereto (including, without limitation, geological
and seismic data and interpretations thereof, whether in the form of maps, charts,
logs, seismographs, calculations, summaries, memoranda, opinions, or other written or
charted means).
	 
	 	c.	 	For purposes hereof, “Intellectual Property” shall mean all ideas, inventions,
discoveries, processes, designs, methods, substances, articles, computer programs, and
improvements
(including, without limitation, enhancements to, or further interpretation or
processing of, information that was in the possession of Employee prior to the date
of this Agreement), whether or not patentable or copyrightable, that do not fall
within the definition of Business Opportunities, that Employee discovers,

Employment Agreement — Page 7

 

	 	 	 	conceives, invents, creates, or develops, alone or with others, during the Employment Term, if
such discovery, conception, invention, creation, or development (i) occurs in the
course of Employee’s employment with the Related Parties or (ii) occurs with the use
of any of the Related Parties’ time, materials, or facilities.

	11.	 	Non-Compete Obligations During Employment Term. Employee agrees that during the
Employment Term and except as provided below or as otherwise permitted by the Company (acting
upon the instruction of the Board):

	 	a.	 	Employee will not, other than through the Related Parties, engage or
participate in any manner, whether directly or indirectly through any family member or
as an employee, employer, consultant, agent, principal, partner, more than one percent
shareholder, officer, director, licensor, lender, lessor, or in any other individual or
representative capacity, in any business or activity that is engaged in leasing,
acquiring, exploring, developing or producing hydrocarbons and related products; and
	 
	 	b.	 	all investments made by Employee (whether in his own name or in the name of any
family members or made by Employee’s controlled affiliates), which relate to the lease,
acquisition, exploration, development or production of hydrocarbons and related
products shall be made solely through the Related Parties; and Employee will not
(directly or indirectly through any family members), and will not permit any of his
controlled affiliates to: (A) invest or otherwise participate alongside the Related
Parties in any Business Opportunities or (B) invest or otherwise participate in any
business or activity relating to a Business Opportunity, regardless of whether any of
the Related Parties ultimately participates in such business or activity;

	 	 	provided that this paragraph 11 shall not apply to (x) the existing personal oil and gas
investments owned by Employee, his family members and his controlled affiliates as of the
date hereof (the “Existing Personal Investments”); (y) future expenditures made by Employee
and his family members and his controlled affiliates that are required to maintain, but not
increase, their respective current ownership interests in the Existing Personal Investments,
excluding however, any expenditure to participate in the acquisition, exploration, or
development of any acreage that is not currently included in the Existing Personal
Investments as of the date hereof; and (z) any opportunity that is first offered to, and
subsequently declined by, the Company (acting through the Board).

	12.	 	Confidentiality Obligations.

	 	a.	 	Employee hereby acknowledges that all trade secrets and confidential or
proprietary
information of the Related Parties (collectively referred to herein as “Confidential
Information”) constitute valuable, special and unique assets of the Related Parties’
business, and that access to and knowledge of such Confidential Information is
essential to the performance of Employee’s duties. Employee agrees that during the
Employment Term and during the one-year period following the Date of

Employment Agreement — Page 8

 

	 	 	 	Termination, Employee will hold the Confidential Information in strict confidence and will not
publish, disseminate, or otherwise disclose, directly or indirectly, to any person
other than the Related Parties and their respective officers, directors, and
employees, any Confidential Information or use any Confidential Information for
Employee’s own personal benefit or for the benefit of anyone other than the Related
Parties. The Company agrees to provide Confidential Information to Employee in
exchange for Employee’s agreement to keep such Confidential Information, and any
Confidential Information to which Employee has already become privy, in strict
confidence as provided in this Agreement.

	 	b.	 	For purposes of this paragraph 12, it is agreed that Confidential Information
includes, without limitation, any information heretofore or hereafter acquired,
developed, or used by any of the Related Parties relating to Business Opportunities or
Intellectual Property or other geological, geophysical, economic, financial, or
management aspects of the business, operations, properties, or prospects of the Related
Parties whether oral or in written form in a Related Parties’ business records, but
shall exclude any information that (i) has become part of common knowledge or
understanding in the oil and gas industry or otherwise in the public domain (other than
from disclosure by Employee in violation of this Agreement), or (ii) was rightfully in
the possession of Employee, as shown by Employee’s records, prior to the date of this
Agreement (including Employee’s method of selecting, purchasing, and reworking oil and
gas properties, which the Company and Employee may utilize subsequent to the Employment
Term (subject to the other limitations contained in this Agreement)); provided,
however, that Employee shall provide to the Company copies of all information described
in clause (ii); provided further, however, that this paragraph 12 shall not be
applicable to the extent Employee is required to testify in a judicial or regulatory
proceeding pursuant to the order of a judge or administrative law judge after Employee
requests that such Confidential Information be preserved.

	13.	 	Obligations After Termination Date.

	 	a.	 	The purpose of the provisions of paragraph 12 and this paragraph 13 are to
protect the Company from unfair loss of goodwill and business advantage and to shield
Employee from pressure to use or disclose Confidential Information or to trade on the
goodwill belonging to the Company. Accordingly, during the “Post-Termination
Non-Compete Term” (as defined below), Employee will not engage or participate in any
manner, whether directly or indirectly through any family member or as an employee,
employer, consultant, agent, principal, partner, shareholder, officer, director,
licensor, lender, lessor, or in any other individual or representative capacity, in any
business or activity that is in engaged in leasing,
acquiring, exploring, developing or producing hydrocarbons and related products
within the boundaries of, or within a three (3) mile radius of the boundaries of,
any mineral property interest of any of the Related Parties (including, without
limitation, a mineral lease, overriding royalty interest, production payment, net
profits interest, mineral fee interest, or option or right to acquire any of the
foregoing, or an area of mutual interest as

Employment Agreement — Page 9

 

	 	 	 	designated pursuant to contractual
agreements between the Related Party and any third party) or any other property on
which the Related Parties have an option, right, license, or authority to conduct or
direct exploratory activities, such as three dimensional seismic acquisition or
other seismic, geophysical and geochemical activities (but not including any
preliminary geological mapping), as of the Termination Date or as of the end of the
six-month period following such Termination Date; provided that, this paragraph 13
shall not preclude Employee from making personal investments in securities of oil
and gas companies that are registered on a national stock exchange, if the aggregate
amount owned by Employee and all family members and affiliates does not exceed one
percent (1%) of such company’s outstanding securities.

	 	b.	 	For purposes hereof, the “Post Termination Non-Compete Term” is:

