Document:

Exhibit 10.3

 

30th March 2010

 

MONTPELIER CAPITAL LIMITED

 

MONTPELIER REINSURANCE LTD

 

THE SOCIETY OF LLOYD’S

 

GR-NEAM LIMITED

 

 

INVESTMENT MANAGEMENT

AGREEMENT

RELATING TO LLOYD’S DEPOSIT

(THIRD PARTY DEPOSITOR)

 

 

Lloyd’s

(regulated by the Financial

Services Authority)

One Lime Street

London

EC3lM 7HA

 

 

CONTENTS

 

	
  Clause

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  PRELIMINARY

  	
  2

  
	
   

  	
   

  	
   

  
	
  1.

  	
  Definitions and construction

  	
  2

  
	
   

  	
   

  	
   

  
	
  2.

  	
  Appointment and effective date

  	
  3

  
	
   

  	
   

  	
   

  
	
  3.

  	
  Amendments

  	
  3

  
	
   

  	
   

  	
   

  
	
  4.

  	
  Customer Status and Investment Discretion

  	
  4

  
	
   

  	
   

  	
   

  
	
  5.

  	
  Initial value and composition of the Lloyd’s
  Deposit

  	
  4

  
	
   

  	
   

  	
   

  
	
  6.

  	
  Warranties and undertakings on the part of the
  Company, the Depositor and the Society

  	
  5

  
	
   

  	
   

  	
   

  
	
  7.

  	
  Instructions and communications

  	
  5

  
	
   

  	
   

  	
   

  
	
  8.

  	
  Advice

  	
  6

  
	
   

  	
   

  	
   

  
	
  PROVISION OF
  SERVICES

  	
  6

  
	
   

  	
   

  	
   

  
	
  9.

  	
  Delegation and use of agent

  	
  6

  
	
   

  	
   

  	
   

  
	
  10.

  	
  Bank accounts and custody

  	
  7

  
	
   

  	
   

  	
   

  
	
  11.

  	
  Voting

  	
  7

  
	
   

  	
   

  	
   

  
	
  12.

  	
  Lending and borrowing

  	
  8

  
	
   

  	
   

  	
   

  
	
  13.

  	
  Valuation

  	
  8

  
	
   

  	
   

  	
   

  
	
  TERMS APPLICABLE TO
  DEALING

  	
  8

  
	
   

  	
   

  	
   

  
	
  14.

  	
  General restrictions

  	
  8

  
	
   

  	
   

  	
   

  
	
  15.

  	
  Dealing and counterparties

  	
  8

  
	
   

  	
   

  	
   

  
	
  16.

  	
  Options, futures and contracts for differences

  	
  9

  
	
   

  	
   

  	
   

  
	
  MATERIAL INTERESTS

  	
  9

  
	
   

  	
   

  	
   

  
	
  17.

  	
  Potential conflicts of interest and disclosures

  	
  9

  
	
   

  	
   

  	
   

  
	
  18.

  	
  Soft commissions

  	
  11

  

 

 

	
  GENERAL

  	
  11

  
	
   

  	
   

  	
   

  
	
  19.

  	
  Fees and charges

  	
  11

  
	
   

  	
   

  	
   

  
	
  20.

  	
  Taxation

  	
  11

  
	
   

  	
   

  	
   

  
	
  21.

  	
  Liability

  	
  11

  
	
   

  	
   

  	
   

  
	
  22.

  	
  Waiver

  	
  13

  
	
   

  	
   

  	
   

  
	
  23.

  	
  Complaints

  	
  13

  
	
   

  	
   

  	
   

  
	
  24.

  	
  Compensation

  	
  13

  
	
   

  	
   

  	
   

  
	
  25.

  	
  Termination

  	
  13

  
	
   

  	
   

  	
   

  
	
  26.

  	
  Consequences of termination

  	
  13

  
	
   

  	
   

  	
   

  
	
  27.

  	
  Relationship

  	
  14

  
	
   

  	
   

  	
   

  
	
  28.

  	
  Confidentiality and Data Protection

  	
  14

  
	
   

  	
   

  	
   

  
	
  29.

  	
  Warranties and undertakings on the part of the
  Manager

  	
  15

  
	
   

  	
   

  	
   

  
	
  30.

  	
  Notifications and records

  	
  15

  
	
   

  	
   

  	
   

  
	
  31.

  	
  Assignment

  	
  16

  
	
   

  	
   

  	
   

  
	
  32.

  	
  Third Party Rights

  	
  16

  
	
   

  	
   

  	
   

  
	
  33.

  	
  Money Laundering

  	
  16

  
	
   

  	
   

  	
   

  
	
  34

  	
  Force Majeure

  	
  17

  
	
   

  	
   

  	
   

  
	
  35.

  	
  Governing law

  	
  17

  
	
   

  	
   

  	
   

  
	
  SCHEDULE

  	
  18

  
	
   

  	
   

  	
   

  
	
  APPENDIX
  - Form of Lloyd’s Deposit Trust Deed (Third Party Deposit)

  	
  21

  

 

3

 

AN INVESTMENT MANAGEMENT
AGREEMENT made on 30th March 2010

 

BETWEEN:

 

(1)                                  Montpelier Capital Limited (registered number 6198350) whose registered
office is at 7th Floor, 85
Gracechurch Street, London, EC3V 0AA (the Company)

 

(2)                                  Montpelier Reinsurance Ltd (registered number 31261) whose registered
office is at Montpelier House, 94 Pitts Bay Road, Pembroke, HM08, Bermuda (the Depositor)

 

(3)                                  THE SOCIETY incorporated by Lloyd’s Act 1871 by the name of LLOYD’S of
One Lime Street, London EC3M 7HA (the Society)

 

(4)                                  GR-NEAM Limited (registered number 451391 Ireland)
whose registered office is at The Oval — Block 3, Ballsbridge, Dublin 4,
Ireland (the Manager)

 

WHEREAS:

 

(A)                              The Company, the Depositor and the Society have entered into a Lloyd’s
Deposit Trust Deed (Third Party Deposit) of even date with this Agreement in
the form set out in the Appendix to this Agreement (the Trust
Deed), and the Depositor, at the request of the Company has
transferred to the Society a trust fund comprised of cash and investments to be
held by the Society (as trustee) upon the trusts set out in the Trust Deed.

 

(B)                                The Depositor and the Company have each requested that the Society
appoint the Manager on the terms of this Agreement to manage the cash and
investments from time to time comprised in the Trust Fund, as defined in the
Trust Deed (the Lloyd’s Deposit).

 

(C)                                If, at the request of the Company and the Depositor, the Society has
appointed a person to act as custodian of the Lloyd’s Deposit that person is
named in the Schedule and references in this Agreement to the Custodian are to be construed as
references to that person or such other person as may from time to time be
appointed by the Society (at the request of the Company and the Depositor) to
act as custodian of the Lloyd’s Deposit. Where no such appointment has been
made, the Society will hold the assets comprised in the Lloyd’s Deposit, from
time to time, in accordance with the terms of the Trust Deed (whether itself
or, in exercise of its power of delegation thereunder, with another).

 

(D)                               The Lloyd’s Deposit must at all times comply with the Membership and
Underwriting Conditions and Requirements (Funds at Lloyd’s)
(Individual/Corporate Member) of the Society as in force from time to time (the
Lloyd’s Requirements).

