Document:

Exhibit 10.2

 

PARTICIPATION AGREEMENT

 

RELATING TO

 

EAST TEXAS BOSSIER - MARGARITA

 

This PARTICIPATION AGREEMENT
(this “Agreement”) is made and
entered into as of October 23, 2007 (the “Effective
Date”), by and among the Parties (as defined below).

 

FOR AND IN CONSIDERATION OF
the mutual covenants, rights, and obligations set forth in this Agreement, the
benefits to be derived from them, and other good and valuable consideration,
the receipt and the sufficiency of which are hereby acknowledged, the Parties agree
as follows:

 

ARTICLE I

DEFINITIONS

 

1.01         Certain
Definitions.  As used in
this Agreement, the following terms have the following meanings:

 

“Acquisition Costs” means (i) with
respect to any Designated Property relating to a Lease that was owned by
CWEI prior to the date such property became subject to this Agreement, the fair
market value of the portion of such Lease that is attributable to such
Designated Property as of the date it became subject to this Agreement, and (ii) with
respect to any Designated Property relating to a Lease that was acquired by
CWEI on or after the date such Designated Property became subject to this
Agreement, the portion of the costs of acquiring such Lease (including,
without limitation, direct costs of seismic data and interpretation, lease
broker services, title examinations, filing fees, and recording costs) that is
attributable to the Designated Property.

 

“Affiliate” means, when used with reference
to a specified Person, (a) any Person directly or indirectly owning, controlling
or holding power to vote 50% or more of the outstanding voting securities of
the specified Person, (b) any Person 50% or more of whose outstanding
voting securities are directly or indirectly owned, controlled or held with
power to vote by the specified Person, (c) any Person directly or
indirectly controlling, controlled by or under common control with the
specified Person, (d) if the specified Person is a corporation, any
officer or director of the specified Person or of any corporation directly or
indirectly controlling that specified Person, (e) if the specified Person
is a partnership, any general partner or if the general partner is a
partnership, the general partners of that partnership, and (f) if the
specified Person is an individual, such individual’s spouse and natural and
adoptive lineal descendants and trusts for the benefit of any such
Persons.  For purposes of this
definition, the ability through share ownership or contractual arrangement to
elect or cause the election of a majority of the board of directors of a
corporation shall constitute “control.”

 

“Agreed Rate” means 4.41 % per annum.

 

 

“Agreement” means this Participation
Agreement, as amended or restated from time to time.

 

“Area of Interest” means the area described
in Exhibit B, as such may amended from time to time by CWEI.

 

“Capital Account” has the meaning set forth
in Section 5.03.

 

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

 

“Contribution Date” has the meaning set forth in Section 5.04(b).

 

“Contribution Notice” has the meaning set forth in Section 5.04(b).

 

“CWEI” means Clayton Williams Energy, Inc.,
a Delaware corporation.

 

“CWEI Counsel” has the meaning set forth
in Section 8.12.

 

“Designated Property” means an undivided 5% of CWEI’s
interests in the Wells.

 

“Event of Forfeiture” has the meaning set forth in Section 4.04.

 

“Indemnified Person” has the meaning set
forth in Section 8.11.

 

“Interest” means an interest in
Designated Property under this Agreement. 
The number of Interests owned by each Participant and the total number
of Interests in this Agreement are set forth on Exhibit A, as
amended from time to time.

 

“Lease” means a lease, mineral
interest, royalty or overriding royalty, fee right, mineral servitude, license,
concession or other right covering oil, gas and related hydrocarbons (or a
contractual right to acquire such an interest) or an undivided interest therein
or portion thereof, together with all appurtenances, easements, permits,
licenses, servitudes and rights-of-way situated upon or used or held for future
use in connection with such an interest or the exploration, development or
production thereof, in each case, in the Area of Interest.  A “Lease” shall also mean and include all
rights and interests in all lands and interests unitized or pooled therewith
pursuant to any law, rule, regulation or agreement.

 

“Majority in Interest” means a majority of
the Interests held by all Participants.

 

“Non-Contributing
Party” has the meaning set forth in Section 5.04(c).

 

“Operating Agreement” means an agreement
between the operator and non-operating interest owners in a Lease for the
testing, development and operation of a tract of land or Lease for the
exploration and development of oil, gas, minerals or hydrocarbons.

 

“Party” means CWEI or any Participant.

 

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“Participant” means each Person listed as
such on Exhibit A.

 

“Payout” means the earliest calendar month
during which CWEI shall have received cumulative cash proceeds relating to all
Designated Property (but only taking into account proceeds received with
respect to a Designated Property after such Designated Property became subject
to this Agreement) in an aggregate amount equal to the sum of (i) the
Acquisition Costs, Well Costs and other expenses incurred by CWEI relating to
the Designated Property, plus (ii) an annual internal rate of return on
such costs equal to the Agreed Rate.  For
this purpose, each proceed and expense shall be deemed to have been made on the
last day of the month during which it was received or made.

 

“Person” means an individual, corporation,
partnership, limited partnership, limited liability company, business trust or
other legal entity.

 

“Regulations” mean the regulations
promulgated by the United States Department of Treasury pursuant to the
Code.  All references herein to sections
of the Treasury Regulations shall include corresponding provision or provisions
of succeeding, similar, substitute, temporary or final Treasury Regulations.

 

“Tax Partnership” means the relationship
(constituting a tax partnership for federal and applicable state law tax
purposes) between the Parties existing pursuant to this Agreement.

 

“Transfer” means any sale, transfer,
assignment, pledge, encumbrance, hypothecation, gift or disposition of an
Interest in whole or in part, or any rights or benefits to which a holder of an
Interest may be entitled as provided in this Agreement, including, without
limitation, the right to receive distributions in cash or in kind.

 

“Well” means a well in which CWEI  holds a Working Interest derived from its
ownership of one or more Leases in the Area of Interest, as determined in
accordance with Section 8.16. 
The name and location of each “Well” is shown on Exhibit C,
as amended from time to time by CWEI.

 

“Well Costs” means CWEI’s share of costs
pursuant to any Operating Agreement for the drilling, completing, equipping,
deepening or sidetracking a Well, including, without limitation:  (i) the costs of surveying and staking
the Well, the costs of any surface damages and the costs of clearing, coring,
testing, logging and evaluating the Well; (ii) the costs of casing, cement
and cement services for the Well; (iii) the cost of plugging and
abandoning the Well (including standard and customary remediation activities
associated therewith), if it is determined that the Well would not produce in
commercial quantities and should be abandoned; (iv) all direct charges and
overhead chargeable to CWEI with respect to the Well under any applicable
Operating Agreement until such time as all operations are carried out as
required by applicable regulations and sound engineering practices to make such
Well ready for production, including the installation and testing of wellhead
equipment, or to plug and abandon a dry hole; (v) all costs incurred by
CWEI in recompleting or plugging back any Well; (vi) all costs incurred by
CWEI in reworking any Well if the rework is covered by an authority for
expenditure under the applicable Operating Agreement; (vii) all costs

 

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incurred by CWEI in
locating, drilling, completing, equipping, deepening or sidetracking any
enhanced recovery producer or injector Well (including the costs of all
necessary surface equipment such as steam generators, compressors, water
treating facilities, injection pumps, flow lines and steam lines); and (viii) the
costs of constructing production facilities, pipelines and other facilities
necessary to develop property acquired pursuant to the terms hereof and produce,
collect, store, treat, deliver, market, sell or otherwise dispose of oil, gas
and other hydrocarbons and minerals therefrom; provided, that Well Costs
shall not include any Acquisition Costs.

 

“Working Interest” means an operating
interest in a Lease that permits CWEI to explore, develop and produce one or
more properties in the Area of Interest and bear its percentage of the costs
and expenses relating to the maintenance and development of and operations
relating to such properties.

 

1.02         Construction.  Whenever the context requires, the gender of
all words used in this Agreement includes the masculine, feminine and
neuter.  All references to Articles and
Sections refer to articles and sections of this Agreement, and all references
to exhibits are to Exhibits attached to this Agreement, each of which is made a
part of this Agreement for all purposes.

 

ARTICLE II

RELATIONSHIP OF THE PARTIES

 

2.01         Formation
of Tax Partnership; No Partnership for any Other Purpose.  This
Agreement and its attachments are not intended and shall not be construed to
create a joint venture or other partnership (general, limited, or otherwise) or
association or to render the Parties hereto liable as partners.  Each of the Parties hereto hereby agrees that
this Agreement creates a partnership for United States federal and State income
tax purposes only, which Tax Partnership shall be deemed to own the Designated
Property and shall function and exist as set forth in Exhibit D
attached hereto, which is hereby incorporated by reference for all purposes of
this Agreement.  Furthermore, each of the
Parties agrees that it shall not make an election for the Tax Partnership to be
excluded from the application of the provisions of Subchapter K of Chapter 1 of
Subtitle A of the Code (“Subchapter K”)
or any similar provisions of applicable state law; provided, however,
that each Participant acknowledges that CWEI may currently be, or may become in
the future, party to an Operating Agreement relating to one or more of the
Leases and/or Wells that requires each party thereto to make an election to be
excluded from the application of the provisions of Subchapter K and authorizes
CWEI to make such elections in the future on behalf of the Tax Partnership (as
an entity) if necessary to comply with the applicable Operating Agreement.

 

2.02         Purpose.  The purpose for which this Agreement is being
entered is to further align the interests of the Participants with those of
CWEI by permitting the Participants to participate with CWEI in the CWEI oil
and gas production (if any) developed, directly or indirectly, by CWEI and the
Participants.

 

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2.03         Term.  This Agreement shall commence on the
Effective Date and continue in effect until terminated in accordance with Section 7.01.

 

ARTICLE III

MANAGEMENT OF LEASES AND WELLS

 

3.01         Authority
of CWEI.  CWEI shall have
the full and exclusive power and authority to do any and all things necessary,
incidental, proper, advisable or convenient for the furtherance of developing
the Leases and Wells on behalf of the Tax Partnership, including without
limitation:

 

(a)   to determine whether to acquire, hold,
develop or produce properties and other assets and whether, when and on what
terms to farm-out, sell, promote or otherwise transfer any particular prospect,
or any interest therein;

 

(b)   to make all decisions concerning the
desirability of payment, and the payment or supervision of payment, of all
delay rentals, shut-in royalty payments, minimum royalty payments and any other
similar or related payments;

 

(c)   to drill, complete, control, rework,
side-track, redrill, recomplete, produce, plug and/or abandon any or all of the
Wells;

 

(d)   to form and participate in partnerships,
joint ventures or other relationships that it deems desirable;

 

(e)   to make any expenditures and incur any
obligations it deems appropriate;

 

(f)    to acquire (including, without limitation,
to purchase at premium prices when deemed appropriate by CWEI), exchange, sell,
lease, or dispose of any or all Designated Property;

 

(g)   to negotiate, execute, deliver and perform
any contracts, conveyances or other instruments which it considers appropriate
for the implementation of its powers under this Agreement, including, without
limitation, Operating Agreements, unit Operating Agreements and joint
development agreements, and the right to make any and all elections that are
required or necessary under the terms of any agreements;

 

(h)   to borrow money, incur indebtedness or make
guaranties and to secure the same by mortgages, deeds of trust, security
interests, pledges or other liens or encumbrances on all or any part of the
Designated Property;

 

(i)    to acquire and maintain such insurance, if
any, for the benefit of the Parties as it deems appropriate; and

 

(j)    to construct pipelines, drilling and
production platforms and facilities, gas plants, processing plants and other
facilities incidental to the development of the Area of Interest and the
production and marketing of oil and gas therefrom.

 

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(k)   to execute and deliver division orders and
transfer orders upon such terms and conditions and containing such provisions
as CWEI may consider appropriate; and

 

(l)    to control any matters affecting the
Designated Property including the conduct of litigation and other incurring of
legal expenses and the settlement of claims in litigation; provided,
that, CWEI shall not be authorized to settle any claims for which any
Participant has, or may have, any individual liability without the Participant’s
prior written consent.

 

3.02         Duties
and Services of CWEI. 
CWEI shall devote such time and effort to the development of the Leases
and Wells as it shall deem appropriate. 
The Parties acknowledge and agree that neither CWEI nor any Affiliate
thereof nor any of their respective officers, directors, employees or agents
shall be required to devote full time to the development of the Leases and
Wells and may from time to time engage in and possess interests in other
business ventures of any and every type and description, independently or with
others, including without limitation, the ownership, acquisition, exploration,
development, operation and management of oil and gas properties and oil and gas
drilling programs, and that no Participant shall by virtue of this Agreement
have any right, title, interest or expectancy in or to such activities or
ventures.

 

3.03         Operating
Agreements.  CWEI shall
use its reasonable efforts to enter into, and act in accordance with the
provisions of, all applicable Operating Agreements relating to any Lease or
Well.  Following termination of this
Agreement, each Party agrees to become a party to all Operating Agreements in
which CWEI serves as operator, and further agrees to use its reasonable efforts
to become a party to all other applicable Operating Agreements.  To the extent any Party for any reason does
not become a party to an applicable Operating Agreement, such Party agrees to
use its reasonable efforts to act in accordance with the provisions of such Operating
Agreement as if it were a party to such Operating Agreement.

 

ARTICLE IV

ACCESS TO INFORMATION; TRANSFER RESTRICTIONS

 

4.01         Access
to Information.  A
Participant, on written request to CWEI stating the purpose, may examine and
copy, at any reasonable time, for any proper purpose, and at the expense of the
Participant, any information regarding the business affairs and financial
condition of any Designated Property as is just and reasonable for the
Participant to examine and copy. 
Information provided to or obtained by a Participant relating to
Designated Property shall be used by such Participant solely in furtherance of
his or her interests hereunder and shall not be used for any other
purpose.  Participants shall maintain the
confidentiality of all such information and shall not disclose such information
to any other Person.  If a Participant
receives a request to disclose information relating to the Designated Property
or this Agreement under the terms of a subpoena, investigative demand or order
issued by a court or governmental agency, the Participant shall promptly notify
CWEI of the existence, terms and circumstances surrounding such request, so
that CWEI may seek a protective order or confidential treatment of such
information.