	 	(i)	 	in the event that (A) Employee voluntarily resigns or otherwise
terminates his position as an officer or employee of the Related Parties other
than on account of a change of control, or (B) Employee’s employment or
engagement by the Related Parties is terminated for Cause, the six month period
following the Termination Date;
	 
	 	(ii)	 	in the event that Employee’s employment is terminated on
account of a change of control in the ownership of the Company, there shall not
be a Post Termination Non-Compete Term; and
	 
	 	(iii)	 	in the event that Employee’s employment is terminated without
Cause, the six month period following the Termination Date.

	 	c.	 	Employee will not, during the one-year period following the Termination Date,
solicit, entice, persuade, or induce, directly or indirectly, any employee (or person
who within the preceding ninety (90) days was an employee) of any of the Related
Parties or any other person who is under contract with or rendering services to any of
the Related Parties, to (i) terminate his employment by, or contractual relationship
with, such person, (ii) refrain from extending or renewing the same (upon the same or
new terms), (iii) refrain from rendering services to or for such person, (iv) become
employed by or to enter into contractual relations with any Persons other than such
person, or (v) enter into a relationship with a competitor of any of the Related
Parties.

	14.	 	Common Law Duties. Employee acknowledges and agrees that his restrictive covenants
in paragraphs 10, 11, 12, and 13 of this Agreement will supplement, rather than supplant, his
common law duties of confidentiality and loyalty owed to the Company.
	 
	15.	 	Survival of Covenants; Enforcement of Covenants; and Remedies.

	 	a.	 	Survival of Covenants. Employee acknowledges and agrees that his
covenants in

Employment Agreement — Page 10

 

	 	 	 	paragraphs 10, 11, 12, and 13 of this Agreement shall survive the
termination of this Agreement and shall be construed as agreements independent of any
other provision of this Agreement, and the existence of any claim or cause of action of
Employee against the Company whether predicated on this Agreement or otherwise shall
not constitute a defense to the enforcement by the Company of those covenants.

	 	b.	 	Enforcement of Covenants. Employee acknowledges and agrees that his
covenants in paragraphs 10, 11, 12 and 13 of this Agreement are ancillary to the
otherwise enforceable agreements to provide Employee with Confidential Information and
are supported by independent, valuable consideration. Employee further acknowledges
and agrees that the limitations as to time, geographical area, and scope of activity to
be restrained by those covenants are reasonable and acceptable to Employee and do not
import any greater restraint than is reasonably necessary to protect the Company’s
goodwill and other legitimate business interests. Employee further agrees that if, at
some later date, a court of competent jurisdiction determines that any of the covenants
in paragraphs 10,11, 12, or 13 are unreasonable, any such covenants shall be reformed
by the court and enforced to the maximum extent permitted under the law.
	 
	 	c.	 	Remedies. In the event of breach or threatened breach by Employee of
any of his covenants in paragraphs 10, 11, 12, and 13 of this Agreement, the Company
shall be entitled to equitable relief by temporary restraining order, temporary
injunction, or permanent injunction or otherwise, in addition to other legal and
equitable relief to which it may be entitled, including any and all monetary damages
that the Company may incur as a result of said breach, violation, or threatened breach
or violation. The Company may pursue any remedy available to it concurrently or
consecutively in any order as to any breach, violation, or threatened breach or
violation, and the pursuit of one of such remedies at any time will not be deemed an
election of remedies or waiver of the right to pursue any other of such remedies as to
such breach, violation, or threatened breach or violation, or as to any other breach,
violation, or threatened breach or violation.

	16.	 	Successors and Assigns. The parties acknowledge and agree that this Agreement may
not be assigned by the Company to any other person or entity without Employee’s written
consent; provided, however, that in the event of a change in control of the Company’s
ownership, the Company shall cause the surviving entity in any such transaction to assume the
payment obligations of paragraph 6, to the extent such obligations have not yet been fully
performed. The parties further
acknowledge and agree that Employee’s duties, responsibilities, authorities, compensation,
and benefits are personal to Employee and may not be assigned to any person or entity other
than a Related Party without written consent from the Board. In the event of Employee’s
death, this Agreement shall be enforceable by Employee’s estate, executors, or legal
representatives, but only to the extent that such person may collect any compensation due to
Employee under this Agreement, as provided in paragraph 6(a). This Agreement shall be
binding upon and inure to the benefit of the parties and their respective heirs, legal
representatives, successors, and assigns; provided, however, that Employee may

Employment Agreement — Page 11

 

	 	 	not assign or
otherwise transfer this Agreement or any of Employee’s rights or obligations under this
Agreement without the prior written consent of the Board.

	17.	 	Representations of Employee. Employee hereby represents and warrants that he has not
previously assumed any obligations inconsistent with those contained in this Agreement.
Employee further represents and warrants that he has entered into this Agreement pursuant to
his own initiative and that the Company did not induce him to execute this Agreement in
contravention of any existing commitments. Employee further acknowledges that the Company has
entered into this Agreement in reliance upon the foregoing representations of Employee.
	 
	18.	 	Dispute Resolution. The parties agree to the following dispute resolution terms:

	 	a.	 	Definition of “Dispute”. Any controversy, claim, or cause of action,
whether based on statute, contract, tort, misrepresentation, or any other legal theory,
arising out of or relating to this Agreement (a “Dispute”), shall be resolved solely in
accordance with the terms of this paragraph; provided, however, that the term “Dispute”
shall not include (i) Employee’s claims for workers’ compensation or unemployment
compensation benefits (although any claim asserted under Ch. 451 of the Texas Labor
Code shall be considered a “Dispute” subject to dispute resolution under this
paragraph), or (ii) the Company’s claims for injunctive and/or other equitable relief
for Employee’s breach or threatened breach of his restrictive covenants in paragraphs
10, 11, 12, or 13. The parties acknowledge and agree that, notwithstanding the
provisions of this paragraph, nothing in this Agreement shall be construed to require
the mediation or arbitration of any claim arising out of or relating to Employee’s
covenants in paragraphs 10, 11, 12, or 13. Those covenants shall be enforceable by any
court of competent jurisdiction, in accordance with paragraph 26, and shall not be
subject to dispute resolution under this paragraph.
	 
	 	b.	 	Mediation. If a Dispute cannot be settled by good faith negotiation
between the parties, the parties shall submit the Dispute to nonbinding mediation. If
complete agreement cannot be reached within 30 calendar days of submission to mediation
(“Mediation Period”), any remaining issues will be resolved by binding arbitration in
accordance with the provisions of this paragraph. The Federal Arbitration Act, 9
U.S.C. §§ 1-15, not state law, will govern the arbitrability of all Disputes.
	 
	 	c.	 	Arbitration. A mutually agreeable arbitrator who is knowledgeable of
the Company’s industry or in commercial matters will conduct the arbitration. If the
parties cannot select a mutually agreeable arbitrator within 15 days after the
expiration of the Mediation Period, the mediator shall be selected according to rules
of the American Arbitration Association (“AAA”). The arbitrator’s decision and award
will be final and binding and may be entered in any court with jurisdiction. The
arbitrator will not have authority to limit, expand, or otherwise modify the terms of
this Agreement.