 

1

 

IT IS AGREED

 

PRELIMINARY

 

DEFINITIONS AND CONSTRUCTION

 

1.1                             The Manager is authorised under the Financial
Services and Markets Act 2000 (FSMA) to manage investments. The Manager is an
investment firm that has been registered in the Irish Company Register since
8th January, 2008 and is authorised by the Irish Financial Services Regulatory
Authority (the “Financial Regulator”), pursuant to the European Communities
(Markets in Financial Instruments) Regulations 2007 (as amended), to carry out
the service of portfolio management, investment advice and investment research.

 

According
to section 31 (b) of the FSMA, an EEA firm qualifying for authorisation
under Schedule 3 of the Act is authorised under the FSMA. Since the Manager is
an EEA firm providing services in the United Kingdom in exercise of an EEA
right, it satisfies the service conditions mentioned in Schedule 3, section 12 (2) and
section 14 of the FSMA and qualifies for authorisation. The Manager has
therefore been granted permission to provide services in the United Kingdom and
has been listed in the FSA Register under the Firm Reference Number 509752
since 12th October,
2009.

 

Nothing
in this Agreement will exclude or restrict any duty or liability of the Manager
to the Company or the Depositor or the Society under the applicable provisions
of the FSMA or the regulatory system for an EEA Firm.

 

Hence
FSA Rules means for the Manager the Irish Investment law as well as the
host state rules with which the firm is required to comply when carrying
on a permitted activity by providing services in the United Kingdom as defined
in Chapter C.8 Schedule 3 Section 14 (4) of the FSMA.

 

1.2                                 Except where the context otherwise demands, words and phrases defined in
the rules from time to time of FSA (the FSA
Rules) have the same meanings in this Agreement.

 

1.3                                 In this Agreement:

 

(a)                                  Best Execution means
the method whereby an investment manager seeks to achieve the best terms for a
customer as the same may be defined by the FSA from time to time;

 

(b)                                 Collective Investment Scheme means an arrangement for assets to be held on a pooled basis on behalf of
a number of investors, for example a unit trust or open ended investment
company; a full definition is contained in FSMA Section 235;

 

(c)                                  Dealing Expenses means the expenses of broker’s commission, and, unless
included therein, value added tax or its equivalent, PTM levy and stamp duty or
its equivalent;

 

2

 

(d)                                 FSA
means the Financial Services Authority or any other authority which is a
successor to the regulatory functions of the same;

 

(e)                                  In House Funds
means Unit Trust Schemes and Collective Investment Schemes of which the Manager
or an associate is the manager;

 

(f)                                    Insolvency means, in relation to any person, the inability of such
person to pay its debts as defined in Section 123 of the Insolvency Act
1986 (but excluding paragraph (a) of sub-section (1) of that
Section), the presentation of a petition, the invoking of any order or the
passing of any resolution for the winding up of such person or for the
appointment of a receiver, manager, administrative receiver or administrator in
respect of such person or the taking of any step by such person with a view to
implementing a voluntary arrangement;

 

(g)                                 Lloyd’s Deposit has
the meaning given to it in Recital (B) of this Agreement and references to
the Lloyd’s Deposit include references to any part of it; and

 

(h)                                 Unit Trust Scheme
means a Collective Investment Scheme under which property is held on trust for
the participants, but excluding limited partnerships; a full description is
contained in FSMA Section 237 (1).

 

1.4                                 The Schedule forms part of this Agreement.

 

1.5                                 References in this Agreement to any statutory provisions are to be deemed
also to refer to any statutory modifications or re-enactments thereof and to
any statutory instruments, orders or regulations made thereunder or under any
such re-enactments.

 

1.6                                 References in this Agreement to any FSA Rules or any other
regulations shall be taken to include any amendments made to them from time to
time.

 

1.7                                 Unless the context otherwise requires, in this Agreement the masculine
gender will be deemed to include the feminine and neuter and the singular
number will be deemed to include the plural and vice versa.

 

APPOINTMENT AND EFFECTIVE
DATE

 

2.1                                 At the request of the Company and the Depositor, the Society appoints the
Manager to manage the Lloyd’s Deposit upon and subject to the terms of this
Agreement.

 

2.2                                 This Agreement will come into force on the date specified in the
Schedule.

 

AMENDMENTS

 

3.                                       No amendment to this Agreement will be valid unless made
in writing and signed by each of the parties provided that the Society’s
consent will not be required to any amendment to the amount or basis of
calculation of any remuneration or expenses payable by the Depositor to the
Manager.

 

3

 

CUSTOMER STATUS AND
INVESTMENT DISCRETION

 

4.1                                 The Society is a Professional Client.  The Society has the right to request to be
treated as a Retail Client in relation to the Manager’s services, and such
categorisation benefits from higher levels of protection under the regulatory
system.  The Manager may accept or reject
such request.

 

4.2                                 The
Manager will manage the Lloyd’s Deposit within the investment objectives and
restrictions stated in paragraph 3 of the Schedule and in accordance with
the investment criteria (and within the restrictions) specified in the Lloyd’s
Requirements.  Subject to such
objectives, restrictions and criteria and to clauses 4.4 and 4.5, the Manager,
acting as agent, will have complete discretion for the account of the Lloyd’s
Deposit (and without prior reference to the Society, the Company or the
Depositor) to buy, sell, retain, exchange or otherwise deal in investments and
other assets, make deposits, subscribe to issues and offers for sale of, and
accept placings, underwritings and sub-underwritings of, any investments,
effect transactions on any markets, take all day to day decisions and otherwise
act as the Manager judges appropriate in relation to the management of the
Lloyd’s Deposit in accordance with the terms of this Agreement.

 

4.3                                 The investment restrictions and criteria stated in the Lloyd’s
Requirements or in the Schedule will be deemed not to have been breached as a
result of changes in the price or value of assets comprised in the Lloyd’s
Deposit brought about solely through movements in the market, but the Manager
will restore the Lloyd’s Deposit to compliance with such investment
restrictions and criteria as soon as reasonably practicable.

 

4.4                                 Any deposits made by the Manager will be:

 

(a)                                  made in the name of and on behalf of the Society; or

 

(b)                                 held in a designated client bank account operated in accordance with the
Client Money Rules.

 

4.5                                 The Manager undertakes not to exercise the powers in clauses 7 or 8
of the Trust Deed except to the extent delegated to it and, to the extent those
powers are delegated to it, not to cause or permit a breach of the relevant
clauses of the Trust Deed.  The Company
will inform the Manager and the Depositor in writing of any changes to
clauses 7 or 8 of the Trust Deed as soon as the Company becomes aware of
the same.

 

INITIAL VALUE AND
COMPOSITION OF THE LLOYD’S DEPOSIT

 

5.                                       A valuation giving the initial value of each asset
comprising the Lloyd’s Deposit and the initial composition of the Lloyd’s
Deposit is attached to this Agreement or will be supplied by the Manager as
soon as reasonably practicable to the Depositor, the Company and the Society.

 

4

 

WARRANTIES AND UNDERTAKINGS
ON THE PART OF THE COMPANY, THE DEPOSITOR AND THE SOCIETY

 

6.1                                 The Society warrants that it has full power to employ the Manager on the
terms of this Agreement.