 

4.02         Transfer
Restrictions.  Except as
provided in Section 4.03, no Participant shall Transfer his or her
Interests without the prior written consent of CWEI.  Any attempted Transfer

 

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in violation of this Section 4.02
shall be null and void, and CWEI shall refuse to recognize any such Transfer.

 

4.03         Permitted
Transfers; Status as Assignee. 
A Participant may
Transfer all or any portion of his or her Interests to his or her spouse,
parents or natural or adoptive lineal descendants, or to one or more trusts or
partnerships established exclusively for the benefit of his or her spouse,
parents or natural or adoptive lineal descendants; provided, that any
such permitted assignee shall receive and hold such rights subject to the
provisions of this Agreement, including, without limitation, the provisions of
this ARTICLE IV, and as a condition to such Transfer, shall execute and
deliver a written agreement with the Parties agreeing to be bound hereby.  A Participant intending to Transfer Interests
pursuant to this Section 4.03 shall provide at least 10 days prior
written notice of such proposed transfer to CWEI.

 

4.04         Forfeiture
of Interests.  A
Participant shall forfeit any and/or all of his or her Interests held by such
Participant if such Participant admits or enters a plea of no contest to or is
convicted of a felony or misdemeanor offense against CWEI or any of its
Affiliates (“Event of Forfeiture”).

 

4.05         Specific
Performance.  The parties
agree that each Party would be irreparably damaged if any of the provisions of
this ARTICLE IV  are not performed in accordance with their specific
terms and that monetary damages would not provide an adequate remedy in such
event.  Accordingly, it is agreed that,
in addition to any other remedy to which they may be entitled, at law or in
equity, CWEI and any nondefaulting Participant shall be entitled to injunctive
relief to prevent breaches of the provisions of this ARTICLE IV and
specifically to enforce the terms and provisions hereof in any action
instituted in any court of competent jurisdiction.

 

ARTICLE V

SHARING, ALLOCATIONS AND DISTRIBUTIONS

 

5.01         Allocation
of Costs and Expenses. 
All costs and expenses, including Acquisition Costs and Well Costs, relating to
the Designated Property shall be shared as follows: (i) 100% to CWEI
before Payout and (ii) 1% to CWEI and 99% to the Participants after
Payout, apportioned among the Participants in proportion to the percentages
listed on Exhibit A attached hereto.

 

5.02         Allocation
of Revenues.  All revenues
relating to the Designated Property shall be allocated as follows: (i) 100%
to CWEI before Payout and (ii) 1% to CWEI and 99% to the Participants
after Payout, apportioned among the Participants in proportion to the
percentages listed on Exhibit A attached hereto.

 

5.03         Allocations
for Capital Account and Tax Purposes.  An individual capital account (a “Capital Account”) shall be established and
maintained for each Participant as provided in Exhibit D.  Subject to Section 7.02(c), all
items of income, gain, deduction, loss, credit and amount realized shall be
allocated to the Parties in accordance with the provisions of Exhibit D.

 

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5.04         Funding
of Costs and Expenses.

 

(a)           The Parties agree to pay timely the costs and expenses
allocated and charged to them pursuant to Section 5.01 and
elsewhere herein.

 

(b)           To the extent that costs and expenses are allocated and
charged to Participants pursuant to Section 5.01 and elsewhere in
this Agreement, and not retained by CWEI from a distribution to Participants
pursuant to Section 5.05, CWEI shall send written notice to the
Participants (a “Contribution Notice”)
setting forth (i) the date on which such additional funds shall be payable
(the “Contribution Date”), which
date shall be not less than 10 days after the date of the Contribution Notice,
and (ii) the total amount of funds required to be paid by each Participant
pursuant to this Section 5.04. 
The funds required of each Participant shall be in proportion to the
number of Interests held by such Participant.

 

(c)           If a Participant does not pay timely the costs and
expenses allocated and charged to such Participant (a “Non-Contributing Party”) at the time or in
the manner provided in the Contribution Notice, CWEI, in its sole discretion,
may pay the costs and expenses that the Non-Contributing Party failed to pay
within 20 days after the Contribution Notice, in which case the
Non-Contributing Party, without further action on his or her part, shall be deemed
to have assigned to CWEI the economic rights to the Interests held by the
Non-Contributing Party pursuant to this Agreement, and CWEI, as the assignee of
the Non-Contributing Party and the holder of such Interests, shall be entitled
to receive all allocations of income, gain, loss, deduction, credit or similar
items, and all distributions, to which the Non-Contributing Party would
otherwise be entitled from and after the Contribution Date.  CWEI shall hold such Interests attributable
to the Non-Contributing Party until such time as CWEI, as the holder of such
Interests, shall have received distributions pursuant to Section 5.05
in an aggregate amount equal to 200% of the additional funds paid by CWEI
pursuant to this Section 5.04(c), whereupon CWEI, without further
action on its part, shall be deemed to have re-assigned the economic rights to
such Interests to the Non-Contributing Party. 
CWEI may use the power of attorney set forth in Section 8.13
to reflect any assignment pursuant to this Section 5.04(c).  Furthermore, a Non-Contributing Party shall
indemnify and hold harmless each other Party to the fullest extent permitted by
law, from and against the costs and expenses that the Non-Contributing Party
failed to pay, including any losses, costs, liabilities, damages, and expenses
(including, without limitation, costs of suit and attorneys’ fees) paid or
incurred in attempting to collect the costs that the Non-Contributing Party
failed to pay.

 

5.05         Distributions
of Revenues.  Subject to Section 5.04(c),
all revenues relating to the Designated Property shall be distributed to the
Party to whom such revenues are allocated pursuant to Section 5.02;
provided, however, that CWEI shall, in lieu of issuing
Contribution Notices, be entitled to retain from any distribution to any
Participant an amount necessary to discharge the costs and expenses allocated
to such Participant pursuant to Section 5.01 that remains unpaid; provided,
further, that if Payout would occur as a result of a distribution of
cash funds to CWEI, such distribution shall be deemed to constitute two
distributions:  (i) the first
distribution shall consist of the amount of cash funds necessary to cause
Payout to occur, and (ii) the second distribution shall consist of the
balance of the funds then distributed.

 

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5.06         Withholding
Taxes.  CWEI shall at all
times be entitled (but not obligated) to make payments required to discharge
any obligation of CWEI to withhold or make payments to any governmental authority
with respect to any federal, state or local tax liability of any Participant
for such taxes arising out of such Participant’s interest in the Designated
Property.  The amount of each such
payment made by CWEI with respect to any Participant shall be deducted from any
distributions otherwise payable to such Participant pursuant to this
Agreement.  Notwithstanding anything
contained in this Agreement to the contrary, in the event CWEI fails to
withhold any federal, state or local taxes in respect of any Participant when
required to do so (including as a result of any change in law or interpretation
thereof or otherwise) any liability incurred by CWEI (including any interest
and penalties) as a result of such failure shall be borne by such Participant
(and charged to such Participant’s Capital Account), and such Participant shall
indemnify and hold harmless CWEI from and against any and all claims, demands,
liabilities, costs, damages and causes of action of any nature whatsoever
related to such withholding obligation.

 

ARTICLE VI

BOOKS AND RECORDS

 

6.01         Maintenance
of Books and Records.  The
books of account for the
Tax Partnership shall be maintained on an accrual basis in accordance with the
terms of this Agreement, except that the Capital Accounts of the Parties shall
be maintained in accordance with Exhibit D.  The accounting year of the Tax Partnership
shall be the calendar year.

 

ARTICLE VII

TERMINATION

 

7.01         Termination. 
This Agreement shall terminate on the first to occur of the
following:

 

(a)           the third anniversary of Payout;

 

(b)           the election of CWEI, in its sole discretion, to terminate
this Agreement.

 

7.02         Distributions upon Termination.  Upon termination of this Agreement, CWEI
shall distribute all Designated Property (or proceeds therefrom) to the Parties
as follows:

 

(a)           CWEI may sell any or all Designated Property and other
assets, including to Parties, and any resulting gain or loss from each sale
shall be computed and allocated to the Capital Accounts of the Parties in
accordance with Section 7.02(c);

 

(b)           With respect to all Designated Property that has not been
sold, the fair market value of such Designated Property shall be determined by
CWEI and any unrealized income, gain, loss, and deduction inherent in such
property that has not been reflected in the Capital Accounts of the Parties
previously shall be allocated among the Parties in accordance with Section 7.02(c);

 

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(c)           All items of income, gain, loss and deduction referred to
in Sections 7.02(a) and (b) shall be allocated among the
Parties in such a manner as to cause, to the maximum extent possible, the
positive Capital Account balance of each Party to equal the distribution such
Party would receive if the distributions upon liquidation of the proceeds
described in Section 7.02(a) and proceeds equal in amount to
the fair market value of property described in Section 7.02(d) were
made in accordance with Section 5.05 of this Agreement;

 

(d)           Designated Property (and proceeds therefrom) shall then be
distributed among the Parties in accordance with the positive Capital Account
balances of the Parties, as determined after taking into account all Capital
Account adjustments for the taxable year of the Tax Partnership during which
the termination of this Agreement occurs (other than those made by reason of
distributions pursuant to this clause (d)), and those distributions shall be
made by the end of the taxable year of the Tax Partnership during which the
termination of this Agreement occurs (or, if later, 90 days after the date of
the liquidation);

 

(e)           It is intended that the distributions made to each Party
pursuant to this Section 7.02 be equal to the distributions to
which such Party would be entitled if liquidating distributions were made in
accordance with Section 5.05 of this Agreement.  To the extent the Parties’ positive Capital
Account balances after application of Section 7.02(c) do not
correspond to the amounts of such intended distributions, the allocations
provided for in Exhibit D for the taxable year in which the
liquidation occurs shall be adjusted, to the maximum extent possible, to
produce Capital Account balances which correspond to the amount of such
intended distributions.

 

All distributions in kind to
the Participants shall be made subject to the liability of each distributee for
his, her or its allocable share of costs, expenses and liabilities previously
incurred or for which CWEI has committed prior to the date of termination and
those costs, expenses and liabilities shall be allocated to the distributee
under this Section 7.02. The distribution of cash or property to a
Participant in accordance with the provisions of this Section 7.02 constitutes
a complete distribution to the Participant of his, her or its Interests and all
the Designated Property and other assets and constitutes a compromise to which
all Parties have consented. To the extent that a Participant returns funds to
CWEI, it has no claim against any other Party for those funds.

 

7.03         Termination.
On completion of the distribution of Partnership assets as provided in this
Agreement, the Tax Partnership shall be considered terminated.

 

ARTICLE VIII

GENERAL PROVISIONS

 

8.01         Offset.  Whenever CWEI is to pay any sum to any
Participant, any
amounts that Participant owes CWEI or its Affiliates may be deducted from that
sum before payment.

 

8.02         Notices.  All notices, requests or consents required or
permitted to
be given under this Agreement must be in writing and shall be considered as
properly given if mailed by first class United States mail, postage paid, and
registered or certified with return receipt requested, or if delivered to the
recipient in person, by courier or by facsimile transmission.  Notices, requests and consents shall be sent
to a Participant at the address shown on its Signature Page for

 

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Participants  A
Participant may change its address by giving written notice to CWEI.  Any notice, request or consent to CWEI shall
be sent to CWEI at its principal place of business, to the attention of Patti
Hollums.

 

8.03         Entire
Agreement.  This Agreement
constitutes the entire agreement of the Parties relating to the Tax Partnership
and the Designated Property, and supersedes all prior contracts or agreements
with respect thereto, whether oral or written.

 

8.04         Effect
of Waiver or Consent.  A
waiver or consent, express or implied, to or of any breach or default by any
Person in the performance by that Person of its obligations with respect to
this Agreement is not a consent or waiver to or of any other breach or default
in the performance by that Person of the same or any other obligations of that
Person with respect to this Agreement. 
Failure on the part of a Person to complain of any act of any Person or
to declare any Person in default with respect to this Agreement, irrespective
of how long that failure continues, does not constitute a waiver by that Person
of its rights with respect to that default until the applicable statute of
limitations period has run.

 

8.05         Amendment
or Modification.

 

(a)    Except as otherwise provided in this Section 8.05,
any amendment to this Agreement must be proposed by CWEI and approved in
writing by CWEI and at least a Majority in Interest of the Participants within
90 days of its proposal to be effective.

 

(b)   CWEI may amend this Agreement without the
consent of any Participant (i) to remove or correct any inconsistency,
ambiguity or error contained herein, provided that such amendment does not
materially and adversely affect the Participants, (ii) to reflect any
Transfer or forfeiture of Interests pursuant to Sections 4.03 and 4.04 ,
(iii) to amend Exhibit B from time to time to amend the Area
of Interest, or (iv) to amend Exhibit C from time to time to
add additional Wells to become subject to this Agreement.

 

(c)   Upon publication of final regulations in the
Federal Register (or other official pronouncement), CWEI shall have the
authority, without any requirement for consent by any Participant, to amend
this Agreement to the extent CWEI determines, in its sole discretion, is
necessary (a) to provide for the making and filing of any available
election to obtain the benefits of a safe harbor corresponding to that
described under proposed U.S. Treasury Regulations section 1.83-3(1) (or
any similar provision) under which the fair market value of an interest that is
transferred in connection with the performance of services is treated as being
equal to the liquidation value of that interest, and (b) to reflect the
agreement of, and the requirement that, the Tax Partnership and all of the
Parties comply with all of the requirements set forth in such regulations and
Notice 2005-43 (and any other guidance to a substantially similar effect
provided by the IRS with respect to such election) with respect to all
interests transferred in connection with the performance of services while the
election remains effective.

 

8.06         Binding
Effect.  Subject to the
restrictions on Transfers set forth in this Agreement, this Agreement is
binding on and inures to the benefit of the Parties and their respective
successors and assigns.