Employment Agreement — Page 12

 

	 	d.	 	Rules of Conduct for Mediation and Arbitration. The mediation and, if
necessary, the arbitration will be conducted under the then current rules of the
alternate dispute resolution (“ADR”) firm selected by the parties, or if the parties
are unable to agree on an ADR firm, the parties will conduct the mediation and, if
necessary, the arbitration under the then current rules and supervision of the AAA.
Each party will bear its own attorneys’ fees associated with the mediation and, if
necessary, the arbitration. The parties will pay all other costs and expenses of the
mediation/arbitration as the rules of the selected ADR firm provide. The parties and
their representatives shall hold the existence, content, and result of the mediation
and arbitration in confidence.
	 
	 	e.	 	Limit on Discovery. There shall be no discovery during the mediation
process. If arbitration is necessary, no discovery shall be conducted except by
agreement of the parties or after approval by the arbitrator, who shall attempt to
minimize the burden of discovery.

	19.	 	Waiver of Rights to Jury Trial and Class-Action Participation. Notwithstanding any
other provision of this Agreement, Employee agrees to irrevocably waive the right to trial by
jury or participate in any class or collective action with respect to any Dispute,
controversy, claim, or cause of action arising out of or relating to Employee’s employment
with the Company, the termination of Employee’s employment with the Company, or this Agreement
(either alleged breach or enforcement).
	 
	20.	 	Attorneys’ Fees and Other Costs. If either party breaches this Agreement, or if a
dispute arises between the parties based on or involving this Agreement, the party that
enforces its rights under this Agreement against the breaching party, or that prevails in the
resolution of such dispute, is entitled to recover from the other party its reasonable
attorneys’ fees, court costs, and expenses incurred in enforcing such rights or resolving such
dispute. For purposes of this paragraph 20, the finder of fact shall be requested to answer
affirmatively as to whether a party “prevailed” in order to recoup attorneys’ fees and other
costs pursuant to this paragraph 20.
	 
	21.	 	Entire Agreement. This Agreement constitutes the entire agreement between the
parties concerning the Agreement’s subject matter and supersedes all prior agreements and
understandings, whether written or oral, between the parties with respect to its subject
matter.
	 
	22.	 	Amendment of Agreement. This Agreement may not be modified or amended in any respect
except by an instrument in writing signed by the party against whom such modification or
amendment is sought to be enforced. No modification or amendment may be enforced against the
Company unless such modification or amendment is in writing and signed by the Board.

Employment Agreement — Page 13

 

	23.	 	Waiver. The waiver by either party of a breach of any term of this Agreement shall
not operate or be construed as a waiver of a subsequent breach of the same provision by either
party or of the breach of any other term or provision of this Agreement.
	 
	24.	 	Severability. If any provision of this Agreement is held to be illegal, invalid, or
unenforceable, (a) this Agreement shall be considered divisible, (b) such provision shall be
deemed inoperative to the extent it is deemed illegal, invalid, or unenforceable, and (c) in
all other respects this Agreement shall remain in full force and effect; provided, however,
that if any such provision may be made enforceable by limitation thereof, then such provision
shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by
applicable law.
	 
	25.	 	Governing Law; Venue. Except as otherwise provided in this Agreement, this Agreement
shall be governed by and construed and enforced in accordance with the laws of the State of
Texas. Exclusive venue for purposes of any controversy, claim, or cause of action not covered
by paragraph 18, and brought by any party under this Agreement, is in any state or federal
court of competent jurisdiction in and for Tarrant County, Texas. Nothing in this Agreement,
however, precludes the Company or Employee from seeking to remove a civil action from any
state court to federal court.
	 
	26.	 	Notices. All notices under this Agreement shall be in writing and shall be deemed to
have been delivered on the date personally delivered or three calendar days after the date
deposited in a receptacle maintained by the United States Postal Service for such purpose,
postage prepaid, by certified mail, return receipt requested, addressed to the Company at its
headquarters or Employee at the address of such person as set forth in the Company’s records.
Either party may designate a different address by providing written notice of such new address
to the other party.
	 
	27.	 	Counterparts. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute but one and the
same instrument.

[signature page to follow]

Employment Agreement — Page 14

 

	 	 	 	 	 	 	 
	 	 	EMPLOYEE:	 	 
	 
	 	 	 	 	 	 
	 	 	/s/ Steven Smart	 	 
	 	 	 	 	 
	 	 	Name: Steven Smart	 	 
	 
	 	 	 	 	 	 
	 	 	COMPANY:	 	 
	 
	 	 	 	 	 	 
	 	 	APPROACH RESOURCES INC.	 	 
	 	 	a Delaware Corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ J. Ross Craft	 	 
	 

	 	 	 	 	 	 
	 	 	Name:	 	J. Ross Craft	 	 
	 	 	Title:	 	President	 	 

Employment Agreement — Page 15exv10w5

 

Exhibit 10.5

EMPLOYMENT AGREEMENT

     This Employment Agreement (the “Agreement”) is entered into as of January 1, 2003 (the
“Effective Date”), by and between APPROACH RESOURCES INC., a Delaware corporation (the “Company”),
and GLENN REED, an individual residing in the state of Texas (“Employee”).