 

6.2                                 Each of the Company and the Depositor warrants that it has the requisite
corporate capacity to enter into this Agreement and to perform its obligations
under it, and that it has taken all necessary corporate and other action to
authorise it to do so.

 

6.3                                 Each of the Company and the Depositor warrants that the Lloyd’s Deposit
is free from all liens and charges, and that no liens or charges will arise
from the acts or omissions of the Company or the Depositor, as the case may be,
except such as exist or may arise under the Trust Deed.

 

6.4                                 Subject to any application of the Lloyd’s Deposit by the Society in
accordance with the terms of the Trust Deed, each of the Company, the Depositor
and the Society severally undertakes not to deal, except through the Manager,
with any of the assets in the Lloyd’s Deposit or to authorise anyone else so to
deal.

 

6.5                                 The Depositor warrants that any information which it has provided to the
Manager in relation to its status, including in particular its residence and
domicile for taxation purposes, is complete and correct and agrees to provide
any further information properly required by any competent authority and will
notify the Manager forthwith if there is any material change in any such
information provided.

 

6.6                                 The Depositor undertakes to monitor compliance by the Manager in managing
the Lloyd’s Deposit within the investment restrictions and criteria stated in
the Lloyd’s Requirements and that it will promptly notify the Society of any
breach.  The Company and the Depositor
will also promptly notify the Society of any other breach of this Agreement by
the Manager of which it becomes aware.

 

6.7                                 The Society undertakes to notify the Manager from time to time of any
changes to the investment restrictions and criteria or the valuation provisions
of the Lloyd’s Requirements.

 

INSTRUCTIONS AND
COMMUNICATIONS

 

7.1                                 Subject
to clauses 7.2 to 7.4, the Manager will comply with any instructions which
the Society may give in respect of the Lloyd’s Deposit, including any
instructions to pay or deliver the Lloyd’s Deposit to the Society or to the
Society’s order.  The Society will send a
copy to the Company and the Depositor of any instructions it may give to the
Manager in respect of the Lloyd’s Deposit at the same time as it gives the
instructions.  Neither the Company nor
the Depositor may give instructions in respect of the Lloyd’s Deposit.

 

7.2                                 Instructions
from the Society (other than instructions to amend this Agreement to which
clause 3 applies) and communications from the Society or the Depositor, as
the case may be, will be given or made in the manner set out in the Schedule
(which may include by electronic methods) and instructions from the Society will
be acknowledged by the Manager acting upon them unless the Society is promptly
advised that the Manager reasonably believes such compliance is likely to
involve any party in a contravention of any law, rule or regulation.

 

5

 

7.3                                 Subject
to clause 7.2, the Manager may rely and act on any written instruction or
communication which purports to have been given (and which is reasonably
accepted as having been given) by or on behalf of any person notified by the
Society from time to time as being authorised to instruct the Manager in
respect of the Lloyd’s Deposit unless the Manager has by then received written
notice to the contrary, whether or not the authority of any such person has
been terminated.

 

7.4                                 Subject to clause 7.2, any instruction or communication to be given
to the Manager by the Depositor or the Society or any communication from the
Company to the Manager under this Agreement will be in writing and sent to the
address set out in the Schedule or the last address notified to the Depositor,
the Company and the Society (as the case may be) and will take effect upon
actual receipt by the Manager.

 

7.5                                 Where the Society gives any instruction or communication to any Custodian
in respect of the Lloyd’s Deposit it will either copy the instruction or
communication to the Manager at the same time, or will procure that the
Custodian promptly does so.

 

7.6                                 All
instructions and communications by the Manager to the Company, the Depositor or
the Society under this Agreement will be in writing and sent to the address set
out in the Schedule or the last address notified to the Manager by the Company,
the Depositor or the Society (as the case may be) in the manner set out in the
Schedule.

 

7.7                                 Any telephone conversations between the parties may be recorded by any of
the parties.

 

7.8                                 The Manager undertakes to safeguard any testkeys, identification codes or
other security devices which any Custodian makes available to the Manager or an
individual designated by the Manager to give instructions or make
communications on behalf of the Society.

 

ADVICE

 

8.                                       Any advice may be given in such manner as the Manager
deems appropriate or as may be agreed with the Society.

 

PROVISION OF SERVICES

 

DELEGATION AND USE OF AGENT

 

9.1                                 The Manager will not delegate the performance of any of its services
under this Agreement.

 

9.2                                 The Manager may employ agents (including associates) to perform any
administrative and ancillary services required to enable the Manager to perform
its services under this Agreement but without affecting its duties
hereunder.  The Manager will act in good
faith and with due diligence in its choice and use of such agents and will be
liable for their acts and omissions.

 

6

 

BANK ACCOUNTS AND CUSTODY

 

10.1                           Where a Custodian has been appointed by the Society, the account or
accounts stated in the Schedule will be opened with the Custodian in the name
and on behalf of the Society for the holding of cash and other assets from time
to time comprised in the Lloyd’s Deposit and the Manager will be empowered by
the Society to give instructions to the Custodian in respect of such accounts
and will take reasonable care and use an appropriate and secure method of
communication in doing so.

 

10.2                           Where no Custodian has been appointed by the Society, the Manager will
give instructions to the Society (in accordance with clause 7.6) in
respect of transactions executed, deposits placed and contracts and decisions
made under this Agreement (including as contemplated under clause 26.1) prior
to the deadlines and otherwise as  agreed
in writing from time to time between the Manager and the Society.

 

10.3                           The Manager will promptly pay any money forming part of the Lloyd’s
Deposit that it may receive into the appropriate account specified in the
Schedule and will, at all times, comply with the terms and conditions of such
accounts and of any mandate relating thereto. 
The Manager will not cause or permit any such account to become
overdrawn.  In no circumstances will the
Manager hold any cash forming part of the Lloyd’s Deposit in an account
situated outside the United Kingdom.

 

10.4                           The Manager will ensure that any assets (including certificates or other
documents evidencing title) forming part of the Lloyd’s Deposit which it may
receive are delivered promptly to the Society or the Custodian (as the case may
be) and that any documents of title or certificates or other documents
evidencing title received by the Manager are held in secure flood-proof and
fire-proof storage pending delivery to the Society or to the Custodian (as the
case may be).

 

10.5                           The Manager will make or assist in making any tax repayment claims in
relation to the Lloyd’s Deposit to which the Society or the Depositor may be
entitled.

 

10.6                           If requested by the Society, the Manager will, once in every calendar
year, prepare an annual report for the Society on the service provided by any
Custodian against such performance indicators as may from time to time be
agreed in writing between the Manager and the Society and generally will
provide such information on the Custodian’s services at the request of the
Society.

 

10.7         The
Manager undertakes promptly to notify any Custodian when the employment of any
individual notified by the Manager to that Custodian, for the purposes of
clause 10.1, as permitted to give instructions or make communications on behalf
of the Society terminates or when the individual becomes for any other reason a person who is no longer (or should no longer
be) permitted to act on behalf of the Society.

 

VOTING

 

11.1                           Subject to the Schedule and clause 7.1, the Manager may decide
either:

 

(a)                                  at its discretion to procure the exercise of any voting rights attaching
to the investments of the Lloyd’s Deposit, subject always to any specific
instructions from the Society; or

 

7

 

(b)                                 not to procure the exercise of any voting rights attaching to the
investments of the Lloyd’s Deposit, except with the agreement or on the
specific instructions of the Society.