 

11

 

8.07         Governing
Law; Severability.  THIS
AGREEMENT IS GOVERNED
BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS,
EXCLUDING ANY CONFLICT OF LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE
GOVERNANCE OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF ANOTHER
JURISDICTION.  If any provision of this
Agreement or its application to any Person or circumstance is held invalid or
unenforceable to any extent, the remainder of this Agreement and the
application of that provision to other Persons or circumstances shall not be
affected and that provision shall be enforced to the fullest extent permitted
by law.

 

8.08         Further
Assurances.  In connection
with this Agreement and
the transactions contemplated by it, each Party shall execute and deliver any
additional documents and instruments and perform any additional acts that may
be necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions.

 

8.09         Waiver
of Certain Rights.  Except
for CWEI, each Party irrevocably
waives any right it may have to maintain any action for partition of the
property of the Tax Partnership.

 

8.10         Insurance.  CWEI may purchase and maintain insurance or enter into other
arrangements on behalf of a Participant against any liability asserted against
the Participant and incurred by the Participant in that capacity or arising out
of this Agreement.  In the absence of
actual fraud, the judgment of CWEI as to the terms and conditions of the
insurance or other arrangement and the identity of the insurer or other Person
participating in an arrangement shall be conclusive, and the insurance or other
arrangement shall not be voidable and shall not subject CWEI approving the
insurance or other arrangement to liability, on any ground, regardless of
whether CWEI will be a beneficiary.

 

8.11         Indemnification.

 

(a)           CWEI agrees to indemnify and hold harmless the Participants (each,
an “Indemnified Person”) to the
fullest extent permitted by law, from and against all losses, costs,
liabilities, damages, and expenses (including, without limitation, costs of
suit and attorneys’ fees) paid or incurred in connection with or resulting from
any and all claims, actions or demands against such Indemnified Person that
arise out of or in any way relate to or are incidental to the Tax Partnership,
the Designated Property or the business or affairs of the Tax Partnership that
occurs prior to the termination of this Agreement; provided, however,
that this indemnity shall not extend to (i) any bad faith, willful
misconduct, or gross negligence of such Indemnified Person, or (ii) the
failure of such Indemnified Person to perform any of its obligations under this
Agreement, including without limitation obligations set forth in Sections
5.01, 5.04, and 5.06. 
THE PARTIES INTEND THAT THE INDEMNIFIED PERSONS BE INDEMNIFIED PURSUANT
TO THIS AGREEMENT FROM LIABILITY FOR THEIR OWN SOLE, PARTIAL OR CONCURRENT
NEGLIGENCE.

 

(b)           The indemnification rights contained in this Section 8.11
shall be cumulative of and in addition to any and all other rights,
remedies and recourses to which any Indemnified Person or their respective
heirs, personal representatives, successors and assigns shall be entitled,
whether pursuant to some other provisions of this Agreement, at law or in
equity.

 

12

 

(c)           CWEI shall advance to any Indemnified Person all reasonable fees, costs
and expenses (including attorneys’ fees and related costs), of defending any
claim, action or demand that arises out of or in any way relates to or is
incidental to the Tax Partnership, the Designated Property, business or affairs
of the Tax Partnership that occurs during any period in which such Indemnified
Person is an employee of CWEI; provided, that such Indemnified Person
agrees in writing to repay to the Tax Partnership all such advances in the
event that it is finally determined that such Indemnified Person is not
entitled to indemnification hereunder with respect to such claim, action or
demand.

 

8.12         CWEI
Counsel.  CWEI has
selected Vinson &
Elkins L.L.P. (“CWEI Counsel”) as
legal counsel to it with respect to this Agreement. Each Participant acknowledges
that CWEI Counsel does not represent such Participant, and that CWEI Counsel
shall owe no duties directly to such Participant.  Each Participant further acknowledges that,
whether or not CWEI Counsel has in the past represented or is currently representing
such Participant with respect to other matters, CWEI Counsel has not advised or
represented the interests of any Participant in the negotiation, preparation,
execution, delivery and performance of this Agreement.

 

8.13         Power
of Attorney.  By the
execution of this Agreement, each Participant does irrevocably constitute and appoint
CWEI, with full power of substitution, as true and lawful attorney-in-fact and
agent with full power and authority to act in such Participant’s name, place
and stead and to execute all documents which such attorney-in-fact deems
necessary or reasonably appropriate in furtherance of this Agreement.

 

8.14         Counterparts.  This Agreement may be executed in any number of
counterparts (including by facsimile transmission) with the same effect as if
all signing parties had signed the same document.  All counterparts shall be construed together
and constitute the same instrument.

 

8.15         No
Employment Contract. 
Nothing contained
in this Agreement shall be construed as conferring upon any Participant who is
or may become an employee of CWEI or any Affiliate of CWEI any right to
continue in the employment of CWEI or any Affiliate of CWEI for any period of
time or interfere with or restrict in any way the rights of CWEI or any Affiliate
of CWEI or such Participant to terminate the employment of such Participant at
any time for any reason (or without any reason) whatsoever, with or without
cause.  For the avoidance of doubt, any
termination of a Participant’s employment with CWEI shall not affect any of
such Participant’s rights pursuant to this Agreement.

 

8.16         Designation
of Wells.  Each of the
Parties hereby agrees that all Wells that are located within the Area of
Interest that are commenced after the date hereof and prior to the Cut-Off Date
shall be subject to this Agreement.  For
purposes of this Agreement, the “Cut-Off
Date” shall be the date that CWEI identifies in a written notice
delivered to each Participant indicating that no Wells within the Area of
Interest commenced after the Cut-Off Date will be made subject to this
Agreement.  Additionally, each
Participant acknowledges that certain circumstances may make it appropriate for
CWEI to deliver such a written notice to the Participants and to enter into
agreements similar to this Agreement with other parties (which may or may not
include certain of the Participants) that relate to Wells that are located in
the Area of Interest but are not subject to this Agreement.

 

13

 

8.17         Acknowledgement
of 409A Issues.  Notwithstanding anything herein to
the contrary, each Participant (i) acknowledges that this Agreement and
the underlying transactions, as currently structured, may be considered to be a
deferral of compensation under section 409A of the Internal Revenue Code (“section 409A”) and (ii) agrees that
CWEI may, in its own discretion and upon its own initiative and without any
action by or consent of the Participants, if existing or future guidance from
the Internal Revenue Service or other interpretative authority indicates that
such action is necessary or advisable, modify this Agreement and/or restructure
the transactions contemplated by this Agreement in any manner CWEI determines
is appropriate under the circumstances in an effort to avoid any adverse tax
consequences for the Participants and/or CWEI that may otherwise be imposed by
section 409A and the Treasury Regulations thereunder, and the Participants
hereby consent to any such action that may be taken by CWEI and expressly ratify
this Agreement as it may be so amended.

 

[Signature Pages Follow]

 

14

 

IN WITNESS
WHEREOF, the parties have executed this Participation Agreement as of the
Effective Date.

 

	
   

  	
  CWEI:

  
	
   

  	
   

  
	
   

  	
  CLAYTON WILLIAMS ENERGY,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  //s// L. Paul Latham

  	
   

  
	
   

  	
   

  	
  L. Paul Latham

  
	
   

  	
   

  	
  Executive Vice President

  

 

 

Signature Page For Participant Agreement

 

 

SIGNATURE PAGE FOR PARTICIPANT

 

The undersigned does hereby
agree to all the terms and provisions of the Participation Agreement,
including, without limitation, the power of attorney set forth in Section 8.13
thereof.

 

 

	
  Date:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name of Participant

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Address:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Fax:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Taxpayer I.D. No.

  
								

 

 

Signature Page For Participant Agreement

 

 

Exhibit A

 

Participants

 

	
  Participants

  	
   

  	
  Interests
  (%)

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Paul Latham

  	
   

  	
  7.75

  	
   

  
	
  Mel Riggs

  	
   

  	
  7.75

  	
   

  
	
  Sam Lyssy

  	
   

  	
  14.50

  	
   

  
	
  Jeff Shultz

  	
   

  	
  9.00

  	
   

  
	
  Greg Wellborn

  	
   

  	
  11.00

  	
   

  
	
  Ed Uzzell

  	
   

  	
  5.00

  	
   

  
	
  Mark Tisdale

  	
   

  	
  3.00

  	
   

  
	
  John Kennedy

  	
   

  	
  7.00

  	
   

  
	
  Jim Wolfshol

  	
   

  	
  4.00

  	
   

  
	
  Ron Gasser

  	
   

  	
  5.50

  	
   

  
	
  Clarence Wolfshohl

  	
   

  	
  4.00

  	
   

  
	
  David Grafe

  	
   

  	
  3.50

  	
   

  
	
  Joe Stembridge

  	
   

  	
  4.00

  	
   

  
	
  Mike Pollard

  	
   

  	
  2.75

  	
   

  
	
  Danny Alford

  	
   

  	
  2.00

  	
   

  
	
  Janet Hamilton

  	
   

  	
  0.75

  	
   

  
	
  Kim Jones

  	
   

  	
  1.00

  	
   

  
	
  Robert Thomas

  	
   

  	
  2.00

  	
   

  
	
  Wilson Beebe

  	
   

  	
  0.75

  	
   

  
	
  Kathy Schwope

  	
   

  	
  0.75

  	
   

  
	
  Dennis Polson

  	
   

  	
  1.00

  	
   

  
	
  Donnie Pruitt

  	
   

  	
  1.00

  	
   

  
	
  Joe Roome

  	
   

  	
  1.00

  	
   

  
	
  Denise Kelly

  	
   

  	
  1.00

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Total:

  	
   

  	
  100.00

  	
   

  

 

A-1

 

EXHIBIT B

 

AREA OF INTEREST

 

The Area of Interest shall
be the prospects located in Robertson County, Texas covered by the leases
described below:

 

[The original Exhibit B
contains the legal description of 38 oil and gas leases covering approximately
2,095 gross acres surrounding the Margarita #1 well, which descriptions have
been omitted in this filing.]

 

B-1

 

EAST TEXAS BOSSIER - MARGARITA

 

EXHIBIT C

 

Wells

 

	
  Well Name

  	
   

  	
  County,
  State

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  [Such
  other wells as may be

  	
   

  	
   

  
	
  added
  from time to time]

  	
   

  	
   

  

 

C-1

 

EXHIBIT D

 

Allocations of Profits and Losses and Other Tax
Matters

 

ARTICLE I

 

TAX DEFINITIONS

 

Section 1.01           Definitions. 
All capitalized terms used herein shall have the meanings assigned to
them in the Participation Agreement relating to EAST TEXAS BOSSIER- MARGARITA,
dated October 23, 2007 (the “Agreement”), or as follows:

 

“Adjusted
Capital Account” means the Capital Account maintained for each
Party, (a) increased by any amounts that such Party is obligated to
restore or is treated as obligated to restore under Regulation Sections
1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) and 1.704-2(i)(5)), and (b) decreased
by any amounts described in Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and
(6) with respect to such Party.

 

“Minimum
Gain” has the meaning assigned to that term in Regulation Section 1.704-2(d).

 

“Partnership
Nonrecourse Liability” has the meaning assigned to that term in
Regulation Section 1.752-1(a)(2).

 

“Partner
Nonrecourse Debt” has the meaning assigned to that term in Regulation
Section 1.704-2(b)(4).

 

“Partner
Nonrecourse Deductions” has the meaning assigned to that term in
Regulation Section 1.704-2(i)(1).

 

“Simulated
Basis” has the meaning set forth in Section 5.01(b) of this
Exhibit.

 

“Simulated
Depletion” has the meaning set forth in Section 5.01(b) of
this Exhibit.

 

“Simulated
Gain” has the meaning set forth in Section 5.01(b) of this
Exhibit.

 

“Simulated
Loss” has the meaning set forth in Section 5.01(b) of this
Exhibit.

 

ARTICLE II.

 

REFLECTION OF ACTIVITIES FOR FEDERAL AND STATE TAX PURPOSES

 

Section 2.01           Entity Level Reflection of Activities.  For federal and state tax purposes, but
for no other purpose, all transactions effected by the Parties with respect to
the Designated Property pursuant to the Agreement shall be deemed to have been
effected through the Tax Partnership, rather than by the Parties individually,
as set out in this Article II.

 

D-1

 

Section 2.02           Receipts, Profits, Income and Gains.  For purposes of applying the provisions
of this Exhibit D, all receipts by any Party in respect of the
Designated Property pursuant to the Agreement shall be deemed first to have
been received by the Tax Partnership and then to have been distributed to such
Party by the Tax Partnership in the manner specified in the Agreement.  All such items shall be taken into account in
computing the Tax Partnership’s gross income and gain or loss, as appropriate,
and shall be allocated among the Parties in accordance with Article III
hereof.

 

Section 2.03           Costs, Expenses, Deductions and Losses.  For purposes of applying the provisions
of this Exhibit D, all costs incurred or payments made by any Party
in respect of the Designated Property pursuant to the Agreement shall be deemed
first to have been received by the Tax Partnership as a contribution by the
Party incurring the cost or making the payment pursuant to the terms of the
Agreement and then to have been paid, incurred or distributed by the Tax
Partnership to the payee or obligee of the cost or the recipient of the
payment.  All such items shall be taken
into account in computing the Tax Partnership’s basis, depreciation, depletion,
gross income, deductible expenses, and/or gain or loss, as appropriate, and
shall be allocated among the Parties in accordance with Article III
hereof.

 

Section 2.04           Contributions and Distributions.  For purposes of applying the provisions
of this Exhibit D, contributions to the Tax Partnership (“Capital
Contributions”) shall include all Acquisition Costs, Well Costs, and any other
costs incurred or payments made in respect of the Designated Property pursuant
to the Agreement.  Similarly, for
purposes of applying the provisions of this Exhibit D,
distributions from the Tax Partnership shall include, in the case of any Party,
all receipts by such Party in respect of the Designated Property pursuant to
the Agreement.

 

Section 2.05           Debt Financing.  For
purposes of applying the provisions of this Exhibit D, unless the
Parties agree otherwise and this Exhibit D is amended to reflect
such agreement, (a) all debt financing incurred by a Party shall be for
the sole account of that Party and shall not be considered debt financing of
the Tax Partnership, and (b) no Tax Partnership asset shall be acquired by
assumption of, or taking subject to, any debt financing.