RECITALS

     WHEREAS, the Company desires to employ Employee pursuant to the terms of this Agreement;

     WHEREAS, Employee desires to be employed by the Company pursuant to the terms of this
Agreement;

     WHEREAS, both the Company and Employee have read and understood the terms of this Agreement,
and have been afforded a reasonable opportunity to review this Agreement with their respective
legal counsel;

     WHEREAS, Employee acknowledges that in the course of his employment by the Company and
performance of services on behalf of the Company and its subsidiaries, if any (collectively, the
“Related Parties”), he will become privy to various business opportunities of the Related Parties;

     WHEREAS, it is a condition to (i) the sale of the Company’s common stock to Employee occurring
on or about the Effective Date, (ii) the grant to Employee of options to acquire common stock of
the Company occurring on or about the Effective Date, and (iii) the continuing employment of
Employee by the Related Parties, that Employee enter into this Agreement; and

     WHEREAS, in connection with the sale on even date herewith to Employee of shares of the
Company’s common stock, Employee is simultaneously purchasing 2,800 shares of the Company’s common
stock in consideration of a promissory note payable to the Company (and committing to purchase an
additional 4,000 shares of the Company’s common stock) (collectively, the “Note Shares”);

     NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this
Agreement, the parties agree as follows:

AGREEMENT

	1.	 	Employment. The Company will employ Employee subject to the terms of this Agreement.
Employee hereby accepts employment subject to the terms of this Agreement.
	 
	2.	 	Duties. The Employee shall serve as Operations Manager of the Company. In such
capacity, the Employee shall be required to perform all duties as may be required from time to
time by the President of the Company.

 

 

	3.	 	Place of Performance. In connection with his employment under this Agreement,
Employee shall be based at the Company’s offices maintained in Fort Worth, Texas. The Company
shall provide without cost to Employee such office space, secretarial, and administrative
services, equipment, furniture, and furnishings as are suitable and appropriate to Employee’s
titles and duties.
	 
	4.	 	Term of Agreement. The term of this Agreement shall be defined and determined as
follows:

	 	a.	 	Initial Term. This Agreement shall continue in full force and effect
for two years (the “Initial Term”), commencing on the Effective Date and expiring on
the second anniversary of the Effective Date (the “Expiration Date”), unless terminated
before the Expiration Date in accordance with paragraph 6.
	 
	 	b.	 	Renewal Term. Notwithstanding paragraph 4(a), the term of this
Agreement will automatically be extended for an additional one year term (a “Renewal
Term”) on the Expiration Date and on each successive anniversary of the Expiration
Date, unless and until the Agreement terminated in accordance with paragraph 6.

	5.	 	Compensation and Employment Benefits. The Company agrees to pay Employee the
following compensation and employment benefits during his employment under this Agreement:

	 	a.	 	Base Salary. From the Effective Date until changed as provided in this
paragraph, the Company agrees to pay Employee an annual base salary of $115,000.00 (the
“Base Salary”), pro-rated for any partial period of employment. The Base Salary will
be payable semi-monthly in accordance with the Company’s ordinary payroll policies and
procedures for employee compensation. The Company agrees that during Employee’s
employment under this Agreement, Employee’s Base Salary will be subject to an annual
review and adjustment by the Company’s Board of Directors.
	 
	 	b.	 	Bonus.

	 	(i)	 	In addition to the Base Salary, Employee is eligible to
participate in an annual employee bonus pool (the “Pool”) to be determined
annually, in its discretion, by the Board or a committee of two members of the
Board designated as the Compensation Committee (the “Compensation Committee”),
initially comprised of Bryan H. Lawrence and J. Ross Craft.
	 
	 	(ii)	 	If the Board or the Compensation Committee gives Employee the
option, Employee may choose to receive his bonus in cash or shares of the
Company’s common stock (with the valuation thereof set by the Board or the
Compensation Committee), or any combination thereof.

Employment Agreement — Page 2

 

	 	(iii)	 	The Board, or the Compensation Committee, as the case may be,
in its discretion, will determine Employee’s participation in the Pool based on
the relative contribution of Employee during the year for which the Pool is
determined to the profitability and welfare of the Company.

	 	c.	 	Employment Benefits. The Company agrees to provide Employee with the
employment benefits that the Company ordinarily provides to its employees. Such
employment benefits shall be governed by the applicable plan documents, insurance
policies, and/or employment policies, and may be modified, suspended, or revoked in
accordance with the terms of the applicable documents or policies. In addition to
those benefits, the Company agrees to provide or cause to provide the following
benefits upon satisfaction by Employee of the any eligibility requirements, subject to
the following limitations:

	 	(1)	 	Sick-Leave Benefits and Disability Insurance. To the
extent made available to other employees of the Company, and unless this
Agreement is terminated pursuant to paragraph 6, Employee shall be paid sick
leave benefits at his then prevailing Base Salary rate during his absence due
to illness or other incapacity.
	 
	 	(2)	 	Vacations. The Company will provide Employee with a
minimum of 20 business days paid vacation per calendar year during his
employment under this Agreement. Such vacation must be utilized in the
calendar year in which it is granted or else it will be forfeited, unless the
Company has adopted a plan pursuant to which some or all of such days of paid
vacation may be rolled over to the next succeeding year. Employee agrees that
the time and duration of any vacation shall be subject to advance notice to the
Board. The Company also agrees to provide Employee with all paid holidays
ordinarily given by the Company to its employees. The Company also agrees to
pay Employee for any accrued unused vacation should this Agreement terminate
pursuant to paragraph 6.

	 	d.	 	Reimbursement of Business Expenses. Employee is authorized to incur
ordinary, necessary, and reasonable business expenses in connection with the
performance of his duties, responsibilities, and authorities under this Agreement and
for the promotion of the Company’s business and activities during this Agreement,
including but not limited to expenses for necessary travel and entertainment and other
items of expenses required in the normal and routine course of Employee’s employment
under this Agreement. The Company will promptly reimburse Employee from time to time
for all such business expenses incurred pursuant to and in conformity with this
paragraph and the policies and practices of the Company then in effect relative to the
reimbursement of business expenses.

Employment Agreement — Page 3

 

	6.	 	Termination of Agreement. This Agreement may be terminated as follows:

	 	a.	 	Death. This Agreement shall terminate immediately in the event of
Employee’s death; provided, however, that Employee’s estate shall be paid the Base
Salary that Employee
earned through the date of his death in the time and manner in which Employee would
have been paid such compensation.
	 
	 	b.	 	Disability. This Agreement shall terminate immediately in the event
that Employee becomes “Disabled” as defined below. For purposes of this Agreement,
Employee shall be deemed to have become “Disabled” when (i) he receives disability
benefits under either Social Security or the Company’s disability plan, if any, (ii)
the Board, upon the written report of a qualified physician designated by the Board or
its insurers, shall have determined (after a complete physical examination of Employee
at any time after he has been absent from the Company for a period of at least 120
calendar days since the Effective Date) that Employee has become physically and/or
mentally incapable of performing his essential job functions with or without reasonable
accommodation as required by law, or (iii) Employee is otherwise unable for a
continuous period of 180 calendar days to perform his essential job functions with or
without reasonable accommodation as required by law due to injury, illness, or other
incapacity (physical or mental).
	 
	 	c.	 	With Cause. The Company shall be entitled to terminate this Agreement
immediately, without any further liability to Employee, except as provided otherwise in
this Agreement, for any “Cause” as defined below.