 

11.2                           Notwithstanding the above, the Manager will not be entitled to procure
the exercise of any voting rights attaching to holdings comprised in the Lloyd’s
Deposit of In House Funds except with the agreement or on the specific instructions
of the Society, but will be entitled to count such holdings for the purpose of
constituting a quorum at a general meeting of any In House Fund.

 

LENDING AND BORROWING

 

12.                                 The Manager will not unless permitted in paragraph 3 of the Schedule or
separately agreed in writing with the Society:

 

(a)                                  lend to a third party investments or documents of title or certificates
evidencing title to investments or other property forming part of the Lloyd’s
Deposit;

 

(b)                                 borrow for the account of the Lloyd’s Deposit (whether on an unsecured
basis or against such investments or other property); or

 

(c)                                  deposit such investments or other property with a third party by way of
collateral.

 

VALUATION

 

13.                                 The Manager will send valuations of the Lloyd’s Deposit to the Company
and the Depositor and copy the same to the Society at the intervals stated in
the Schedule.  The Manager will also
prepare for the Society, as and when requested by the Society from time to
time, a special valuation of the Lloyd’s Deposit.  All valuations will be made on the basis set
out in the Lloyd’s Requirements.

 

TERMS APPLICABLE TO DEALING

 

GENERAL RESTRICTIONS

 

14.                                 The
Manager will not have power to commit the Society, the Company or the Depositor
to supplement the assets in the Lloyd’s Deposit by borrowing for the Lloyd’s
Deposit or by committing the Society to a contract which may require the
Society, the Company or the Depositor to supplement such assets.

 

DEALING AND COUNTERPARTIES

 

15.1                           In effecting transactions for the Lloyd’s Deposit the Manager will seek
Best Execution at all times and may (subject to the Schedule) deal on such
markets or exchanges and, subject to clause 15.4 with such counterparties
as it thinks fit.  The Society agrees
that all transactions will be effected in accordance with the rules and
regulations of the relevant market or exchange, and that the Manager may take
all such steps as may be required or permitted by such rules and
regulations and/or by good market practice.

 

8

 

15.2                          The Manager is obliged to obtain Best Execution
for its Professional Clients in respect of all orders executed on their
behalf.  In order to execute orders for
its Professional Clients, the Manager advises the Society that it may pass such
orders to one or more other firms to execute. 
Such other firms may be connected to or affiliated with the
Manager.  Accordingly, appropriate
information regarding the Manager’s execution arrangements will be provided to
the Society prior to such date.  In the
event that an order is executed following specific instructions from the
Society, the rules regarding best execution shall not apply to that aspect
of the order to which the specific instructions relate.

 

15.3                           Subject to the FSA Rules, the Manager may aggregate transactions for the
Lloyd’s Deposit with those of other customers and of its employees and of
associates and their employees and will allocate such transactions on a fair
and reasonable basis.  Each of the
Society and the Depositor recognises that on some occasions such  combination may operate to its disadvantage.

 

15.4                           The Manager will act in good faith and with due diligence in its choice
and use of brokers and counterparties.

 

OPTIONS, FUTURES AND
CONTRACTS FOR DIFFERENCES

 

16.1                           Where permitted under the Lloyd’s Requirements and where paragraph 3
of the Schedule so indicates, and subject to any restrictions therein, the
Manager may effect transactions in options, futures and contracts for
differences including contingent liability transactions and may settle or close
out such transactions without reference to the Society.

 

16.2                           The Manager may debit the Lloyd’s Deposit with any sums required to pay
or supplement any deposit or margin in support of any such transaction.

 

MATERIAL INTERESTS

 

POTENTIAL CONFLICTS OF
INTEREST AND DISCLOSURES

 

17.1                           The Manager (who will normally act as agent), and any associate may,
subject to the overriding principles of suitability and Best Execution and
without prior reference to the Society, effect transactions in which the Manager
or associate has, directly or indirectly, a material interest or a relationship
of any description with another party, which may involve a potential conflict
with the Manager’s duty to the Society. 
Neither the Manager nor any associate will be liable to account to the
Society, the Company or the Depositor for any profit, commission or
remuneration made or received from or by reason of such transactions or any
connected transactions and any fee payable to the Manager will not, unless
otherwise provided, be abated thereby. 
The Manager will, if requested, disclose the amount of any such profit,
commission or remuneration to the Society.

 

17.2                           The Manager will ensure that such transactions are effected on terms
which are not materially less favourable to the Society than if the potential
conflict had not existed.

 

17.3                           Potential conflicts of interest as referred to in clauses 17.1 and 17.2
may arise because:

 

9

 

(a)                                  the Manager or an associate undertakes regulated
activities for other customers;

 

(b)                                 any of the Manager’s directors or employees, or those of an associate, is
a director of, holds or deals in securities of, or is otherwise interested in
any Company whose securities are held or dealt in on behalf of the Society;

 

(c)                                  the transaction is in securities issued by an associate or the customer
of an associate;

 

(d)                                 the Manager deals on behalf of the Society with an associate;

 

(e)                                  the Manager may act as agent for the Society in relation to transactions
in which it is also acting as agent for the account of other customers and
associates;

 

(f)                                    the Manager may, in exceptional circumstances, deal in investments as
principal with the Society and the Manager may, acting as principal, sell to or
purchase from the Society currency other than sterling;

 

(g)                                 the transaction is in units or shares of In House Funds or any company of
which the Manager or any associate is the manager, operator, banker, adviser or
trustee;

 

(h)                                 the Manager may effect transactions involving placings and/or new issues
with an associate who may be acting as principal or receiving agent’s
commission.  Associates may retain any
agent’s commission or discount or other benefit (including directors’ fees)
that accrues to them;

 

(i)                                     the transaction is in the securities of an issuer for which the Manager
or an associate has underwritten, managed or arranged an issue within the
period of 12 months before the date of the transaction;

 

(j)                                     the Manager or an associate may receive remuneration or other benefits by
reason of acting in corporate finance or similar transactions involving issuers
whose securities are held by the Society; and

 

(k)                                 the transaction is in securities in respect of which the Manager or an
Associate, or a director or employee of the Manager or an Associate, is
contemporaneously trading or has traded on its own account or has either a long
or short position.

 

17.4                          The Manager maintains and operates effective organisational and
administrative arrangements, with a view to taking all reasonable steps to
prevent conflicts of interest from adversely affecting the interests of its
clients.  Further information about how
the Manager identifies and manages potential conflicts of interest is available
on request.

 

10

 

SOFT COMMISSIONS

 

18.                                 The Manager’s policy on soft commissions is stated in the Schedule, which
also lists such soft commission agreements (if any) as may be relevant to this
Agreement.

 

GENERAL

 

FEES AND CHARGES

 

19.1                           The Manager will receive remuneration from the Depositor for its
services, and reimbursement of costs and expenses from the Depositor, as stated
in the Schedule, which will also state whether or not interest is payable on
overdue fees.

 

19.2                           The
Depositor will be responsible for the payment of any commissions, transfer
fees, registration fees, taxes and similar liabilities and costs properly
payable or incurred by the Manager under this Agreement provided that Dealing
Expenses in relation to transactions effected in investments comprised in the
Lloyd’s Deposit (other than transactions disputed by the Society) may be paid
from the Lloyd’s Deposit or deducted from the proceeds of sale of such
investments.