 

Section 2.06           Record Title.        For
purposes of applying the provisions of this Exhibit D,  (a) all legal title to Designated
Property held by any Party shall be deemed to be held by such Party strictly as
nominee for the Tax Partnership, (b) all assignments made among the
Parties with respect to Designated Property prior to termination of the Tax
Partnership shall be disregarded, and (c) upon termination of the Tax
Partnership each Party holding record title to any Designated Property shall
make such assignments as are required to comply with the provisions of the
Agreement.

 

ARTICLE III

 

ALLOCATIONS OF PROFIT AND LOSS

 

Section 3.01           Allocations for Capital Account and
Tax Purposes.  Subject to Section 7.02
of the Agreement and except as otherwise provided herein, for purposes of any
applicable

 

D-2

 

federal, state or local
income tax law, rule or regulation items of income, gain, deduction, loss,
credit and amount realized shall be allocated to the Parties as follows:

 

(a)           Income from the sale of oil or gas production and any
credits allowed by Section 29 of the Code relating thereto shall be
allocated in the same manner as proceeds therefrom are allocated and credited
pursuant to Section 5.02 of the Agreement.

 

(b)           Cost and percentage depletion deductions and the gain or
loss on the sale or other disposition of property the production from which is
subject to depletion (herein sometimes called “Depletable
Property”) as computed for tax purposes shall be taken into account
separately by the Parties rather than the Tax Partnership and, except to the
extent and in the manner provided in Section 5.01(b) of this Exhibit D,
shall not affect any Party’s Capital Account. 
For purposes of Section 613A(c)(7)(D) of the Code, the
Tax Partnership’s adjusted basis in each Depletable Property shall be allocated
to the Parties in proportion to each Party’s respective share of the costs and
expenses which entered into the Tax Partnership’s adjusted basis for each
Depletable Property, and the amount realized on the sale or other disposition
of each Depletable Property shall be allocated to the Parties in proportion to
each Party’s respective share of the proceeds from the sale or other
disposition of such property provided for in Section 5.02 of the
Agreement.  For purposes of allocating
amounts realized upon any such sale or disposition which are deemed to be
received for federal or state income tax purposes and are attributable to Tax
Partnership indebtedness or indebtedness to which the Depletable Property is
subject at the time of such sale or disposition, such amounts shall be
allocated in the same manner as Partnership proceeds used for the repayment of
such indebtedness would have been allocated under Section 5.02 of
the Agreement.

 

(c)           Items of deduction, loss and credit not specifically
provided for above (other than loss from the sale or other disposition of
Designated Property), including depreciation, cost recovery and amortization
deductions, shall be allocated to the Parties in the same manner that the costs
and expenses of the Tax Partnership that gave rise to such items of deduction,
loss and credit were allocated pursuant to Section 5.01 of the
Agreement.

 

(d)           Gain from the sale or other disposition of Designated
Property that is not specifically provided for above shall be allocated to the
Parties in a manner which reflects each Party’s allocable share of the revenue
from the sale of the Designated Property provided for in Section 5.02 of
the Agreement, and loss from the sale or other disposition of Designated
Property that is not specifically provided for above shall be allocated to the
Parties in a manner which reflects each Party’s allocable share of the costs
and expenses of the Designated Property provided for in Section 5.01 of
the Agreement.

 

(e)           All recapture of income tax deductions resulting from the
sale or other disposition of Designated Property shall be allocated to the
Party to whom the deduction that gave rise to such recapture was allocated
hereunder to the extent that such Party is allocated any gain from the sale or
other disposition of such property.

 

(f)            Any other items of Tax Partnership income or gain not
specifically provided for above shall be allocated in the same manner as the
revenue that resulted in such income or gain is allocated and credited pursuant
to Section 5.02 of the Agreement.

 

D-3

 

(g)          Notwithstanding any of the foregoing
provisions of this Section 3.01 to the contrary:

 

(i)            If during any fiscal year of the Tax
Partnership there is a net increase in Minimum Gain attributable to a Partner
Nonrecourse Debt that gives rise to Partner Nonrecourse Deductions, each Party
bearing the economic risk of loss for such Partner Nonrecourse Debt shall be
allocated items of Partnership deductions and losses for such year (consisting
first of cost recovery or depreciation deductions with respect to property that
is subject to such Partner Nonrecourse Debt and then, if necessary, a pro rata
portion of the Tax Partnership’s other items of deductions and losses, with any
remainder being treated as an increase in Minimum Gain attributable to Partner
Nonrecourse Debt in the subsequent year) equal to such Party’s share of Partner
Nonrecourse Deductions, as determined in accordance with applicable
Regulations.

 

(ii)           If for any fiscal year of the Tax
Partnership there is a net decrease in Minimum Gain attributable to Partnership
Nonrecourse Liabilities, each Party shall be allocated items of Tax Partnership
income and gain for such year (consisting first of gain recognized, including
Simulated Gain, from the disposition of Designated Property subject to one or
more Partnership Nonrecourse Liabilities and then, if necessary, a pro rata
portion of the Tax Partnership’s other items of income and gain, and if
necessary, for subsequent years) equal to such Party’s share of such net
decrease (except to the extent such Party’s share of such net decrease is
caused by a change in debt structure with such Party commencing to bear the
economic risk of loss as to all or part of any Partnership Nonrecourse
Liability or by such Party contributing capital to the Tax Partnership that the
Tax Partnership uses to repay a Partnership Nonrecourse Liability), as
determined in accordance with applicable Regulations.

 

(iii)          If for any fiscal year of the Tax
Partnership there is a net decrease in Minimum Gain attributable to a Partner
Nonrecourse Debt, each Party shall be allocated items of Tax Partnership income
and gain for such year (consisting first of gain recognized, including
Simulated Gain, from the disposition of Designated Property subject to Partner
Nonrecourse Debt, and then, if necessary, a pro rata portion of the Tax
Partnership’s other items of income and gain, and if necessary, for subsequent
years) equal to such Party’s share of such net decrease (except to the extent
such Party’s share of such net decrease is caused by a change in debt structure
or by the Tax Partnership’s use of capital contributed by such Party to repay
Partner Nonrecourse Debt) as determined in accordance with applicable
Regulations.

 

(h)          CWEI shall use all reasonable efforts
to prevent any allocation or distribution from causing a negative balance in a
Party’s Adjusted Capital Account. 
Consistent therewith, and notwithstanding any of the foregoing
provisions of this Section 3.01 of this Exhibit D to
the contrary, if for any fiscal year of the Tax Partnership the allocation of
any loss or deduction (net of any income or gain) to any Party would cause or
increase a negative balance in such Party’s Adjusted Capital Account as of the
end of such fiscal year (the “Deficit Party”)
after taking into account the provisions of Section 3.01(g) of
this Exhibit D, only the amount of such loss or

 

D-4

 

deduction that reduces the
balance to zero shall be allocated to such Deficit Party and the remaining loss
or deduction shall be allocated to the Parties whose Adjusted Capital Accounts
have a positive balance remaining at such time (each, a “Positive Party”).  After any such allocation, any Tax
Partnership income or gain (including Simulated Gain) that would otherwise be
allocated to the Deficit Party shall be allocated instead to the Positive Parties
up to an amount equal to the Tax Partnership loss or deduction allocated to
each Positive Party under the preceding sentence; provided, however,
that no allocation of income or gain realized shall be made under this sentence
if the effect of such allocation would be to cause the Adjusted Capital Account
of the Deficit Party to be less than zero. 
If, after taking into account the allocation in the first sentence of
this Section 3.01(h), the Adjusted Capital Account balance of the
Deficit Party remains less than zero at the end of a fiscal year, a pro rata
portion of each item of Tax Partnership income or gain (including Simulated
Gain) otherwise allocable to the Positive Parties for such fiscal year (or if
there is no such income or gain allocable to the Positive Parties for such
fiscal year, all such income or gain (including Simulated Gain) so allocable in
the succeeding fiscal year or years) shall be allocated to the Deficit Party in
an amount necessary to cause its Adjusted Capital Account balance to equal
zero; provided, that no allocation under this sentence shall have the
effect of causing the Positive Party’s Adjusted Capital Account to be less than
zero.  After any such allocation, any Tax
Partnership gain (including Simulated Gain) resulting from the sale or other
disposition of Designated Property that would otherwise be allocated to the
Deficit Party for any fiscal year under this Section 3.01 shall be
allocated instead to the Positive Parties until the amount of gain so allocated
equals the amount of gain (including Simulated Gain) previously allocated to
such Deficit Party under the preceding sentence of this Section 3.01(h);
provided, however, that no allocation of gain (including
Simulated Gain) shall be made under this sentence if the effect of such
allocation would be to cause the Adjusted Capital Account of a Deficit Party to
be less than zero.

 

ARTICLE IV

 

OTHER TAX MATTERS

 

Section 4.01           Tax Elections.

 

(a)           For tax purposes, the Tax Partnership shall elect to use
the calendar as its taxable year, and to report income and loss under the
accrual method of accounting.

 

(b)           In connection with any Transfer or other assignment of an
interest in the Tax Partnership permitted by the terms and provisions of this
Agreement, CWEI shall, at the written request of the transferor, transferee or
other successor, cause the Tax Partnership to make an election to adjust the
basis of the Tax Partnership’s property in the manner provided in sections 734(b) and
743(b) of the Code (or any like statute or regulation then in effect), and
such transferor, transferee or other successor shall pay all costs incurred by
the Tax Partnership in connection therewith, including, without limitation,
reasonable attorneys’ and accountants’ fees.

 

(c)           Unless approved by the Participants, the Tax Partnership
shall not file any election pursuant to sections 761 or 7701 of the Code,
section 301.7701-3 of the Regulations or otherwise, the effect of which would
cause the Tax Partnership not to be treated as a partnership for Federal income
tax purposes.

 

D-5

 

(d)           Except as otherwise specifically provided herein, CWEI
shall have the sole and absolute discretion to make any other available
election under the Code on behalf of the Tax Partnership without the prior
approval by the Participants.

 

Section 4.02           Tax Matters Partner.  CWEI is hereby designated the “tax matters
partner” of the Tax Partnership pursuant to Section 6231(a)(7) of the
Code.

 

ARTICLE V

 

CAPITAL ACCOUNT MAINTENANCE

 

Section 5.01           Maintenance of Capital Accounts.  An individual Capital Account (a “Capital Account”) shall be maintained by
the Tax Partnership for each Party as provided below:

 

(a)           The Capital Account of each Party shall, except as
otherwise provided herein, be (A) credited by such Party’s Capital
Contributions when made (net of liabilities secured by contributed property
that the Tax Partnership is considered to assume or take subject to under Section 752
of the Code), (B) credited with the amount of any item of taxable income
or gain and the amount of any item of income or gain exempt from tax allocated
to such Party, (C) credited with the Party’s share of Simulated Gain as
provided in Section 5.01(b) of this Exhibit D, (D) debited
by the amount of any item of tax deduction or loss allocated to such Party, (E) debited
with the Party’s share of Simulated Loss and Simulated Depletion as provided in
Section 5.01(b) of this Exhibit D, (F) debited
by such Party’s allocable share of expenditures of the Tax Partnership not
deductible in computing the Tax Partnership’s taxable income and not properly
chargeable as capital expenditures, including any non-deductible book
amortizations of capitalized costs, and (G) debited by the amount of cash
or the fair market value of any property distributed to such Party (net of
liabilities secured by such distributed property that such Party is considered
to assume or take subject to under Section 752 of the Code).  Immediately prior to any distribution of
assets by the Tax Partnership that is not pursuant to a liquidation of the Tax
Partnership or all or any portion of a Party’s interest therein, the Parties’
Capital Accounts shall be adjusted by (X) assuming that the distributed
assets were sold by the Tax Partnership for cash at their respective fair
market values as of the date of distribution by the Tax Partnership and (Y) crediting
or debiting each Party’s Capital Account with its respective share of the
hypothetical gains or losses, including Simulated Gains and Simulated Losses,
resulting from such assumed sales in the same manner as each such Capital
Account would be debited or credited for gains or losses on actual sales of
such assets.

 

(b)           The allocation of basis prescribed by Section 613A(c)(7)(D) of
the Code and provided for in Section 3.01(b) of this Exhibit D
and each Party’s separately computed depletion deductions shall not reduce such
Party’s Capital Account, but such Party’s Capital Account shall be decreased by
an amount equal to the product of the depletion deductions that would otherwise
be allocable to the Tax Partnership in the absence of Section 613A(c)(7)(D) of
the Code (computed without regard to any limitations which theoretically could
apply to any Party) times such Party’s percentage share of the adjusted basis
of the property (determined under Section 3.01(b) of this Exhibit D)
with respect to which such depletion is claimed (“Simulated Depletion”). 
The Tax Partnership’s basis in any Depletable Property as adjusted from
time to time for the Simulated Depletion allocable to all Parties (and where
the context requires, each

 

D-6

 

Party’s allocable share
thereof, which share shall be determined in the same manner as the allocation
of basis prescribed in Section 3.01(b) of this Exhibit D)
is herein called “Simulated Basis.”  No Party’s Capital Account shall be
decreased, however, by Simulated Depletion deductions attributable to any
Depletable Property to the extent such deductions exceed such Party’s allocable
share of the Tax Partnership’s remaining Simulated Basis in such property.  The Tax Partnership shall compute simulated
gain (“Simulated Gain”) or
simulated loss (“Simulated Loss”)
attributable to the sale or other disposition of a Depletable Property based on
the difference between the amount realized from such sale or other disposition
and the Simulated Basis of such property, as theretofore adjusted.  Any Simulated Gain shall be allocated to the
Parties and shall increase their respective Capital Accounts in the same manner
as the amount realized from such sale or other disposition in excess of
Simulated Basis shall have been allocated pursuant to Section 3.01(b) of
this Exhibit D.  Any Simulated
Loss shall be allocated to the Parties and shall reduce their respective
Capital Accounts in the same percentages as the costs of the property sold were
allocated up to an amount equal to each Party’s share of the Tax Partnership’s
Simulated Basis in such property at the time of such sale.