	 	(i)	 	For purposes of this Agreement, “Cause” shall be defined as
follows:

	 	(A)	 	the willful and continued failure by Employee
substantially to perform his duties hereunder (other than any such
failure resulting from Employee becoming Disabled);
	 
	 	(B)	 	the willful engaging by Employee in misconduct
that is materially injurious to the Company;
	 
	 	(C)	 	any misconduct in the course and scope of
Employee’s employment under this Agreement, including but not limited
to dishonesty, disloyalty, disorderly conduct, insubordination,
harassment of other employees or third parties, abuse of alcohol or
controlled substances, or other violations of the Company’s rules; or
	 
	 	(D)	 	any material violation of this Agreement or the
Voting and Stockholders’ Agreement dated even date herewith among the
Company and its stockholders.

	 	 	 	For purposes of this paragraph, no act, or failure to act, on Employee’s
part shall be considered “willful” unless done, or omitted to be done, by
him not

Employment Agreement — Page 4

 

	 	 	 	in good faith and without reasonable belief that his action or
omission was in the best interest of the Company.

	 	(ii)	 	If the Company believes Cause exists for terminating this
Agreement pursuant to this paragraph, it shall give Employee written notice of
the acts or omissions constituting Cause, and no termination of this Agreement
shall be effective unless and until Employee fails to cure such acts or
omissions within 10 days after receiving such notice.

	 	d.	 	Without Cause. The Company shall be entitled to terminate this
Agreement for any reason other than death, disability, or Cause, at any time during
Employee’s employment by providing 90 days written notice to Employee that the Company
is terminating the Agreement without Cause as defined in this paragraph (a termination
“without Cause”).
	 
	 	e.	 	Expiration of Term. The Employee’s employment shall terminate upon the
expiration of the Initial Term or any successive Renewal Term, provided that the
Company notify Employee at least 60 days before the expiration of the Initial Term or
any successive Renewal Term of its intention not to extend this Agreement pursuant to
paragraph 4(b).

	7.	 	Compensation Upon Termination. Upon termination of Employee’s employment for one of
the following reasons, Employee shall be entitled to the following compensation:

	 	a.	 	Cause. If Employee’s employment shall be terminated for Cause, the
Company shall pay Employee his Base Salary then in effect through the Date of
Termination, prorated as provided in paragraph 5(a), and the Company shall have no
further obligations to Employee under this Agreement.
	 
	 	b.	 	Breach by the Company. If in breach of this Agreement the Company
shall terminate Employee’s employment (it being understood that a purported termination
of Employee’s employment by the Company pursuant to any provision of this Agreement
that is disputed and finally determined not to have been proper shall be a termination
by the Company in breach of this Agreement), then the Company shall pay or provide
Employee, in lieu of any further salary payments to Employee for any remaining portion
of the Term of this Agreement following the Date of Termination:

	 	(A)	 	on or before the 20th day following the Date of Termination, a
lump sum in cash equal to 50% of his Base Salary in effect as of the Date of
Termination;
	 
	 	(B)	 	on or before the 90th day following the Date of Termination, a
lump sum in cash equal to 150% of Employee’s Base Salary in effect as of the
Date of Termination; and
	 
	 	(C)	 	all benefits Employee may be entitled to receive pursuant to
any pension or employee benefit plan or other arrangement or life insurance
policy

Employment Agreement — Page 5

 

	 	 	 	maintained by the Company.

	 	c.	 	Without Cause or Expiration of Term of Agreement. If Employee’s
employment shall be terminated without Cause as provided in paragraph 6(d) or if the
Company elects not to extend this Agreement as provided in paragraph 6(e), the Company
shall continue to pay Employee his Base Salary plus benefits for the period of 24
months from the date of termination. Such Base Salary and benefits shall be paid from
time to time during such 24 month period in accordance with the time periods set forth
in paragraph 5(a). Additionally, upon a termination of Employee’s employment without
Cause or if the Company elects not to extend this Agreement, within 60 days after such
event, the Company hereby agrees to purchase from Employee, and Employee hereby agrees
to sell to the Company, all of the Note Shares in consideration for the forgiveness of
the outstanding indebtedness under any promissory note made to purchase the Note
Shares. The acquisition of the Note Shares by the Company shall be at a price no less
than the price paid by the Employee for the Note Shares; provided that to the extent
such purchase price is below the fair market value of the common stock of the Company
at the time of such purchase, Employee shall be responsible for any taxes associated
with the Company’s purchase of the Note Shares. Notwithstanding the preceding two
sentences, Employee shall have the right to pay off the indebtedness in full under any
promissory note made to purchase the Note Shares within 30 days after the notice of
termination without Cause.

	8.	 	Intentionally Omitted.
	 
	9.	 	Other Provisions Relating to Termination.

	 	a.	 	Notice of Termination. Any termination of Employee’s employment by the
Company or by Employee (other than termination because of Death) shall be communicated
by written Notice of Termination to the other party thereto. For purposes of this
Agreement, a “Notice of Termination” shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon, and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Employee’s employment under the provision so indicated.
	 
	 	b.	 	Date of Termination. For purposes of this Agreement, “Date of
Termination” shall mean (i) if Employee’s employment is terminated by Death, the date
of Death; (ii) if Employee’s employment is terminated because of Employee becoming
Disabled, then 60 days after Notice of Termination is given (provided that Employee
shall not have returned to the performance of his duties on a full-time basis during
such 60 day period); (iii) if (a) Employee’s employment is terminated by the Company
for Cause or (b) Employee’s employment is terminated by Employee, then in each case the
date specified in the Notice of Termination; (iv) if this Agreement is not renewed, the
last date of the Initial Term or the Renewal Term as the case may be; and (v) if
Employee’s employment is terminated for any other reason, the date on which a Notice of
Termination is given; provided that if within 30 days after any Notice of Termination
is given (other than with respect to a termination
without Cause) the

Employment Agreement — Page 6

 

	 	 	 	party receiving such Notice of Termination notifies the other
party that a dispute exists concerning the termination, the Date of Termination
shall be the date on which the dispute is finally determined, either by mutual
written agreement of the parties, by a binding and final arbitration award, or by a
final judgment order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected), as applicable.

	 	c.	 	Mitigation. Employee shall not be required to mitigate the amount of
any payment provided for in paragraph 7 by seeking other employment or otherwise, nor
shall the amount of any payment provided for therein be reduced by any compensation
earned by Employee as the result of employment by another employer after the Date of
Termination, or otherwise.
	 
	 	d.	 	Interest. Until paid, all past due amounts required to be paid by the
Company under any provision of this Agreement shall bear interest at 8% per annum
compounded daily.