 

19.3                           The Manager will have no right to recover any of its remuneration or
expenses, or any stamp or other duties, taxes, impositions or fiscal charges of
any nature from the Society.

 

19.4                           Subject to the proviso to clause 19.2, the Manager:

 

(a)                                  will have no right to recover any of its remuneration or expenses from
the Lloyd’s Deposit; and

 

(b)                                 may only recover any stamp or other duties, taxes, impositions or fiscal
charges of any nature from the Lloyd’s Deposit if and to the extent required by
applicable legislation.

 

19.5                           The Manager acknowledges that it has and will have no security interest,
lien or right of set-off of any kind over or in respect of the Lloyd’s Deposit.

 

TAXATION

 

20.                                 The Manager will not take or omit to take any action which to its
knowledge would prejudice any tax status of the Depositor stated in the
Schedule.  Subject thereto, the Depositor
and any professional tax adviser of the Depositor remain responsible for the
management of the Depositor’s affairs for tax purposes.

 

LIABILITY

 

21.1                           The Manager will act in good faith and with due diligence and will comply
with the FSA Rules.

 

11

 

21.2                           Subject to clauses 21.1 and 21.8, the Manager will not be liable for
any loss to the Society, the Depositor or the Company howsoever arising except
to the extent that such loss is due to negligence, wilful default, fraud or
breach of this Agreement on the part of the Manager or its employees.

 

21.3                           If any counterparty should fail to deliver any necessary documents or to account
for any transaction or securities, the Manager will take all reasonable steps
on behalf of the Society to recover such documents or securities, or any sums
due, or compensation in lieu thereof, but subject thereto (and to
clauses 21.1, 21.2 and 21.8) will not be liable for any such failure.  All reasonable costs and expenses properly
incurred by the Manager will be charged to the Depositor.

 

21.4                           Subject to clauses 4.2, 4.4, 9.2, 10.3, 10.4, 10.7, 15.3, 21.1 to
21.3 and 21.8, the Manager will not be liable for any default of the Custodian
or any counterparty, bank, sub-custodian or other person or entity which holds
money, investments or other documents of title on behalf of the Society.

 

21.5                           Subject to clauses 21.1 to 21.3 and 21.8, no warranty is given by the
Manager as to the performance or profitability of the Lloyd’s Deposit.

 

21.6                           The Depositor will indemnify the Manager against all claims by third
parties (other than the Society) which may be made against it in connection
with its services under this Agreement, except to the extent that the claim is
due to negligence, wilful default, fraud or breach of this Agreement on the
part of the Manager or its employees. 
The Manager will promptly inform the Depositor of any such claims in
respect of which an indemnity is sought under this Agreement.

 

21.7                           The
Company, the Depositor and the Manager each acknowledges that:

 

(a)                                  the
Manager has been appointed at the request of the Company and the Depositor, and
that the Society has no responsibility for the investment performance of the
Manager or for any diminution in value of the Lloyd’s Deposit caused by any
act, default or omission of the Manager; and

 

(b)                                 the
Society has no liability or responsibility to the Manager in respect of any act
or omission of the Company or the Depositor.

 

21.8                           The Depositor and the Manager jointly and severally agree to indemnify
the Society, its officers and employees and any subsidiary of the Society which
acts as a nominee in respect of the Lloyd’s Deposit (on an after-tax basis)
against any loss, claim, expense or liability arising from:

 

(a)                                  any act or omission of the Manager or its agents or its or their
employees in carrying out or purporting to carry out any of its services under
this Agreement save where any such act or omission is not caused by any
negligence, wilful default or fraud on the part of the Manager or its agents or
its or their employees; or

 

(b)                                 any breach by the Manager or its agents or its or their employees of any
provisions of this Agreement;

 

12

 

except to the extent that
such loss, claim, expense or liability arises from the negligence, wilful
default or fraud on the part of the Society or its agents or its or their
employees.

 

WAIVER

 

22.                                 No exercise or failure to exercise or delay in exercising any right,
power or remedy vested in the Society under or pursuant to this Agreement will
amount to a waiver by the Society of that or any other right, power or remedy.

 

COMPLAINTS

 

23.                                 All formal complaints in respect of the Manager should in the first
instance be made in writing to the compliance officer of the Manager at the
address stated in the Schedule.  A copy
of the Manager’s complaints procedure (if any) will be provided to each of the
Society and the Depositor upon request.

 

COMPENSATION

 

24.                                 A statement is available from the Manager describing the Depositor’s and
the Society’s rights to compensation, if any, in the event that the Manager is
unable to meet its liabilities.

 

TERMINATION

 

25.1                           Each
of the Company, the Depositor and the Society may terminate this Agreement in
either case at any time by written notice to the other parties.

 

25.2                           This Agreement will terminate with immediate effect in the event of the
Manager’s Insolvency or:

 

(a)                                  if the Manager ceases to be an authorised person under the FSMA; or

 

(b)                                 if the Manager ceases to be permitted, under any rules applicable to
it, to carry out its functions under this Agreement; or

 

(c)                                  if the trusts created by the Trust Deed terminate (otherwise than in
circumstances where the Lloyd’s Deposit is to become subject to the terms of a
replacement Lloyd’s Deposit trust deed).

 

25.3                           The Manager may terminate this Agreement on one month’s written notice to
the Society, the Company and the Depositor or by immediate notice if so
required by any competent regulatory authority.

 

CONSEQUENCES OF TERMINATION

 

26.1                           The Manager will complete expeditiously all transactions in progress at
termination provided that the Society may require that a transaction not be
completed where this would not result in breach of contract or occasion loss or
damage.

 

26.2                           Termination
will not affect accrued rights, existing commitments or any contractual
provision intended to survive termination and will be without penalty or other
additional payment save that the Depositor will pay the fees of the Manager pro

 

13

 

rata to the date of
termination.  For the avoidance of doubt,
the termination of this Agreement will not affect the operation of
clauses 1, 7, 21, 22, 26, 28, 30.2, 30.4 and 30.6.

 

26.3                           Subject to the proviso to clause 26.1, on termination the Manager will be
entitled to instruct any Custodian (in accordance with clause 10.1) to
retain and/or realise such assets as may be required to settle transactions
already initiated.

 

26.4                           The Depositor undertakes (which undertaking will survive termination of
this Agreement) to keep the Society at all times fully and effectively
indemnified (on an after-tax basis) against any loss, costs, expenses, claims
or demands which the Society may suffer or incur and which arise directly or
indirectly from any termination of this Agreement provided that this indemnity
will not extend to anything arising from the negligence, wilful default, fraud
or breach of this Agreement on the part of the Society or its agents or its or
their employees.

 

RELATIONSHIP

 

27.                                 The Manager acts as the agent of the Society which will therefore be
bound by the Manager’s acts under this Agreement.  Nevertheless, none of the services to be
provided hereunder nor any other matter will give rise to any fiduciary or
equitable duties which would prevent or hinder the Manager or any associate, in
transactions with or for the Society, acting as both market-maker and broker,
principal or agent, dealing with other associates and other customers, and
generally effecting transactions as provided above.