 

(c)           Any adjustments of basis of Designated Property provided
for under Sections 734 and 743 of the Internal Revenue Code and comparable
provisions of state law (resulting from an election under Section 754 of
the Code or comparable provisions of state law) and any election by an individual
Party under Section 59(e)(4) of the Code to amortize such Party’s
share of intangible drilling and development costs shall not affect the Capital
Accounts of the Parties (unless otherwise required by applicable Treasury
Regulations), and the Parties’ Capital Accounts shall be debited or credited
pursuant to the terms of this Section 5.01 as if no such election
had been made.

 

(d)           Capital Accounts shall be adjusted, in a manner consistent
with this Section 5.01, to reflect any adjustments in items of Tax
Partnership income, gain, loss or deduction that result from amended returns
filed by the Tax Partnership or pursuant to an agreement by the Tax Partnership
with the Internal Revenue Service or a final court decision.

 

(e)           In the case of property carried on the books of the Tax
Partnership at an amount which differs from its adjusted basis, the Parties’
Capital Accounts shall be debited or credited for items of depreciation, cost
recovery, Simulated Depletion, amortization and gain or loss (including
Simulated Gain or Simulated Loss) with respect to such property computed in the
same manner as such items would be computed if the adjusted tax basis of such
property were equal to such book value, in lieu of the capital account
adjustments provided above for such items, all in accordance with Regulation Section 1.704-1(b)(2)(iv)(g).

 

(f)            It is the intention of the Parties that the Capital
Accounts of each Party be kept in the manner required under Regulation Section 1.704-1(b)(2)(iv).  To the extent any additional adjustment to
the Capital Accounts is required by such regulations, CWEI is hereby authorized
to make such adjustment after notice to the Party.

 

[End of Exhibit D]

 

D-7Exhibit
10.1

 

EXECUTIVE EMPLOYMENT AGREEMENT

 

THIS
EMPLOYMENT AGREEMENT (this “Agreement”)
is made and entered into as of the 14th day of December, 2007, by and between STATION CASINOS, INC., a Nevada corporation, with its
principal offices located at 1505 South Pavilion Center Drive, Las Vegas,
Nevada 89135 (the “Company”), and KEVIN L. KELLEY (the “Executive”).

 

WHEREAS,
the Company desires to employ the Executive on the terms and conditions set
forth herein; and

 

WHEREAS,
the Executive desires to accept employment with the Company on the terms and
conditions set forth herein; and

 

NOW,
THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
Company and the Executive (each individually a “Party”
and together the “Parties”) agree
as follows.

 

1.                                       DEFINITIONS.  In addition to certain terms defined
elsewhere in this Agreement, the following terms shall have the following
respective meanings:

 

1.1                                 “Affiliate” shall mean any Person controlling, controlled by
or under common control with, the Company.

 

1.2                                 “Base Salary” shall mean the salary provided for in Section 3.1 of this Agreement, as the same may be
increased from time to time thereunder.

 

1.3                                 “Board” shall mean the Board of Directors of the Company.

 

1.4                                 “Cause” shall mean that the Executive:

 

(a)                                  has
been convicted of any felony;

 

(b)                                 has
been found unsuitable to hold a gaming license by a final non-appealable
decision of the Nevada Gaming Commission; or

 

(c)                                  in
carrying out his duties under this Agreement, has engaged in acts or omissions
constituting gross negligence or willful misconduct resulting, in either case,
in material economic harm to the Company.

 

1.5                                 “Change in Control” shall mean the following:  (A) prior to the occurrence of an
Initial Public Offering (as defined in the LLC Agreement), the consummation of
any transaction (including, without limitation, any merger or consolidation) as
a result of which any “person” or “group” (in each case, as such term is used
in Section 13(d)(3) of the Exchange Act), other than any Member of
HoldCo LLC who is an Existing Equity Holder or Permitted Transferee (as defined
in the LLC Agreement) of such a Member of HoldCo LLC, or an Affiliate thereof,
becomes the “beneficial owner” (as such term is defined in rule 13d-3

 

 

promulgated under the Exchange Act) of more than fifty
percent (50%) of the total issued and outstanding Class A Units and Class B
Units of HoldCo LLC; (B) after the occurrence of an Initial Public
Offering, the consummation of any transaction (including, without limitation,
any merger or consolidation) as a result of which any person or group, other
than a Member of HoldCo LLC who is an Existing Equity Holder or Permitted
Transferee of such a Member of HoldCo LLC, or any Affiliate thereof, becomes
the beneficial owner of more than thirty-five percent (35%) of the total issued
and outstanding shares of Voting Stock of the IPO Corporation; or (C) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation) in one or a series of related transactions, of more
than fifty percent (50%) (as measured by fair market value at the time of
transfer) of the assets of the Company to any person (other than the Company or
a Company subsidiary), other than (x) any Member of HoldCo LLC on the date
hereof or Permitted Transferee of such a Member of HoldCo LLC or Affiliate
thereof or (y) as part of any financing transaction engaged in by the
Company or a Company subsidiary.  In
addition, no Change of Control shall be deemed to have occurred as a result of
any reorganization of or similar transaction engaged in by the Company or any
subsidiary of the Company (including in respect of an Initial Public Offering).

 

1.6                                 “Code” shall mean the Internal Revenue Code of 1986, as
amended.

 

1.7                                 “Company Property” shall mean all items and materials
provided by the Company to the Executive, or to which the Executive has access,
in the course of his employment, including, without limitation, all files,
records, documents, drawings, specifications, memoranda, notes, reports,
manuals, equipment, computer disks, videotapes, drawings, blueprints and other
documents and similar items relating to the Company, its Affiliates or their
respective customers, whether prepared by the Executive or others, and any and
all copies, abstracts and summaries thereof.

 

1.8                                 “Competing Business” shall mean any Person engaged in the
gaming industry that directly or through an affiliate or subsidiary conducts
its business within the Restricted Area.

 

1.9                                 “Confidential Information” shall mean all nonpublic and/or
proprietary information respecting the business of the Company or any
Affiliate, including, without limitation, its products, programs, projects,
promotions, marketing plans and strategies, business plans or practices,
business operations, employees, research and development, intellectual
property, software, databases, trademarks, pricing information and accounting
and financing data.  Confidential
Information also includes information concerning the Company’s or any Affiliate’s
customers, such as their identity, address, preferences, playing patterns and
ratings or any other information kept by the Company or any Affiliate
concerning its customers whether or not such information has been reduced to
documentary form.  Confidential
Information does not include information that is, or becomes, available to the
public unless such availability occurs through an unauthorized act on the part
of the Executive.

 

1.10                           “Deferred Compensation Plan for Executives” shall mean the
Company’s Deferred Compensation Plan for  Executives,
effective as of November 30, 1994, as the same may be amended from time to
time.

 

2

 

1.11                           “Disability” shall mean a physical or mental incapacity that
prevents the Executive from performing the essential functions of his position
with the Company for a period of ninety (90) days as determined (a) in
accordance with any long-term disability plan provided by the Company of which
the Executive is a participant, or (b) by the following procedure:  The Executive agrees to submit to medical
examinations by a licensed healthcare professional selected by the Company, in
its sole discretion, to determine whether a Disability exists.  In addition, the Executive may submit to the
Company documentation of a Disability, or lack thereof, from a licensed
healthcare professional of his choice. 
Following a determination of a Disability or lack of Disability by the
Company’s or the Executive’s licensed healthcare professional, the other Party
may submit subsequent documentation relating to the existence of a Disability
from a licensed healthcare professional selected by such other Party.  In the event that the medical opinions of
such licensed healthcare professionals conflict, such licensed healthcare
professionals shall appoint a third licensed healthcare professional to examine
the Executive, and the opinion of such third licensed healthcare professional
shall be dispositive.

 

1.12                           “ERISA” shall mean the Employee Retirement Income Security
Act of 1974, as amended.

 

1.13                           “Existing Equity Holders” shall mean Frank J. Fertitta III,
Blake L. Sartini, Delise F. Sartini, Lorenzo J. Fertitta, Scott M Nielson,
William W. Warner and Richard J. Haskins, and their executors, administrators
or the legal representatives of their estates, their heirs, distributees and
beneficiaries, and any trust as to which any of the foregoing is a settlor or
co-settlor and any corporation, partnership or other entity which is an
affiliate of any of the foregoing, and any lineal descendants of such persons
(but only to the extent that the beneficial ownership of the Class A
and/or Class B Units of HoldCo LLC held by such lineal descendants was
directly received by gift, trust or sale from any such person).

 

1.14                           “Good Reason,” as used in Section 7.2, shall mean
and exist if there has been a Change in Control and, thereafter, without the
Executive’s prior written consent, one or more of the following events occurs:

 

(a)                                  the
Executive is assigned duties or responsibilities that are inconsistent, in any
significant respect, with the position of a senior manager;

 

(b)                                 the
Executive is required to relocate from, or maintain his principal office
outside of, Clark County, Nevada;

 

(c)                                  the
Executive’s Base Salary is decreased by the Company;

 

(d)                                 the
Executive is excluded from participation in any employee benefit or short-term
incentive plan or program offered to other similarly situated executives of the
Company or his benefits under such plans or programs or opportunities under any
employee benefit or incentive plan or program of the Company is or are
materially reduced;

 

(e)                                  the
Company fails to pay the Executive any deferred payments that have become
payable under the Deferred Compensation Plan for Executives or other bonus or
incentive plans;

 

3

 

(f)                                    the
Company fails to reimburse the Executive for business expenses in accordance
with the Company’s policies, procedures or practices;

 

(g)                                 the
Company fails to agree to or to actually indemnify the Executive for his
actions and/or inactions, as either a director or an officer of the Company, in
accordance with Section 10, and/or the Company fails to maintain
reasonably sufficient levels of directors’ and officers’ liability insurance
coverage for the Executive when such insurance is available; or

 

(h)                                 the
Company fails to obtain a written agreement from any successor or assign of the
Company to assume the obligations under this Agreement upon a Change in
Control.

 

For
purposes of this Agreement, a determination by the Executive that the Executive
has “Good Reason” shall be final and binding on the Company and the Executive
absent a showing of bad faith on the part of the Executive.

 

1.15                           “HoldCo LLC” shall mean Fertitta Colony Partners LLC.

 

1.16                           “IPO Corporation” shall mean the Company (or Affiliate
thereof) which is the issuer of the equity interests offered and sold in the
Initial Public Offering.

 

1.17                           “LLC Agreement” shall mean that Second Amended and Restated
Operating Agreement of Fertitta Colony Partners LLC, dated as of November 7,
2007, as the same may be amended from time to time in accordance with the terms
thereof.

 

1.18                           “Person” shall mean any individual, firm, partnership, association,
trust, company, corporation or other entity.

 

1.19                           “Pro Rata Annual Bonus” shall mean the amount of Annual Bonus,
multiplied by a fraction, the numerator of which is the number of days in such
year during which the Executive was actually employed by the Company and the
denominator of which is 365.

 

1.20                           “Restricted Area” shall mean (a) the City of Las Vegas,
Nevada, and the area within a forty-five (45) mile radius of that city, and (b) any
area in or within a one hundred fifty (150) mile radius of any other location
in which the Company or any of its Affiliates are directly or indirectly
engaged in the development, ownership, operation or management of any gaming
activities or is actively pursuing any such activities; provided, however,
that in the event the Executive voluntarily terminates this Agreement pursuant
to Sections 6.3, 7.2 or 7.3, the Restricted Area shall (a) after
the first twelve (12) months of the Restriction Period, exclude the Las Vegas
Strip (which is defined as that area bounded by Koval Lane and straight
extensions thereof on the East, Charleston Boulevard on the North, I-15 on the
West, and Sunset Road on the South) and (b) after a Change in Control,
exclude Downtown Las Vegas (which is defined as that area bounded by Eastern Avenue
and straight extensions thereof on the East, I-515 (U.S. Highway 93/95) on the
North, I-15 on the West, and Charleston Boulevard on the South).

 

4

 

1.21                           “Restriction Period” shall mean the period ending twenty-four
(24) months after the termination or expiration of the Term of Employment,
regardless of the reason for such termination or expiration.

 

1.22                           “Special Long-Term Disability Plan” shall mean the Company’s
Special Long-Term Disability Plan, effective as of November 30, 1994, as
the same may be amended from time to time.

 

1.23                           “Sponsor Equity Holder” shall mean the affiliates of Colony
Capital, LLC, including FC Investor, LLC and its affiliated funds and
controlled accounts.

 

1.24                           “Supplemental Management Retirement Plan” shall mean the
Company’s Supplemental Management Retirement Plan, effective as of November 30,
1994, as the same may be amended from time to time.

 

1.25                           “Target Annual Bonus” shall mean an amount that is no less
than one hundred percent (100%) of the Executive’s then current Base Salary.

 

1.26                           “Term of Employment” shall mean the period specified in Section 2.2.

 

1.27                           “Voting Stock” shall mean capital stock or other equity
interests of any class or classes whose holders are entitled under ordinary
circumstances (irrespective of whether at the time stock or other equity
interests of any other class or classes shall have or might have voting power
by reason of the happening of any contingency) to vote for the election of a
majority of the directors, managers, trustees or other governing body of such
Person.

 

2.                                       TERM OF EMPLOYMENT, POSITION AND RESPONSIBILITIES.

 

2.1                                 Employment  Accepted. 
This Agreement shall be effective as of the date of this Agreement.  The Company hereby employs the Executive, and
the Executive hereby accepts employment with the Company, for the Term of
Employment, in the position and with the responsibilities set forth in Section 2.3 and upon such other terms and conditions
as are stated in this Agreement.