	10.	 	Business Opportunities and Intellectual Property; Personal Investments; Confidentiality;
Covenant not to Compete.

	 	a.	 	Employee shall promptly disclose to the Company all “Business Opportunities”
and “Intellectual Property” (as defined below).
	 
	 	b.	 	For purposes hereof “Business Opportunities” shall mean all business ideas,
prospects, proposals or other opportunities pertaining to the lease, acquisition,
exploration, production, gathering or marketing of hydrocarbons and related products
and the exploration potential of geographical areas on which hydrocarbon exploration
prospects are located, that are developed by Employee during the period that Employee
is employed by any of the Related Parties (the “Employment Term”) or originated by any
third party and brought to the attention of Employee during the Employment Term,
together with information relating thereto (including, without limitation, geological
and seismic data and interpretations thereof, whether in the form of maps, charts,
logs, seismographs, calculations, summaries, memoranda, opinions, or other written or
charted means).
	 
	 	c.	 	For purposes hereof, “Intellectual Property” shall mean all ideas, inventions,
discoveries, processes, designs, methods, substances, articles, computer programs, and
improvements (including, without limitation, enhancements to, or further interpretation
or processing of, information that was in the possession of Employee prior to the date
of this Agreement), whether or not patentable or copyrightable, that do not fall within
the definition of Business Opportunities, that Employee discovers, conceives, invents,
creates, or develops, alone or with others, during the Employment Term, if such
discovery, conception, invention, creation, or development (i) occurs in the course of
Employee’s employment with the Related Parties or (ii) occurs with the use of any of
the Related Parties’ time, materials, or facilities.

Employment Agreement — Page 7

 

	11.	 	Non-Compete Obligations During Employment Term. Employee agrees that during the
Employment Term and except as provided below or as otherwise permitted by the Company (acting
upon the instruction of the Board):

	 	a.	 	Employee will not, other than through the Related Parties, engage or
participate in any manner, whether directly or indirectly through any family member or
as an employee, employer, consultant, agent, principal, partner, more than one percent
shareholder, officer, director, licensor, lender, lessor, or in any other individual or
representative capacity, in any business or activity that is engaged in leasing,
acquiring, exploring, developing or producing hydrocarbons and related products; and
	 
	 	b.	 	all investments made by Employee (whether in his own name or in the name of any
family members or made by Employee’s controlled affiliates), which relate to the lease,
acquisition, exploration, development or production of hydrocarbons and related
products shall be made solely through the Related Parties; and Employee will not
(directly or indirectly through any family members), and will not permit any of his
controlled affiliates to: (A) invest or otherwise participate alongside the Related
Parties in any Business Opportunities or (B) invest or otherwise participate in any
business or activity relating to a Business Opportunity, regardless of whether any of
the Related Parties ultimately participates in such business or activity;

	 	 	provided that this paragraph 11 shall not apply to (x) the existing personal oil and gas
investments owned by Employee, his family members and his controlled affiliates as of the
date hereof (the “Existing Personal Investments”); (y) future expenditures made by Employee
and his family members and his controlled affiliates that are required to maintain, but not
increase, their respective current ownership interests in the Existing Personal Investments,
excluding however, any expenditure to participate in the acquisition, exploration, or
development of any acreage that is not currently included in the Existing Personal
Investments as of the date hereof; and (z) any opportunity that is first offered to, and
subsequently declined by, the Company (acting through the Board).

	12.	 	Confidentiality Obligations.

	 	a.	 	Employee hereby acknowledges that all trade secrets and confidential or
proprietary information of the Related Parties (collectively referred to herein as
“Confidential Information”) constitute valuable, special and unique assets of the
Related Parties’ business, and that access to and knowledge of such Confidential
Information is essential to the performance of Employee’s duties. Employee agrees that
during the Employment Term and during the one-year period following the Date of
Termination, Employee will hold the Confidential Information in strict confidence and
will not publish, disseminate, or otherwise disclose, directly or indirectly, to any
person other than the Related Parties and their respective officers, directors, and
employees, any Confidential Information or use any Confidential Information for
Employee’s own personal benefit or for the benefit of anyone other than the Related
Parties. The Company agrees to provide Confidential Information to
Employee in

Employment Agreement — Page 8

 

	 	 	 	exchange for Employee’s agreement to keep such Confidential Information,
and any Confidential Information to which Employee has already become privy, in
strict confidence as provided in this Agreement.

	 	b.	 	For purposes of this paragraph 12, it is agreed that Confidential Information
includes, without limitation, any information heretofore or hereafter acquired,
developed, or used by any of the Related Parties relating to Business Opportunities or
Intellectual Property or other geological, geophysical, economic, financial, or
management aspects of the business, operations, properties, or prospects of the Related
Parties whether oral or in written form in a Related Parties’ business records, but
shall exclude any information that (i) has become part of common knowledge or
understanding in the oil and gas industry or otherwise in the public domain (other than
from disclosure by Employee in violation of this Agreement), or (ii) was rightfully in
the possession of Employee, as shown by Employee’s records, prior to the date of this
Agreement (including Employee’s method of selecting, purchasing, and reworking oil and
gas properties, which the Company and Employee may utilize subsequent to the Employment
Term (subject to the other limitations contained in this Agreement)); provided,
however, that Employee shall provide to the Company copies of all information described
in clause (ii); provided further, however, that this paragraph 12 shall not be
applicable to the extent Employee is required to testify in a judicial or regulatory
proceeding pursuant to the order of a judge or administrative law judge after Employee
requests that such Confidential Information be preserved.