 

CONFIDENTIALITY AND DATA
PROTECTION

 

28.1                           Neither the Manager nor any associate is obliged to disclose to the
Society or to take into consideration information either:

 

(a)                                  the disclosure of which by it to the Society would or might be a breach
of duty or confidence to any other person; or

 

(b)                                 which comes to the notice of an employee, officer or agent of the Manager
or of an associate, but properly does not come to the actual notice of an
individual managing the Lloyd’s Deposit.

 

28.2                           The Manager shall not disclose information of a confidential nature
acquired in consequence of this Agreement, except for information which it may
be entitled or bound to disclose by law, or which is requested by regulatory
authorities or which is disclosed to its professional advisers where reasonably
necessary for the performance of such advisers’ professional services.

 

28.3                           The Manager will act as data controller
(and in certain circumstances, data processor) within the meaning of the Data
Protection Act 1998 (the Data Protection Act).  Each of the Society, the Depositor and the
Company hereby severally consents to the processing and use by the Manager and
its (or their) agents and associates of personal data (as defined in the Data
Protection Act) given by the Society, the Depositor and the Company
respectively under this Agreement.  The
Manager may only process the personal data in accordance with the provisions of
the Data Protection Act and only for the purposes set out in this
Agreement.  Such data may 

 

14

 

also be
used by the Manager and its agents and associates to update customer
records.  The Society, the Depositor and
the Company each severally undertakes to supply personal data to the Manager in
accordance with the provisions of the Data Protection Act.

 

WARRANTIES AND UNDERTAKINGS
ON THE PART OF THE MANAGER

 

29.                                 The Manager warrants and undertakes that:

 

(a)                                  it has the requisite corporate capacity to enter into this Agreement and
to perform its obligations under it, and that it has taken all necessary
corporate and other action to authorise it to do so;

 

(b)                                 the
execution and performance of this Agreement does not and will not contravene
any law, regulation or rule applicable to the Manager or any contract to
which it is a party or by which it is bound;

 

(c)                                  it is an authorised person under the FSMA, is regulated by the FSA in the
conduct of its regulated activities, and it is permitted under the provisions
of the FSMA and the FSA Rules to enter into this Agreement and perform its
obligations under it; and

 

(d)                                 it has fidelity and professional indemnity insurance and insurance
relating to the loss or theft of customer’s cash or investments, brief details
of such insurances being set out in the Schedule, and the Manager will maintain
such insurances in full force and will notify the Society of any changes in
such insurance or any failure to maintain such insurances in full force.

 

NOTIFICATIONS AND RECORDS

 

30.1                           The Manager will maintain accounting records sufficient to show at any
time all transactions in respect of the Lloyd’s Deposit.

 

30.2                           The Manager will provide the Society with contract notes (or procure the
Society is provided with contract notes) in respect of all transactions
effected for the Lloyd’s Deposit and will promptly provide the Society with all
such information as the Society may request for the purpose of complying with
its obligations under Part VI of the Companies Act 1985 (as from time to
time amended) or such other legislation of the United Kingdom or elsewhere (as
from time to time in force) under which it may be required to disclose any
interest it may have in any investments.

 

30.3                           The Manager will inform the Society promptly of:

 

(a)                                  any enforcement or disciplinary action instituted against the Manager or
any of its officers or employees by any regulatory authority;

 

(b)                                 any material breach by the Manager of its obligations under this
Agreement.

 

30.4                           The Manager will at all times (including after termination of this
Agreement for so long as the Manager is required by the FSA Rules to
maintain such records and documents) allow the Society and its authorised
agents and employees full rights of access to, and to inspect and take copies
of, the records and documents of the 

 

15

 

Manager relating to the Lloyd’s
Deposit.  The Society is not required to
give the Manager prior notice of its wish to exercise such rights.

 

30.5                           The Manager will send the Society a copy of its annual report and
accounts prepared in accordance with the Companies Act 1985 at the time when it
is required by that Act to send such report and accounts to its members.

 

30.6                           Upon termination of the appointment of the Manager under this Agreement
the Depositor will allow the Society full rights of access to, and to inspect
and take copies of, any books and records relating to the Lloyd’s Deposit
passed to the Depositor that had been in the possession or under the control of
the Manager.

 

ASSIGNMENT

 

31.                                 This Agreement and all rights and obligations under it will not be
capable of assignment by any of the parties, except that the Society may assign
its rights under this Agreement to any person who is for the time being a
trustee under the Trust Deed.

 

THIRD PARTY RIGHTS

 

32.                                 A person who is not a party to this Agreement shall have no right under
the Contracts (Rights of Third Parties) Act 1999 to enforce any of its terms

 

ANTI
MONEY-LAUNDERING

 

33.1                           The Society and the Company each acknowledge the
Manager’s obligations under applicable anti-money laundering laws and
regulations and agree that the Manager reserves the right to:

 

(a)                                delay the commencement of the management of the Lloyd’s
Deposit; or

 

(b)                               suspend its management of the Lloyd’s Deposit

 

until
the Manager has received satisfactory responses to anti-money laundering
enquiries undertaken with the Society or the Company.

 

33.2                          The Company and the Society agree that, if requested
to do so by the Manager, they will use their reasonable endeavours to provide
information required by the Manager for the purpose of the Manager ensuring its
compliance with its obligations outlined in this clause.  Any information provided to the Manager under
this clause is subject to the obligations of confidentiality contained in
clause 28.

 

16

 

FORCE
MAJEURE

 

34.1                           None of the parties to this Agreement shall be
deemed to be in breach of this Agreement or otherwise liable to the other as a
result of any delay, failure or defective performance of its obligations under
this Agreement if and to the extent that such delay or failure arises solely
out of causes beyond the control and without the fault or negligence of the
party in question.  Such clauses may
include, without limitation, acts of God; any civil commotion or disorder,
riot, invasion, terrorism or war; fire, explosion, storm, flood, earthquake,
subsidence, epidemic or other natural physical disaster; power failures,
destruction or breakdown of any premises, plant or equipment (including
computer systems); strike; lockout or other industrial action; or any action
taken by a governmental or public authority of any kind.

 

GOVERNING LAW

 

35.                                 This Agreement will be governed by and construed in accordance with
English law.  The English courts are to
have exclusive jurisdiction to settle any disputes or claims which may arise
out of or in connection with this Agreement for which purpose all parties agree
to submit to the jurisdiction of the English courts.

 

17

 

SCHEDULE

 

1.                                      Date this Agreement comes into
force (clause 2.1)

30th March 2010

 

2.                                      Name and address of Custodian
(Recital (C))

The Corporation of Lloyd’s
(Lloyd’s)

 

3.                                      Investment objectives and
restrictions (clause 4.2)

 

These investment objectives
and restrictions are supplemental to the investment criteria and restrictions
specified in the Lloyd’s Requirements. 
In the event of any inconsistency, the criteria and restrictions
specified in the Lloyd’s Requirements will prevail.

 

The
investment objectives and restrictions are set out in the attached document
entitled “Montpelier Re Ltd Syndicate 5151
- Funds at Lloyds Investment
Policy and Guidelines”.