 

2.2                                 Term of Employment.  The initial Term of Employment shall commence
on January 7, 2008 (the “Commencement Date”)
and, unless earlier terminated pursuant to the provisions of this Agreement,
shall terminate upon the close of business on the day immediately preceding the
fifth anniversary of the Commencement Date; provided, however,
that the initial Term of Employment shall automatically be extended for
successive five-year periods if neither Party has advised the other in writing
in accordance with Section 14 at least six (6) months prior to
the end of the then current Term of Employment that such Term of Employment
will not be extended for an additional five year period.  In the event that such notice is given, (i) the
Executive’s employment shall terminate upon the close of business on the day
immediately preceding the expiration of the then current Term of Employment,
and (ii) the Executive shall not be entitled to any additional
compensation hereunder after the expiration thereof, but such termination of
employment shall not otherwise affect accrued but unpaid compensation or
benefits provided under this Agreement or pursuant to any Company plan or
program.

 

5

 

2.3                                 Responsibilities.  During the Term of Employment, the Executive
shall be employed as Executive Vice President and Chief Operating Officer, or
in such other capacity as the Company may direct, and shall have such
responsibilities as the Company may direct from time to time.  During the Term of Employment, the Executive
shall devote his full time and attention to the business and affairs of the
Company and shall use his best efforts, skills and abilities to promote the
Company’s interests.  Anything herein to
the contrary notwithstanding, the Executive shall not be precluded from
engaging in charitable and community affairs and managing his personal
investments.  It is expressly understood
and agreed that, to the extent any such activities have been conducted by the
Executive prior to the date of this Agreement and disclosed to the Board, the
continued conduct of such activities (or activities similar in nature and scope
thereto) after the date of this Agreement shall be deemed not to interfere with
the Executive’s duties and obligations to the Company under this
Agreement.  The Executive also may serve
as a member of the board of directors of other corporations, subject to the
approval of a majority of the Board, which approval shall not be unreasonably
withheld or delayed.

 

3.                                       COMPENSATION.

 

3.1                                 Base Salary.  During the Term of Employment, the Executive
shall be entitled to receive a base salary (the “Base Salary”)
payable no less frequently than in equal bi-weekly installments at an
annualized rate of no less than $1,000,000. 
The Base Salary shall be reviewed annually for increase (but not
decrease) in the discretion of the Board. 
In conducting any such annual review, the Board shall take into account
any change in the Executive’s responsibilities, increases in the compensation
of other executives of the Company or any Affiliate (or any competitor(s) of
either or both), the performance of the Executive and/or other pertinent
factors.  Such increased Base Salary
shall then constitute the Executive’s “Base Salary” for purposes of this
Agreement.

 

3.2                                 Annual Bonus.  The Company may pay the Executive an annual
bonus (the “Annual Bonus”) for each calendar year
ending during the Term of Employment in an amount that will be determined by
the Board based on the Executive’s performance. 
Any Annual Bonus that may be awarded to the Executive shall be paid at
the same time as annual bonuses are paid to other senior officers of the
Company, and in any event no later than March 1 of the year following the
calendar year in which such bonus is earned, unless the Executive has elected
to defer receipt of all or part of the bonus amounts to which he is entitled in
respect of any such calendar year in accordance with the terms and provisions
of any deferred compensation program maintained by the Company.

 

3.3                                 Equity Awards.  Not later than ten (10) days following
the Commencement Date, the Company shall award, or shall cause to be awarded,
to the Executive (a) 1.667 Class B units of FCP Class B Holdco
LLC, which owns Class B units in each of HoldCo LLC and Fertitta Partners
LLC, (b) 92,893 Class C units of Holdco LLC, and (c) 29,431 Class C
units of Fertitta Partners, LLC (collectively, the “Equity
Awards”); provided, however, that the Equity Awards
shall be subject to the approval (administrative or otherwise) of the Nevada
Gaming Commission.  The Equity Awards
shall vest 20% per year for five (5) years, commencing on the first
anniversary of the Commencement Date.

 

6

 

3.4                                 Deferred Compensation.  During the Term of Employment, the Executive
shall be eligible to participate in the Company’s Deferred Compensation Plan
for Executives, and any other deferred compensation plans that the Company may
adopt for executives, pursuant to the terms of the plans.

 

4.                                       EMPLOYEE BENEFIT PROGRAMS.

 

4.1                                 Pension and Welfare Benefit Plans. 
During the Term of Employment, the Executive shall be entitled to
participate in all employee benefit programs made available to the Company’s
executives or salaried employees generally, as such programs may be in effect
from time to time, including, without limitation, pension and other retirement
plans, profit sharing plans, group life insurance, group health insurance,
accidental death and dismemberment insurance, long-term disability, sick leave
(including salary continuation arrangements), vacations, holidays and other
employee benefit programs sponsored by the Company.

 

4.2                                 Additional Pension and Welfare Benefits.  In addition to the foregoing, the Company
shall provide the Executive with the following benefits during the Term of
Employment:

 

(a)                                  Executive
Group Health Insurance Coverage pursuant to such other plan or plans as the
Company may select, which shall be fully paid for by the Company, and for which
the Company shall waive the standard ninety (90) day period for benefits
thereunder;

 

(b)                                 full
salary continuation during the first ninety (90) days of any physical or mental
incapacity that prevents the Executive from performing his duties and, for any
Disability that continues thereafter, benefits pursuant to the Company’s
Special Long-Term Disability Plan and any other long-term disability benefits
pursuant to any other disability plan of which the Executive is a participant;

 

(c)                                  an
annual supplemental retirement benefit as set forth in the Supplemental Management
Retirement Plan, in addition to any other benefit pursuant to any other
retirement plan under which the Executive is covered; provided, however,
that the Supplemental Management Retirement Plan may not be amended or modified
in any respect without the prior written consent of the Executive; and

 

(d)                                 term
life insurance coverage, through individual and/or group policies, in an
aggregate amount of not less than $4.0 million.

 

5.                                       BUSINESS EXPENSE REIMBURSEMENT AND PERQUISITES.

 

5.1                                 Expense Reimbursement.  During the Term of Employment, the Executive
shall be entitled to receive reimbursement by the Company for all reasonable
out-of-pocket expenses incurred by him in (a) relocating from Macao
Special Administrative Region to 

 

7

 

Las Vegas, Nevada, and (b) performing services
under this Agreement, subject to providing the proper documentation of said
expenses.

 

5.2                                 Perquisites.  During the Term of Employment, the Executive
shall also be entitled to any of the Company’s executive perquisites in
accordance with the terms and provisions of the applicable policies, including,
without limitation:

 

(a)                                  vacation
of four weeks per year;

 

(b)                                 payment
or reimbursement of the cost of an annual physical examination;

 

(c)                                  payment
or reimbursement of initiation fees and annual membership fees and assessments
for a country club, a luncheon club and a physical fitness program of the
Executive’s choice; and

 

(d)                                 payment
or reimbursement of fees and expenses, up to a maximum amount of $2500.00,
incurred in connection with having this Agreement reviewed by legal counsel
prior to execution.

 

6.                                       TERMINATION OF EMPLOYMENT.

 

6.1                                 Termination Due to Death or Disability.  The Executive’s employment shall be
terminated immediately in the event of his death or Disability.  In the event of a termination due to the
Executive’s death or Disability, the Executive or his estate, as the case may
be, shall be entitled, in lieu of any other compensation whatsoever, to:

 

(a)                                  Base
Salary at the rate in effect at the time of his termination until the date of
death or Disability;

 

(b)                                 any
Annual Bonus awarded but not yet paid;

 

(c)                                  a
Pro Rata Annual Bonus for the fiscal year in which death or Disability occurs;

 

(d)                                 immediate
vesting of any deferred compensation or bonuses, including interest or other
credits on the deferred amounts to the extent provided in the plans or programs
providing for deferral;

 

(e)                                  reimbursement of expenses incurred but not paid
prior to such termination of employment; and

 

(f)                                    such
rights to other benefits as may be provided in applicable plans and programs of
the Company, including, without limitation, applicable employee benefit plans
and programs, according to the terms and provisions of such plans and programs.

 

8

 

6.2                                 Termination by the Company for Cause. 
The Company may terminate the Executive’s employment for Cause at any
time during the Term of Employment by giving written notice to the
Executive.  In the event of a termination
for Cause, the Executive shall be entitled, in lieu of any other compensation
and benefits whatsoever, to:

 

(a)                                  Base
Salary at the rate in effect at the time of his termination through the date of
termination of employment;

 

(b)                                 any
Annual Bonus awarded but not yet paid;

 

(c)                                  immediate
vesting of any deferred compensation or bonuses, including interest or other
credits on the deferred amounts to the extent provided in the plans or programs
providing for deferral;

 

(d)                                 reimbursement
for expenses incurred but not paid prior to such termination of employment; and

 

(e)                                  such
rights to other benefits as may be provided in applicable plans and programs of
the Company, including, without limitation, applicable employee benefit plans
and programs, according to the terms and conditions of such plans and programs.

 

Notwithstanding
anything to the contrary in this Section 6.2, if the Executive’s
employment is terminated for Cause (i) due to his having been formally
charged pursuant to Section 1.4(a) but thereafter said charges
are dismissed or the Executive is acquitted, or (ii) due to his having
been convicted pursuant to Section 1.4(a) but said conviction
is subsequently overturned on appeal and he is not required to submit to
re-trial within six (6) months thereafter, the Company shall have the
option of reinstating the Executive with payment of all base salary payments
that would have been paid to him had his employment not been terminated and
restoration of all benefits provided for pursuant to Section 4, or
making a payment to him of an amount equal to three times one hundred sixty
percent (160%) of the Executive’s Base Salary at the rate in effect at the time
of his termination.

 

6.3                                 Termination by the Executive.  The Executive may terminate his employment on
his own initiative for any reason prior to a Change in Control upon thirty (30)
days prior written notice to the Company. 
Such termination shall have the same consequences as a termination for
Cause under Section 6.2.

 

6.4                                 Termination by the Company Without Cause. 
Notwithstanding any other provision of this Agreement, the Company may
terminate the Executive’s employment without Cause, other than due to death or
Disability, at any time during the Term of Employment by giving written notice
to the Executive.  In the event that the
Company terminates the Executive’s employment without Cause prior to a Change
in Control, the Executive shall be entitled, in lieu of any other compensation
and benefits whatsoever, to:

 

(a)                                  an
amount equal to three times one hundred sixty percent (160%) of the Executive’s
Base Salary at the rate in effect at the time of his termination, one-third of
which shall be paid in a lump sum upon satisfaction of the 

 

9

 

conditions set
forth in Section 8.3, and the other two-thirds of which shall be
paid out in equal bi-weekly installments for the duration of the Restriction
Period;

 

(b)                                 any
Annual Bonus awarded but not yet paid and a Pro Rata Annual Bonus for the
fiscal year in which such termination of employment occurs;

 

(c)                                  immediate
vesting of any deferred compensation or bonuses, including interest or other
credits on the deferred amounts, to the extent provided in the plans or
programs providing for deferral;

 

(d)                                 exercise,
within one hundred eighty (180) days, all vested stock options, phantom stock
units, stock appreciation rights and other exercisable stock-based or
performance-based interests, and shall forfeit all stock options, phantom stock
units, stock appreciation rights and other exercisable stock-based or
performance-based interests that have not vested;

 

(e)                                  reimbursement
for expenses incurred but not paid prior to such termination of employment; and

 

(f)                                    continuation
of the Executive’s medical insurance, at the Company’s expense, for thirty-six
(36) months following such termination or, at the Company’s option, payment to
the Executive of the economic equivalent thereof.

 

6.5                                 Termination Due to Expiration of the Term of
Employment.  If either
Party elects not to extend the initial Term of Employment or any successive
Term of Employment, the Executive shall not be entitled to any additional
compensation after the expiration thereof, but such termination of employment
shall not otherwise affect accrued but unpaid compensation or benefits provided
under this Agreement or pursuant to any Company plan or program.

 

7.                                       CHANGE IN CONTROL.

 

7.1                                 Change in Control.  Immediately upon a Change in Control, in
addition to any other compensation or benefits payable pursuant to this
Agreement or otherwise, the Executive shall be entitled to immediate vesting of
all restricted stock, stock options, phantom stock units, stock appreciation
rights and similar stock-based or performance-based interests.

 

7.2                                 Termination by the Company Without Cause or by the
Executive for Good Reason After a Change in Control.  If within five years following a Change in
Control, the Executive’s employment is terminated by the Company without Cause
or by the Executive for Good Reason, the Executive shall be entitled, in addition
to any compensation and benefits provided pursuant to Section 7.1,
but in lieu of any other compensation and benefits whatsoever, to:

 

10

 

(a)                                  a
lump sum payment equal to the greater of (i) three times one hundred sixty
percent (160%) of the Executive’s Base Salary at the time of the Change in
Control or (ii) three times one hundred sixty percent (160%) of the
Executive’s Base Salary at the time of the termination of his employment;

 

(b)                                 a
Pro Rata Annual Bonus for the fiscal year in which such termination of
employment occurs;

 

(c)                                  any
deferred compensation or bonuses, including interest or other credits on the
deferred amounts to the extent provided in the plans or programs providing for
deferral;

 

(d)                                 exercise,
within one hundred eighty (180) days, all vested stock options, phantom stock
units, stock appreciation rights and other exercisable stock-based or
performance-based interests;

 

(e)                                  immediate
vesting of the Executive’s supplemental retirement benefit as set forth in the
Supplemental Management Retirement Plan;

 

(f)                                    (i) continued
funding of the Executive’s term life insurance policy as if the Executive were
employed by the Company through the maturity date of such policy or payment in
full of all premium obligations under such policy, or (ii) at the
Executive’s option, a lump-sum payment to the Executive of the economic
equivalent thereof, as if the Executive were employed by the Company through
the maturity date of such policy; and

 

(g)                                 (i) continuation
of the Executive’s medical insurance, at the Company’s expense, for thirty-six
(36) months following such termination, or (ii) at the Executive’s option,
a lump-sum payment to the Executive of the economic equivalent thereof.