	13.	 	Obligations After Termination Date.

	 	a.	 	The purpose of the provisions of paragraph 12 and this paragraph 13 are to
protect the Company from unfair loss of goodwill and business advantage and to shield
Employee from pressure to use or disclose Confidential Information or to trade on the
goodwill belonging to the Company. Accordingly, during the “Post-Termination
Non-Compete Term” (as defined below), Employee will not engage or participate in any
manner, whether directly or indirectly through any family member or as an employee,
employer, consultant, agent, principal, partner, shareholder, officer, director,
licensor, lender, lessor, or in any other individual or representative capacity, in any
business or activity that is in engaged in leasing, acquiring, exploring, developing or
producing hydrocarbons and related products within the boundaries of, or within a three
(3) mile radius of the boundaries of, any mineral property interest of any of the
Related Parties (including, without limitation, a mineral lease, overriding royalty
interest, production payment, net profits interest, mineral fee interest, or option or
right to acquire any of the foregoing, or an area of mutual interest as designated
pursuant to contractual agreements between the Related Party and any third party) or
any other property on which the Related Parties have an option, right, license, or
authority to conduct or direct exploratory activities, such as three dimensional
seismic acquisition or other seismic, geophysical and geochemical activities (but not
including any preliminary geological mapping), as of the Termination Date or as of the
end of the six-month period following such Termination Date; provided that, this
paragraph 13 shall not preclude
Employee from

Employment Agreement — Page 9

 

	 	 	 	making personal investments in securities of oil and gas companies
that are registered on a national stock exchange, if the aggregate amount owned by
Employee and all family members and affiliates does not exceed one percent (1%) of
such company’s outstanding securities.

	 	b.	 	For purposes hereof, the “Post Termination Non-Compete Term” is:

	 	(i)	 	in the event that (A) Employee voluntarily resigns or otherwise
terminates his position as an officer or employee of the Related Parties other
than on account of a change of control, or (B) Employee’s employment or
engagement by the Related Parties is terminated for Cause, the one-year period
following the Termination Date;
	 
	 	(ii)	 	in the event that Employee’s employment is terminated on
account of a change of control in the ownership of the Company, there shall not
be a Post Termination Non-Compete Term; and
	 
	 	(iii)	 	in the event that Employee’s employment is terminated without
Cause, the one-year period following the Termination Date.

	 	c.	 	Employee will not, during the one-year period following the Termination Date,
solicit, entice, persuade, or induce, directly or indirectly, any employee (or person
who within the preceding ninety (90) days was an employee) of any of the Related
Parties or any other person who is under contract with or rendering services to any of
the Related Parties, to (i) terminate his employment by, or contractual relationship
with, such person, (ii) refrain from extending or renewing the same (upon the same or
new terms), (iii) refrain from rendering services to or for such person, (iv) become
employed by or to enter into contractual relations with any Persons other than such
person, or (v) enter into a relationship with a competitor of any of the Related
Parties.

	14.	 	Common Law Duties. Employee acknowledges and agrees that his restrictive covenants
in paragraphs 10, 11, 12, and 13 of this Agreement will supplement, rather than supplant, his
common law duties of confidentiality and loyalty owed to the Company.
	 
	15.	 	Survival of Covenants; Enforcement of Covenants; and Remedies.

	 	a.	 	Survival of Covenants. Employee acknowledges and agrees that his
covenants in paragraphs 10, 11, 12, and 13 of this Agreement shall survive the
termination of this Agreement and shall be construed as agreements independent of any
other provision of this Agreement, and the existence of any claim or cause of action of
Employee against the Company whether predicated on this Agreement or otherwise shall
not constitute a defense to the enforcement by the Company of those covenants.
	 
	 	b.	 	Enforcement of Covenants. Employee acknowledges and agrees that his
covenants in paragraphs 10, 11, 12 and 13 of this Agreement are ancillary to the
otherwise

Employment Agreement — Page 10

 

	 	 	 	enforceable agreements to provide Employee with Confidential Information and
are supported by independent, valuable consideration. Employee further acknowledges
and agrees that the limitations as to time, geographical area, and scope of activity to
be restrained by those covenants are reasonable and acceptable to Employee and do not
import any greater restraint than is reasonably necessary to protect the Company’s
goodwill and other legitimate business interests. Employee further agrees that if, at
some later date, a court of competent jurisdiction determines that any of the covenants
in paragraphs 10,11, 12, or 13 are unreasonable, any such covenants shall be reformed
by the court and enforced to the maximum extent permitted under the law.

	 	c.	 	Remedies. In the event of breach or threatened breach by Employee of
any of his covenants in paragraphs 10, 11, 12, and 13 of this Agreement, the Company
shall be entitled to equitable relief by temporary restraining order, temporary
injunction, or permanent injunction or otherwise, in addition to other legal and
equitable relief to which it may be entitled, including any and all monetary damages
that the Company may incur as a result of said breach, violation, or threatened breach
or violation. The Company may pursue any remedy available to it concurrently or
consecutively in any order as to any breach, violation, or threatened breach or
violation, and the pursuit of one of such remedies at any time will not be deemed an
election of remedies or waiver of the right to pursue any other of such remedies as to
such breach, violation, or threatened breach or violation, or as to any other breach,
violation, or threatened breach or violation.

	16.	 	Successors and Assigns. The parties acknowledge and agree that this Agreement may
not be assigned by the Company to any other person or entity without Employee’s written
consent; provided, however, that in the event of a change in control of the Company’s
ownership, the Company shall cause the surviving entity in any such transaction to assume the
payment obligations of paragraph 6, to the extent such obligations have not yet been fully
performed. The parties further acknowledge and agree that Employee’s duties,
responsibilities, authorities, compensation, and benefits are personal to Employee and may not
be assigned to any person or entity other than a Related Party without written consent from
the Board. In the event of Employee’s death, this Agreement shall be enforceable by
Employee’s estate, executors, or legal representatives, but only to the extent that such
person may collect any compensation due to Employee under this Agreement, as provided in
paragraph 6(a). This Agreement shall be binding upon and inure to the benefit of the parties
and their respective heirs, legal representatives, successors, and assigns; provided, however,
that Employee may not assign or otherwise transfer this Agreement or any of Employee’s rights
or obligations under this Agreement without the prior written consent of the Board.
	 
	17.	 	Representations of Employee. Employee hereby represents and warrants that he has not
previously assumed any obligations inconsistent with those contained in this Agreement.
Employee further represents and warrants that he has entered into this Agreement pursuant to
his own initiative and
that the Company did not induce him to execute this Agreement in contravention of any
existing commitments. Employee further acknowledges that the Company has entered into this
Agreement in reliance upon the foregoing representations of Employee.