 

4.                                      Authorised means of
communication, and addresses etc. for notices (clauses 7 and 23)

 

	
  Investment Manager

  
	
   

  
	
  Contact Person for Trades:

  
	
  Simon O’Flaherty

  
	
  GR-NEAM Limited

  
	
  The Oval — Block 3,

  
	
  Ballsbridge,

  
	
  Dublin 4,

  
	
  Ireland

  
	
  Phone ++353 1 6738500

  
	
  Fax ++353 1 6732066

  
	
   

  
	
  Complaints and notes by written notice addressed to:

  
	
  Compliance Officer

  
	
  Fiona Molloy

  
	
  GR-NEAM Limited

  
	
  The Oval — Block 3,

  
	
  Ballsbridge,

  
	
  Dublin 4,

  
	
  Ireland

  
	
  Phone ++353 1 6738542

  
	
  Fax ++353 1 6732066

  

 

5.                                      Bank and Securities accounts
(clause 10.1)

 

[Where no custodian has been
appointed, the relevant bank account is at National Westminster Bank plc, 1
Princes Street, London EC2R 8PA account number 13637444 and it is entitled “Corporation
of Lloyd’s Members’ Current Account” and /or 
Lloyd’s Dollar Trust Account “Corporation of Lloyd’s Members Trust
Clients

 

18

 

Money Account”, account
number GB87NWBK60730140120066 as appropriate .]

 

[N.B. All income arising on
the Lloyd’s Deposit must initially be paid into a trust account and may then,
subject to the Society’s instructions to the contrary, be paid out to the
Company or the Depositor as appropriate.]

 

6.                                      Exercise of voting rights (clause
11)

 

No
exercise of voting rights by Manager.

 

7.                                      Intervals at which statements and
valuations in respect of the Lloyd’s Deposit to be produced (clause 13)

 

The Manager will at quarterly
intervals produce Periodic Statements in accordance with the FSA Rules.

 

8.                                      Soft Commissions (clause 18)

 

Manager,
as a matter of policy and practice, does not utilise research,
research-related products and other services obtained from brokers, or third
parties, on a soft commission basis.

 

9.                                      Remuneration of Manager and
reimbursement of Manager’s expenses (clause 19.1)

 

For
the services to be provided by the Manager pursuant to this Agreement, the
Company agrees to pay the Manager 8 basis points (0.08%) p.a. as Management
Fee.

 

This Management Fee is
payable on a quarterly basis and is due on the 10th calendar day of the month
following each quarter end. The Fee is calculated monthly on the basis of
end-of-month values. The end-of-month value is defined as the market value of
all assets managed by the Manager as of the last trading day of each month
(including accrued interest for fixed income portfolios). For any partial
months, the Management Fee is calculated on a pro-rata basis for the number of
days the client account has been managed.

 

10.                               Tax status of the Depositor  (clause 20)

 

The depositor and beneficial owner of funds is a
Bermuda company not resident or trading in the UK, and not liable to UK
corporate tax.

 

11.                               Insurance (clause 29(d))

 

The
Manager has fidelity insurance with Chubb Group, Warren, NJ, USA. Sum insured:
USD 10,000,000.00 with an aggregate of USD 20,000,000.

 

19

 

IN WITNESS WHEREOF the parties have executed this Agreement as of the
first date above written.

 

 

	
  SIGNED by

  	
  G Perdoni

  	
   

  	
  )

  	
  G Perdoni

  
	
  a duly authorised representative of

  	
   

  	
  )

  	
   

  
	
  [the Company]

  	
   

  	
  )

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SIGNED by

  	
  M Colesworthy

  	
   

  	
  )

  	
  M Colesworthy

  
	
  a duly authorised representative of

  	
   

  	
  )

  	
   

  
	
  THE
  SOCIETY OF LLOYD’S

  	
   

  	
  )

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SIGNED by

  	
   

  	
   

  	
   

  	
   

  
	
  John Connolly and Hugh McCutcheon

  	
   

  	
  )

  	
  John Connolly

  
	
  both duly authorised representatives of

  	
   

  	
  )

  	
  Hugh
  McCutcheon

  
	
  [the Manager]

  	
   

  	
  )

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SIGNED by

  	
  T G S Busher

  	
   

  	
  )

  	
  T G S Busher

  
	
  a duly authorised representative of

  	
   

  	
  )

  	
   

  
	
  [the Depositor]

  	
   

  	
  )

  	
   

  

 

20

 

APPENDIX

 

Form of Lloyd’s Deposit
Trust Deed

 

21Exhibit 10.1

 

AMENDMENT
NO. 2 AND AGREEMENT

 

This AMENDMENT NO. 2 AND AGREEMENT (“Amendment”)
entered into and made effective as of March 30, 2010 (“Effective Date”),
is among Cano Petroleum, Inc., a Delaware corporation (“Borrower”),
the Guarantors (as defined below), the Lenders (as defined below), and Union
Bank, N.A. (f/k/a Union Bank of California, N.A.), as administrative agent for
such Lenders (in such capacity, the “Administrative Agent”) and as
issuing lender (in such capacity, the “Issuing Lender”).

 

RECITALS

 

A.            The Borrower is
party to that certain Amended and Restated Credit Agreement dated as of December 17,
2008 (as amended, restated and otherwise modified from time to time, the “Credit
Agreement”) among the Borrower, the lenders party thereto from time to time
(the “Lenders”), the Administrative Agent and the Issuing Lender.

 

B.            The Lenders, subject to the terms
and conditions set forth herein, wish to amend the Credit Agreement as provided
herein.

 

THEREFORE,
the Borrower, the Guarantors, the Lenders, the Administrative Agent and the
Issuing Lender hereby agree as follows:

 

Section 1.              Defined
Terms; Other Definitional Provisions.  As used in this Amendment, each of the terms
defined in the opening paragraph and the Recitals above shall have the meanings
assigned to such terms therein.  Each
term defined in the Credit Agreement and used herein without definition shall
have the meaning assigned to such term in the Credit Agreement, unless
expressly provided to the contrary.  The
words “hereof”, “herein”, and “hereunder” and words of similar import when used
in this Amendment shall refer to this Amendment as a whole and not to any
particular provision of this Amendment. 
Paragraph headings have been inserted in this Amendment as a matter of
convenience for reference only and it is agreed that such paragraph headings
are not a part of this Amendment and shall not be used in the interpretation of
any provision of this Amendment.

 

Section 2.              Amendments to Credit Agreement.

 

(a)           Section 6.18 (Leverage Ratio) of
the Credit Agreement is hereby amended by replacing the last sentence therein
in its entirety with the following:

 

Notwithstanding the foregoing,
this Section 6.18 shall not apply for the fiscal quarters ending December 31,
2009 and March 31, 2010.

 

(b)           Section 6.19 (Interest Coverage
Ratio) of the Credit Agreement is hereby amended by replacing the last sentence
therein in its entirety with the following:

 

Notwithstanding the foregoing,
this Section 6.19 shall not apply for the fiscal quarters ending December 31,
2009 and March 31, 2010.

 

 

Section 3.              Agreement.  If the Credit Agreement has not been
replaced, refinanced, or amended and restated on or before May 31, 2010,
then the Borrower hereby agrees to pay on May 31, 2010, in consideration
for the agreements of the Lenders provided herein, an amendment fee in the
amount of $90,000 to the Administrative Agent for the pro rata account of the
Lenders.