 

7.3                                 Termination by Executive without Good Reason After
a Change in Control.  If
the Executive terminates his employment without Good Reason within ninety (90)
days following the first anniversary of a Change in Control, the Executive
shall be entitled, in addition to any compensation and benefits provided
pursuant to Section 7.1, but in lieu of any other compensation and
benefits whatsoever, to:

 

(a)                                  an
amount equal to the greater of (i) three times one hundred sixty percent
(160%) of the Executive’s Base Salary at the time of the Change in Control or (ii) three
times one hundred sixty percent (160%) of the Executive’s Base Salary at the
time of the termination of his employment;

 

(b)                                 a
Pro Rata Annual Bonus for the fiscal year in which such termination of
employment occurs;

 

11

 

(c)                                  any
deferred compensation or bonuses, including interest or other credits on the
deferred amounts to the extent provided in the plans or programs providing for
deferral;

 

(d)                                 exercise,
within one hundred eighty (180) days, all vested stock options, phantom stock
units, stock appreciation rights and other exercisable stock-based or
performance-based interests;

 

(e)                                  immediate
vesting of the Executive’s supplemental retirement benefit as set forth in the
Supplemental Management Retirement Plan;

 

(f)                                    (i) continued
funding of the Executive’s term life insurance policy as if the Executive were
employed by the Company through the maturity date of such policy or payment in
full of all premium obligations under such policy, or (ii) at the
Executive’s option, a lump-sum payment to the Executive of the economic
equivalent thereof, as if the Executive were employed by the Company through
the maturity date of such policy; and

 

(g)                                 (i) continuation
of the Executive’s medical insurance, at the Company’s expense, for thirty-six
(36) months following such termination, or (ii) at the Executive’s option,
a lump-sum payment to the Executive of the economic equivalent thereof.

 

7.4                                 Termination for Other Reasons After a Change in Control.  If the Executive’s employment is terminated by
the Company after a Change in Control for any reason not otherwise provided for
by Section 7.2 or Section 7.3, his rights shall be
determined in accordance with the applicable subsection of Section 6.

 

8.                                       CONDITIONS TO PAYMENTS.

 

8.1                                 Timing of Payments.  Unless otherwise provided herein, any
payments to which the Executive shall be entitled under Sections 6 and
7 shall be payable upon the satisfaction of the conditions set forth in Section 8.3.

 

8.2                                 No Mitigation; No Offset.  In the event of any termination of employment
under Sections 6 or 7, the Executive shall be under no obligation to
seek other employment and there shall be no offset against amounts due to the
Executive on account of any remuneration attributable to any subsequent
employment that the Executive may obtain. 
Notwithstanding any contrary provision contained herein, in the event of
any termination of employment of the Executive, the exclusive remedies
available to the Executive shall be the amounts due under Sections 6 or 7,
which are in the nature of severance payments, or liquidated damages, or both,
and are not in the nature of a penalty. 
In the event of a termination of this Agreement, neither Party shall
publish in any way or make any negative comment or statement about the other
Party or concerning the reasons for such termination.  The provisions of this Section 8.2
shall survive the expiration or earlier termination of this Agreement.

 

12

 

8.3                                 General Release.  No payments or benefits payable to the
Executive upon the termination of his employment pursuant to Sections 6 or 7
shall be made to the Executive unless and until he executes a general release
substantially in the form annexed to this Agreement as Exhibit A and such
general release becomes effective pursuant to its terms.

 

8.4                                 Compliance with the Agreement.  No payments or benefits payable to the
Executive upon the termination of his employment pursuant to Sections 6 or 7
shall be made to the Executive if he fails to comply with all of the terms and
conditions of this Agreement, including, without limitation, Sections 11 and
12.

 

8.5                                 Continuing Obligations of Executive.  No act or omission by the Executive in breach
of this Agreement, including, without limitation his failure to execute the
general release and the resulting forfeiture of termination payments, shall be
deemed to permit the Executive to forego or waive such payments in order to
avoid his obligations under Section 11.

 

9.                                       SPECIAL REIMBURSEMENT.

 

9.1                                 If
any payment or benefit paid or payable, or received or to be received, by or on
behalf of the Executive , whether any such payments or benefits are pursuant to
the terms of this Agreement or any other plan, program, arrangement or
agreement of or with the Company, any Affiliate, any Person, or otherwise (the “Total Payments”), will or would be subject to the excise tax
imposed under Section 4999 of the Code (the “Excise Tax”),
the Company shall pay to the Executive an additional amount (the “Gross-Up Payment”) such that, after payment by the Executive
of all taxes (including any interest or penalties imposed with respect to such
taxes) imposed upon or in respect of the Total Payments and the Gross-Up
Payments, including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and any Excise Tax imposed thereon, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Total Payments.

 

9.2                                 For
purposes of determining whether any of the Total Payments will be subject to
the Excise Tax and the amount of such Excise Tax,

 

(a)                                  the
Total Payments shall be treated as “parachute payments” within the meaning of Section 280G(b)(2) of
the Code, and all “excess parachute payments” within the meaning of Section 280G(b)(1) of
the Code shall be treated as subject to the Excise Tax, unless in the opinion
of tax counsel selected by the Company and reasonably acceptable to the
Executive (which opinion shall be provided to the Executive) such Total
Payments (in whole or in part) (i) do not constitute parachute payments,
including (without limitation) by reason of Section 280G(b)(4)(A) of
the Code, (ii) such excess parachute payments (in whole or in part)
represent reasonable compensation for services actually rendered, within the
meaning of Section 280G(b)(4)(B) of the Code, or (iii) are not,
in the opinion of legal counsel, otherwise subject to the Excise Tax, and

 

13

 

(b)                                 the
value of any non-cash benefits or any deferred payment or benefit shall be
determined by the Company’s independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code.

 

9.3                                 In
the event that the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder, the Executive shall repay to the Company,
at the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to such reduction
plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code.  In the event that the Excise
Tax is determined to exceed the amount taken into account hereunder at the time
of the termination of the Executive’s employment (including by reason of any
payment the existence or amount of which cannot be determined at the time of
the initial Gross-Up Payment), the Company shall make an additional Gross-Up
Payment in accordance with Section 9.1 in respect of such excess
Excise Tax (plus any interest, penalties or additions payable by the Executive
with respect to such excess Excise Tax) at the time that the amount of such
excess Excise Tax is finally determined. 
The Executive and the Company shall each reasonably cooperate with each
other in connection with any administrative or judicial proceedings concerning
the existence or amount of any such subsequent liability for Excise Tax with
respect to the Total Payments.

 

10.                                 INDEMNIFICATION.

 

10.1                           General.  The Company agrees that if the Executive is
made a party or is threatened to be made a party to any action, suit or
proceeding, whether civil, criminal, administrative or investigative (an “Indemnifiable Action”), by reason of the fact that he is or
was a director or officer of the Company or is or was serving at the request of
the Company as a director, officer, member, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether or not the
basis of such Indemnifiable Action is alleged action in an official capacity as
a director, officer, member, employee or agent, he shall be indemnified and
held harmless by the Company to the fullest extent authorized by Nevada law and
the Company’s bylaws, as the same exist or may hereafter be amended (but, in
the case of any such amendment to the Company’s bylaws, only to the extent such
amendment permits the Company to provide broader indemnification rights than the
Company’s bylaws permitted the Company to provide before such amendment),
against all expense, liability and loss (including, without limitation,
attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by the
Executive in connection therewith.

 

10.2                           Procedure.  The indemnification provided pursuant to this
Section 10 shall be subject to the following conditions:

 

(a)                                  The
Executive must promptly give the Company written notice of any actual or
threatened Indemnifiable Action and, upon providing such notice, the Executive
shall be presumed to be entitled to indemnification under this Agreement and
the Company shall have the burden of proof to overcome that presumption in
reaching any contrary determination; 

 

14

 

provided,
however, that the Executive’s failure to give such notice shall not
affect the Company’s obligations hereunder;

 

(b)                                 The
Company will be permitted, at its option, to participate in, or to assume, the
defense of any Indemnifiable Action, with counsel reasonably approved by the
Executive; provided, however, that (i) the Executive shall
have the right to employ his own counsel in such Indemnifiable Action at the
Executive’s expense, and (ii) if (A) the retention of counsel by the
Executive has been previously authorized in writing by the Company, (B) the
Company shall have reasonably concluded, based on the advice of independent
legal counsel mutually selected by the Company and the Executive, that there
may be a conflict of interest between the Company and the Executive in the
conduct of any such defense, or (C) the Company shall not, in fact, have
retained counsel to assume the defense of such Indemnifiable Action, the fees
and expenses of the Executive’s counsel shall be at the expense of the Company;
and provided, further, that the Company shall not settle any
action or claim that would impose any limitation or penalty on the Executive
without obtaining the Executive’s prior written consent, which consent shall
not be unreasonably withheld;

 

(c)                                  The
Executive must provide reasonable cooperation to the Company in the defense of
any Indemnifiable Action; and

 

(d)                                 The
Executive must refrain from settling any Indemnifiable Action without obtaining
the Company’s prior written consent, which consent shall not be unreasonably
withheld.

 

10.3                           Advancement of Costs and Expenses.  The Company agrees to advance all costs and
expenses referred to in Sections 10.1 and 10.6; provided, however,
that the Executive agrees to repay to the Company any amounts so advanced only
if, and to the extent that, it shall ultimately be determined by a court of
competent jurisdiction that the Executive is not entitled to be indemnified by
the Company as authorized by this Agreement. 
The advances to be made hereunder shall be paid by the Company to or on
behalf of the Executive within twenty (20) days following delivery of a written
request therefore by the Executive to the Company.  The Executive’s entitlement to advancement of
costs and expenses hereunder shall include those incurred in connection with
any action, suit or proceeding by the Executive seeking a determination,
adjudication or arbitration award with respect to his rights and/or obligations
under this Section 10.

 

10.4                           Non-Exclusivity of Rights.  The right to indemnification and the payment
of expenses incurred in defending an Indemnifiable Action in advance of its
final disposition conferred in this Section 10 shall not be exclusive
of any other right which the Executive may have or hereafter may acquire under
any statute, provision of the certificate of incorporation or by-laws of the
Company, agreement, vote of stockholders or disinterested directors or
otherwise.

 

15

 

10.5                           D&O Insurance.  The Company will maintain a directors’ and
officers’ liability insurance policy covering the Executive that provides
coverage that is reasonable in relation to the Executive’s position during the
Term of Employment.

 

10.6                           Witness Expenses.  Notwithstanding any other provision of this
Agreement, the Company shall indemnify the Executive if and whenever he is a
witness or threatened to be made a witness to any action, suit or proceeding to
which the Executive is not a party, by reason of the fact that the Executive is
or was a director or officer of the Company or its Affiliates or by reason of
anything done or not done by him in such capacity, against all expense,
liability and loss incurred or suffered by the Executive in connection
therewith; provided, however, that if the Executive is no longer
employed by the Company, the Company will compensate him, on an hourly basis,
for all time spent, at either his then current compensation rate or his Base Salary
at the rate in effect as of the termination of his employment, whichever is
higher.

 

10.7                           Survival.  The provisions of this Section 10
shall survive the expiration or earlier termination of this Agreement,
regardless of the reason for such termination.

 

11.                                 COVENANT NOT ENGAGE IN CERTAIN ACTS.

 

11.1                           General.  The Parties understand and agree that the
purpose of the restrictions contained in this Section 11 is to
protect the goodwill and other legitimate business interests of the Company,
and that the Company would not have entered into this Agreement in the absence
of such restrictions.  The Executive
acknowledges and agrees that the restrictions are reasonable and do not, and
will not, unduly impair his ability to make a living after the termination of
his employment with the Company.  The
provisions of this Section 11 shall survive the expiration or
sooner termination of this Agreement.

 

11.2                           Non-assistance; Non-diversion.  In consideration for this Agreement to employ
the Executive and the other valuable consideration provided hereunder, the
Executive agrees and covenants that during the Term of Employment and during
the Restriction Period, and except when acting on behalf of the Company or on
behalf of any Affiliate, the Executive shall not, directly or indirectly, for
himself or any third party, or alone or as a member of a partnership, or as an
officer, director, shareholder or otherwise, engage in the following acts:

 

(a)                                  divert
or attempt to divert any existing business of the Company or any Affiliate;

 

(b)                                 accept
any position or affiliation with, or render any services on behalf of, any
Competing Business; or

 

(c)                                  hire
or retain any employee of the Company or any Affiliate to provide services for
any other Person or induce, solicit, attempt to solicit, encourage, divert,
cause or attempt to cause any employee or prospective employee of the Company
or any Affiliate to (i) terminate and/or leave such employment, or (ii) accept
employment with anyone other than the Company or an Affiliate.

 

16

 

11.3                           Cessation/Reimbursement of Payments.  If the Executive violates any provision of
this Section 11, the Company may, upon giving written notice to the
Executive, immediately cease all payments and benefits that it may be providing
to the Executive pursuant to Section 3, Section 6 or Section 7.2,
and the Executive may be required to reimburse the Company for any payments
received from, and the cash value of any benefits provided by, the Company
between the first day of the violation and the date such notice is given; provided,
however, that the foregoing shall be in addition to such other remedies
as may be available to the Company and shall not be deemed to permit the
Executive to forego or waive such payments in order to avoid his obligations
under this Section 11.

 

11.4                           Survival.  The Executive agrees that the provisions of
this Section 11 shall survive the termination of this Agreement and
the termination of the Executive’s employment.

 

12.                                 CONFIDENTIAL INFORMATION.

 

12.1                           Confidential Information.  The Executive understands and acknowledges
that Confidential Information constitutes a valuable asset of the Company and
its Affiliates and may not be converted to the Executive’s own or any third
party’s use.  Accordingly, the Executive
hereby agrees that he shall not directly or indirectly, during the Term of
Employment or any time thereafter, disclose any Confidential Information to any
Person not expressly authorized by the Company to receive such Confidential
Information.  The Executive further
agrees that he shall not directly or indirectly, during the Term of Employment
or any time thereafter, use or make use of any Confidential Information in
connection with any business activity other than that of the Company.  The Parties acknowledge and agree that this
Agreement is not intended to, and does not, alter either the Company’s rights
or the Executive’s obligations under any state or federal statutory or common
law regarding trade secrets and unfair trade practices.