Employment Agreement — Page 11

 

	18.	 	Dispute Resolution. The parties agree to the following dispute resolution terms:

	 	a.	 	Definition of “Dispute”. Any controversy, claim, or cause of action,
whether based on statute, contract, tort, misrepresentation, or any other legal theory,
arising out of or relating to this Agreement (a “Dispute”), shall be resolved solely in
accordance with the terms of this paragraph; provided, however, that the term “Dispute”
shall not include (i) Employee’s claims for workers’ compensation or unemployment
compensation benefits (although any claim asserted under Ch. 451 of the Texas Labor
Code shall be considered a “Dispute” subject to dispute resolution under this
paragraph), or (ii) the Company’s claims for injunctive and/or other equitable relief
for Employee’s breach or threatened breach of his restrictive covenants in paragraphs
10, 11, 12, or 13. The parties acknowledge and agree that, notwithstanding the
provisions of this paragraph, nothing in this Agreement shall be construed to require
the mediation or arbitration of any claim arising out of or relating to Employee’s
covenants in paragraphs 10, 11, 12, or 13. Those covenants shall be enforceable by any
court of competent jurisdiction, in accordance with paragraph 26, and shall not be
subject to dispute resolution under this paragraph.
	 
	 	b.	 	Mediation. If a Dispute cannot be settled by good faith negotiation
between the parties, the parties shall submit the Dispute to nonbinding mediation. If
complete agreement cannot be reached within 30 calendar days of submission to mediation
(“Mediation Period”), any remaining issues will be resolved by binding arbitration in
accordance with the provisions of this paragraph. The Federal Arbitration Act, 9
U.S.C. §§ 1-15, not state law, will govern the arbitrability of all Disputes.
	 
	 	c.	 	Arbitration. A mutually agreeable arbitrator who is knowledgeable of
the Company’s industry or in commercial matters will conduct the arbitration. If the
parties cannot select a mutually agreeable arbitrator within 15 days after the
expiration of the Mediation Period, the mediator shall be selected according to rules
of the American Arbitration Association (“AAA”). The arbitrator’s decision and award
will be final and binding and may be entered in any court with jurisdiction. The
arbitrator will not have authority to limit, expand, or otherwise modify the terms of
this Agreement.
	 
	 	d.	 	Rules of Conduct for Mediation and Arbitration. The mediation and, if
necessary, the arbitration will be conducted under the then current rules of the
alternate dispute resolution (“ADR”) firm selected by the parties, or if the parties
are unable to agree on an ADR firm, the parties will conduct the mediation and, if
necessary, the arbitration under the then current rules and supervision of the AAA.
Each party will bear its own attorneys’ fees associated with the mediation and, if
necessary, the arbitration. The parties will pay all other costs and expenses of the
mediation/arbitration as the rules of the selected ADR firm
provide. The parties and their representatives shall hold the existence, content,
and result of the mediation and arbitration in confidence.

Employment Agreement — Page 12

 

	 	e.	 	Limit on Discovery. There shall be no discovery during the mediation
process. If arbitration is necessary, no discovery shall be conducted except by
agreement of the parties or after approval by the arbitrator, who shall attempt to
minimize the burden of discovery.

	19.	 	Waiver of Rights to Jury Trial and Class-Action Participation. Notwithstanding any
other provision of this Agreement, Employee agrees to irrevocably waive the right to trial by
jury or participate in any class or collective action with respect to any Dispute,
controversy, claim, or cause of action arising out of or relating to Employee’s employment
with the Company, the termination of Employee’s employment with the Company, or this Agreement
(either alleged breach or enforcement).
	 
	20.	 	Attorneys’ Fees and Other Costs. If either party breaches this Agreement, or if a
dispute arises between the parties based on or involving this Agreement, the party that
enforces its rights under this Agreement against the breaching party, or that prevails in the
resolution of such dispute, is entitled to recover from the other party its reasonable
attorneys’ fees, court costs, and expenses incurred in enforcing such rights or resolving such
dispute. For purposes of this paragraph 20, the finder of fact shall be requested to answer
affirmatively as to whether a party “prevailed” in order to recoup attorneys’ fees and other
costs pursuant to this paragraph 20.
	 
	21.	 	Entire Agreement. This Agreement constitutes the entire agreement between the
parties concerning the Agreement’s subject matter and supersedes all prior agreements and
understandings, whether written or oral, between the parties with respect to its subject
matter.
	 
	22.	 	Amendment of Agreement. This Agreement may not be modified or amended in any respect
except by an instrument in writing signed by the party against whom such modification or
amendment is sought to be enforced. No modification or amendment may be enforced against the
Company unless such modification or amendment is in writing and signed by the Board.
	 
	23.	 	Waiver. The waiver by either party of a breach of any term of this Agreement shall
not operate or be construed as a waiver of a subsequent breach of the same provision by either
party or of the breach of any other term or provision of this Agreement.
	 
	24.	 	Severability. If any provision of this Agreement is held to be illegal, invalid, or
unenforceable, (a) this Agreement shall be considered divisible, (b) such provision shall be
deemed inoperative to the extent it is deemed illegal, invalid, or unenforceable, and (c) in
all other respects this Agreement shall remain in full force and effect; provided, however,
that if any such provision may be made enforceable by limitation thereof, then such provision
shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by
applicable law.
	 
	25.	 	Governing Law; Venue. Except as otherwise provided in this Agreement, this Agreement
shall be governed by and construed and enforced in accordance with the laws of the State of

Employment Agreement — Page 13

 

	 	 	Texas. Exclusive venue for purposes of any controversy, claim, or cause of action not covered
by paragraph 18, and brought by any party under this Agreement, is in any state or federal
court of competent jurisdiction in and for Tarrant County, Texas. Nothing in this Agreement,
however, precludes the Company or Employee from seeking to remove a civil action from any
state court to federal court.

	26.	 	Notices. All notices under this Agreement shall be in writing and shall be deemed to
have been delivered on the date personally delivered or three calendar days after the date
deposited in a receptacle maintained by the United States Postal Service for such purpose,
postage prepaid, by certified mail, return receipt requested, addressed to the Company at its
headquarters or Employee at the address of such person as set forth in the Company’s records.
Either party may designate a different address by providing written notice of such new address
to the other party.
	 
	27.	 	Counterparts. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute but one and the
same instrument.

[signature page to follow]

Employment Agreement — Page 14

 

	 	 	 	 	 	 	 
	 	 	EMPLOYEE:	 	 
	 
	 	 	 	 	 	 
	 	 	/s/ Glenn W. Reed	 	 
	 	 	 	 	 
	 	 	Name: Glenn Reed	 	 
	 
	 	 	 	 	 	 
	 	 	COMPANY:	 	 
	 
	 	 	 	 	 	 
	 	 	APPROACH RESOURCES INC.	 	 
	 	 	a Delaware Corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ J. Ross Craft	 	 
	 

	 	 	 	 	 	 
	 	 	Name:	 	J. Ross Craft	 	 
	 	 	Title:	 	President	 	 

Employment Agreement — Page 15

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