 

Section 4.              Representations and Warranties.  The Borrower and each Guarantor represents
and warrants that: (a) the representations and warranties contained in the
Credit Agreement and the representations and warranties contained in the other
Loan Documents are true and correct in all material respects on and as of the
Effective Date as if made on as and as of such date except to the extent that
any such representation or warranty expressly relates solely to an earlier
date, in which case such representation or warranty is true and correct in all
material respects as of such earlier date; (b) no Default has occurred and
is continuing; (c) the
execution, delivery and performance of this Amendment are within the corporate,
limited liability company, or partnership power and authority of such Person and
have been duly authorized by appropriate corporate, limited liability company,
or partnership actions and proceedings; (d) this Amendment constitutes the
legal, valid, and binding obligation of such Person enforceable in accordance
with its terms, except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, or similar laws affecting the rights of creditors generally and
general principles of equity; (e) there are no governmental or other third
party consents, licenses and approvals required in connection with the
execution, delivery, performance, validity and enforceability of this Amendment;
(f) the Liens under the Security Instruments are valid and subsisting and
secure the Borrower’s and such Person’s obligations under the Loan Documents;
and (g) as to each Guarantor, it has no defenses to the enforcement of the
Guaranty.

 

Section 5.              Conditions
to Effectiveness.  This Amendment and the
amendments to the Credit Agreement provided herein shall become effective on and as of the Effective Date and
enforceable against the parties hereto upon the occurrence (whether before or after the Effective
Date) of the following conditions precedent: (a) the Administrative
Agent shall have received multiple original counterparts, as requested by the
Administrative Agent, of this Amendment duly and validly executed and delivered
by duly authorized officers of the Borrower, the Guarantors, the Administrative
Agent, and the Lenders, (b) no Default shall have occurred and be continuing
as of the Effective Date, (c) the representations and warranties in this Amendment
shall be true and correct in all material respects, and (d) the Borrower shall have paid all costs and
expenses that have been invoiced prior to the Effective Date and are payable
pursuant to Section 9.04 of the Credit Agreement.

 

Section 6.              Acknowledgments and Agreements.

 

(a)           The Borrower acknowledges that on the date hereof all
Obligations are payable without defense, offset, counterclaim or recoupment.

 

(b)           The Administrative Agent and the Lenders hereby expressly
reserve all of their rights, remedies, and claims under the Loan
Documents.  Nothing in this Amendment
shall constitute a waiver or relinquishment of (i) any Default or Event of
Default under any of the Loan Documents, (ii) any of the agreements, terms
or conditions contained in any of the Loan Documents, (iii) any rights or
remedies of the Administrative Agent or any Lender with respect 

 

2

 

to the Loan Documents, or (iv) the
rights of the Administrative Agent or any Lender to collect the full amounts
owing to them under the Loan Documents.

 

(c)           Each of the Borrower, the Guarantors, the Lenders, the
Administrative Agent and the Issuing Lender does hereby adopt, ratify, and
confirm the Credit Agreement, as amended hereby, and acknowledges and agrees
that the Credit Agreement, as amended hereby, is and remains in full force and
effect, and the Borrower and the Guarantors acknowledge and agree that their
respective liabilities and obligations under the Credit Agreement, as amended
hereby, and the Guaranty, are not impaired in any respect by this Amendment.

 

(d)           From and after the Effective Date, all references to the
Credit Agreement and the Loan Documents shall mean such Credit Agreement and
such Loan Documents as amended by this Amendment.

 

(e)           This Amendment is a Loan Document for the purposes of the
provisions of the other Loan Documents. 
Without limiting the foregoing, any breach of representations,
warranties, and covenants under this Amendment shall be a Default or Event of
Default, as applicable, under the Credit Agreement.

 

Section 7.              Reaffirmation of the Guaranty.  Each Guarantor hereby ratifies, confirms,
acknowledges and agrees that its obligations under the Guaranty are in full
force and effect and that such Guarantor continues to unconditionally and
irrevocably guarantee the full and punctual payment, when due, whether at
stated maturity or earlier by acceleration or otherwise, all of the Guaranteed
Obligations (as defined in the Guaranty), as such Guaranteed Obligations may
have been amended by this Amendment, and its execution and delivery of this Amendment
does not indicate or establish an approval or consent requirement by such
Guarantor under the Guaranty in connection with the execution and delivery of
amendments, consents or waivers to the Credit Agreement, the Notes or any of
the other Loan Documents.

 

Section 8.              Counterparts;
Invalidity.  This Amendment
may be signed in any number of counterparts, each of which shall be an original
and all of which, taken together, constitute a single instrument.  This Amendment may be executed by facsimile
signature and all such signatures shall be effective as originals.  In the event that any one or more of the
provisions contained in this Amendment shall for any reason be held invalid, illegal
or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Amendment.

 

Section 9.              Successors
and Assigns.  This Amendment
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns permitted pursuant to the Credit Agreement.

 

Section 10.            Governing
Law.  This Amendment
shall be deemed to be a contract made under and shall be governed by and
construed in accordance with the laws of the State of Texas.

 

Section 11.            Entire
Agreement.  THIS AMENDMENT, THE CREDIT AGREEMENT AS AMENDED BY THIS AMENDMENT, THE
NOTES, AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG
THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER 

 

3

 

HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL,
WITH RESPECT THERETO.

 

THERE ARE NO UNWRITTEN
ORAL AGREEMENTS AMONG THE PARTIES.

 

[signature pages follow]

 

4

 

EXECUTED effective as of the
date first above written.

 

	
  BORROWER:

  	
  CANO
  PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Ben Daitch

  
	
   

  	
  Name:

  	
  Ben Daitch

  
	
   

  	
  Title:

  	
  Senior Vice
  President & CFO

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  GUARANTORS:

  	
  SQUARE
  ONE ENERGY, INC.

  
	
   

  	
  LADDER
  COMPANIES, INC.

  
	
   

  	
  W.O.
  ENERGY OF NEVADA, INC.

  
	
   

  	
  WO
  ENERGY, INC.

  
	
   

  	
  CANO PETRO OF NEW MEXICO, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Each by:

  	
  /s/ Ben Daitch

  
	
   

  	
  Name:

  	
  Ben Daitch

  
	
   

  	
  Title:

  	
  Vice
  President & Chief Financial Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  W.O.
  OPERATING COMPANY, LTD.

  
	
   

  	
  W.O.
  PRODUCTION COMPANY, LTD.

  
	
   

  	
  Each
  by:

  	
  WO
  Energy, Inc., its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Ben Daitch

  
	
   

  	
  Name:

  	
  Ben Daitch

  
	
   

  	
  Title:

  	
  Vice
  President & Chief Financial Officer

  
				

 

Signature Page to
Amendment No. 2 and Agreement

 

 

	
   

  	
  UNION
  BANK, N.A. (f/k/a Union Bank of California, N.A.), as Administrative
  Agent, Issuing Lender and a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Randall Osterberg

  
	
   

  	
  Name:

  	
  Randall Osterberg

  
	
   

  	
  Title:

  	
  Senior Vice President

  

 

Signature Page to
Amendment No. 2 and Agreement

 

 

	
   

  	
  NATIXIS,
  as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Donovan C.
  Broussard

  
	
   

  	
  Name:

  	
  Donovan C. Broussard

  
	
   

  	
  Title:

  	
  Managing Director

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Louis P. Laville,
  III

  
	
   

  	
  Name:

  	
  Louis P. Laville, III

  
	
   

  	
  Title:

  	
  Managing
  Director

  

 

Signature Page to
Amendment No. 2 and Agreement

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