 

12.2                           Company Property.  All Company Property is and shall remain
exclusively the property of the Company. 
Unless authorized in writing to the contrary, the Executive shall
promptly, and without charge, deliver to the Company on the termination of
employment hereunder, or at any other time the Company may so request, all
Company Property that the Executive may then possess or have under his control.

 

12.3                           Required Disclosure.  In the event the Executive is required by
law or court order to disclose any Confidential Information or to produce any
Company Property, the Executive shall promptly notify the Company of such
requirement and provide the Company with a copy of any court order or of any
law which requires such disclosure and, if the Company so elects, to the extent
permitted by applicable law, give the Company an adequate opportunity, at its
own expense, to contest such law or court order prior to any such required
disclosure or production by the Executive.

 

12.4                           Survival.  The Executive agrees that the provisions of
this Section 12 shall survive the termination of this Agreement and
the termination of the Executive’s employment to the extent provided above.

 

17

 

13.                                 MUTUAL ARBITRATION AGREEMENT.

 

13.1                           Arbitrable Claims.  All disputes between the Executive (and his
attorneys, successors, and assigns) and the Company (and its trustees,
beneficiaries, officers, directors, managers, affiliates, employees, agents,
successors, attorneys, and assigns) relating in any manner whatsoever to the
employment or termination of the Executive, including, without limitation, all
disputes arising under this Agreement (“Arbitrable Claims”),
shall be resolved by binding arbitration as set forth in this Section 13
(the “Mutual Arbitration Agreement”).  Arbitrable Claims shall include, but are not
limited to, claims for compensation, claims for breach of any contract or
covenant (express or implied), and tort claims of all kinds, as well as all
claims based on any federal, state, or local law, statute or regulation, but
shall not include the Company’s right to seek injunctive relief as provided in Section 15.  Arbitration shall be final and binding upon
the Parties and shall be the exclusive remedy for all Arbitrable Claims.  THE PARTIES HEREBY WAIVE
ANY RIGHTS THEY MAY HAVE TO TRIAL BY JUDGE OR JURY IN REGARD TO ARBITRABLE
CLAIMS, EXCEPT AS PROVIDED BY SECTION 13.4.

 

13.2                           Procedure.  Arbitration of Arbitrable Claims shall be in
accordance with the National Rules for the Resolution of Employment
Disputes of the American Arbitration Association, as amended, and as augmented
in this Agreement.  Either Party may
bring an action in court to compel arbitration under this Agreement and to
enforce an arbitration award.  Otherwise,
neither Party shall initiate or prosecute any lawsuit, appeal or administrative
action in any way related to an Arbitrable Claim.  The initiating Party must file and serve an
arbitration claim within sixty (60) days of learning the facts giving rise to
the alleged claim.  All arbitration
hearings under this Agreement shall be conducted in Las Vegas, Nevada.  The Federal Arbitration Act shall govern the
interpretation and enforcement of this Agreement.  The fees of the arbitrator shall be divided
equally between both Parties.

 

13.3                           Confidentiality.  All proceedings and all documents prepared in
connection with any Arbitrable Claim shall be confidential and, unless
otherwise required by law, the subject matter and content thereof shall not be
disclosed to any Person other than the parties to the proceedings, their
counsel, witnesses and experts, the arbitrator and, if involved, the court and
court staff.

 

13.4                           Applicability.  This Section 13 shall apply to
all disputes under this Agreement other than disputes relating to the
enforcement of the Company’s rights under Sections 11 and 12 of this
Agreement.

 

13.5                           Acknowledgements.  The Executive acknowledges that he:

 

(a)                                  has
carefully read this Section 13;

 

(b)                                 understands
its terms and conditions; and

 

(c)                                  has
entered into this Mutual Arbitration Agreement voluntarily and not in reliance
on any promises or representations made by the Company other than those
contained in this Mutual Arbitration Agreement.

 

18

 

14.                                 NOTICES.  All notices, demands and requests required or
permitted to be given to either Party under this Agreement shall be in writing
and shall be deemed to have been given when delivered personally or sent by
certified or registered mail, postage prepaid, return receipt requested, duly
addressed to the Party concerned at the address indicated below or to such
changed address as such Party may subsequently give notice of:

 

	
  If to the Company:

  	
   

  	
  Station
  Casinos, Inc.

  
	
   

  	
   

  	
  1505 S. Pavilion Center
  Drive

  
	
   

  	
   

  	
  Las Vegas, NV 89135

  
	
   

  	
   

  	
  Attention: Richard J.
  Haskins

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Milbank, Tweed, Hadley & McCloy

  
	
   

  	
   

  	
  601 South Figueroa Street, 30th Floor

  
	
   

  	
   

  	
  Los Angeles, CA 90017

  
	
   

  	
   

  	
  Attention: Kenneth J. Baronsky

  
	
   

  	
   

  	
   

  
	
  If to the Executive:

  	
   

  	
  Kevin L. Kelley

  
	
   

  	
   

  	
  1505 S. Pavilion Center
  Drive

  
	
   

  	
   

  	
  Las Vegas, NV 89135

  

 

15.                                 RIGHT TO SEEK INJUNCTIVE RELIEF.  The Executive acknowledges that a violation
on his part of any of the covenants contained in Sections 11 and 12
would cause immeasurable and irreparable damage to the Company.  The Executive accordingly agrees and hereby
grants his consent that, without limiting the remedies available to the
Company, any actual or threatened violation of such covenants may be enforced
by injunctive relief or by other equitable remedies issued or ordered by any
court of competent jurisdiction.

 

16.                                 EMPLOYEE BENEFIT PLAN DOCUMENTS.  In the event that any provision of this
Agreement conflicts with the terms and provisions of any employee benefit plan
document, the provisions of this Agreement shall govern; and the Company shall
take any and all actions that may be necessary, including amendment of any plan
document, to effect the provision of benefits expressly provided upon
termination of the Executive’s employment pursuant to Sections 6 and 7.

 

17.                                 BENEFICIARIES/REFERENCES.  The Executive shall be entitled to select a
beneficiary or beneficiaries to receive any compensation or benefit payable
hereunder following the Executive’s death, and may change such election, by
giving the Company written notice thereof. 
In the event of the Executive’s death or a judicial determination of his
incompetence, reference in this Agreement to the Executive shall be deemed,
where appropriate, to refer to his beneficiary, estate or other legal
representative.

 

18.                                 SURVIVORSHIP.  The respective rights and obligations of the
Parties hereunder shall survive the termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.  The provisions of this Section 18
are in addition to the survivorship provisions of any other Section of
this Agreement.

 

19

 

19.                                 REPRESENTATIONS AND WARRANTIES.  Each Party represents and warrants that he or
it is fully authorized and empowered to enter into this Agreement and that the
performance of his or its obligations under this Agreement will not violate any
agreement between that Party and any other Person.  The Executive also represents and warrants
that he has not and will not, by entering into or performing his obligations
under this Agreement, or otherwise, (a) violate the terms of that
separation agreement dated as of December 14, 2007, between Las Vegas
Sands Corp. and the Executive, nor (b) cause the Company to violate the
terms of that letter agreement dated as of December 14, 2007, between Las
Vegas Sands Corp. and the Company.

 

20.                                 ENTIRE AGREEMENT.  This Agreement contains the entire agreement
between the Parties concerning the subject matter hereof and supersedes all
prior agreements, understandings, discussions, negotiations and undertakings,
whether written or oral, between the Parties with respect thereto.  No representations, inducements, promises or
agreements not embodied herein shall be of any force or effect.

 

21.                                 ASSIGNABILITY; BINDING NATURE.  This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective successors, heirs and
assigns; provided, however, that no rights or obligations of the
Executive under this Agreement may be assigned or transferred by the Executive,
other than rights to compensation and benefits hereunder, which may be
transferred only by will or operation of law and subject to the limitations of
this Agreement; and provided, further, that no rights or
obligations of the Company under this Agreement may be assigned or transferred
by the Company, except that such rights or obligations may be assigned or
transferred pursuant to a merger or consolidation in which the Company is not
the continuing entity, or the sale or liquidation of all or substantially all
of the assets of the Company, provided that the assignee or transferee is the
successor to all or substantially all of the assets of the Company and such
assignee or transferee assumes the liabilities, obligations and duties of the
Company under this Agreement, either contractually or as a matter of law.  Upon the consummation of the Initial Public
Offering, this Agreement shall be assumed by the IPO Corporation and the
Company and any other Company Affiliate having obligations hereunder shall
thereupon be released from any liabilities or obligations hereunder.

 

22.                                 AMENDMENT OR WAIVER.  No provision in this Agreement may be amended
or waived unless such amendment or waiver is agreed to in writing, signed by
both Parties.  No waiver by one Party of
any breach by the other Party of any condition or provision of this Agreement
to be performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.  No failure of the Company to exercise any
power given it hereunder or to insist upon strict compliance by the Executive
with any obligation hereunder, and no custom or practice at variance with the
terms hereof, shall constitute a waiver of the right of the Company to demand
strict compliance with the terms hereof.

 

23.                                 SEVERABILITY.  In the event that any provision or portion of
this Agreement shall be determined to be invalid or unenforceable for any
reason, in whole or in part, the remaining provisions of this Agreement shall
be unaffected thereby and shall remain in full force and effect to the fullest
extent permitted by law.

 

20

 

24.                                 SECTION 409A.  Notwithstanding anything in this Agreement to
the contrary, no payment under this Agreement shall be made to the Executive at
a time or in a form that would subject Executive to the penalty tax of Section 409A
of the Code (the “409A Tax”).  If any payment under any other provision of
this Agreement would, if paid at the time or in the form called for under such
provision, subject the Executive to the 409A Tax, such payment (the “Deferred Amount”) shall instead be paid at the earliest
time that it could be paid without subjecting the Executive to the 409A Tax,
and shall be paid in a form that would not subject the Executive to the 409A
Tax.  The Deferred Amount shall accrue
simple interest at the prime rate of interest as published by Bank of America
N.A. (or its successor) during the deferral period and shall be paid with the
Deferred Amount.  The Company will place
an amount in a “rabbi trust” with Towers Perrin (or such other trustee mutually
acceptable to the Company and the Executive) equal to the Deferred Amount, plus
the interest that will accrue thereon.

 

25.                                 GOVERNING LAW.  This Agreement shall be governed by and
construed and interpreted in accordance with the laws of the State of Nevada
without reference to the principles of conflict of laws thereof.  In the event of any dispute or controversy
arising out of or relating to this Agreement that is not an arbitrable claim,
the Parties mutually and irrevocably consent to, and waive any objection to,
the exclusive jurisdiction of any court of competent jurisdiction in Clark
County, Nevada, to resolve such dispute or controversy.

 

26.                                 HEADINGS.  The headings of the Sections contained in
this Agreement are for convenience only and shall not be deemed to control or
affect the meaning or construction of any provision of this Agreement.

 

27.                                 COUNTERPARTS.  This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same Agreement with the same effect as if all Parties
had signed the same signature page.  Any
signature page of this Agreement may be detached from any counterpart of
this Agreement and reattached to any other counterpart of this Agreement
identical in form hereto but having attached to it one or more additional
signature pages.

 

28.                                 ACKNOWLEDGEMENT.  The Executive represents and acknowledges the
following:

 

(a)                                  he
has carefully read this Agreement in its entirety;

 

(b)                                 he
understands the terms and conditions contained herein;

 

(c)                                  he
has had the opportunity to review this Agreement with legal counsel of his own
choosing and has not relied on any statements made by the Company or its legal
counsel as to the meaning of any term or condition contained herein or in
deciding whether to enter into this Agreement; and

 

(d)                                 he
is entering into this Agreement knowingly and voluntarily.

 

21

 

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

 

 

	
   

  	
  STATION CASINOS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Richard J. Haskins

  	
   

  
	
   

  	
  Name:

  	
  Richard J. Haskins

  
	
   

  	
  Title:

  	
  Executive Vice President,

  
	
   

  	
   

  	
  General Counsel and
  Secretary

  
	
   

  	
   

  
	
   

  	
  /s/ Kevin L. Kelley

  	
   

  
	
   

  	
  KEVIN
  L. KELLEY

  

 

GUARANTEE

 

Fertitta Colony Partners LLC, a Nevada limited liability company, hereby,
to the fullest extent permitted by applicable law, irrevocably and
unconditionally guarantees to the Executive the prompt performance and payment
in full when due of all obligations of the Company to the Executive under this
Employment Agreement; provided, however, that upon an Initial
Public Offering, such Guarantee shall automatically terminate and be of no
further force or effect.

 

	
   

  	
  FERTITTA
  COLONY PARTNERS LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Frank J. Fertitta III

  	
   

  
	
   

  	
  Name:

  	
  Frank J. Fertitta III

  	
   

  
	
   

  	
  Title:

  	
  Authorized Member

  	
   

  

 

22

 

EXHIBIT “A”

 

GENERAL RELEASE AND COVENANT NOT TO SUE

 

This
GENERAL RELEASE AND COVENANT NOT TO SUE
(this “Release”) is executed and delivered by KEVIN L. KELLEY (the “Executive”) to STATION CASINOS, INC., a Nevada corporation
(the “Company”).

 

In
consideration of the agreement by the Company to provide the separation
payments and benefits in Section 6 and Section 7 of the
Employment Agreement between the Executive and the Company, dated as of December
14, 2007 (the “Employment Agreement”), and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Executive hereby agrees as follows:

 

1.                                       RELEASE AND COVENANT.  THE EXECUTIVE, OF HIS
OWN FREE WILL, VOLUNTARILY RELEASES AND FOREVER DISCHARGES THE COMPANY AND ITS
SUBSIDIARIES AND AFFILIATES, AND EACH OF THEIR RESPECTIVE PAST AND PRESENT
AGENTS, EMPLOYEES, MANAGERS, REPRESENTATIVES, OFFICERS, DIRECTORS, ATTORNEYS,
ACCOUNTANTS, TRUSTEES, SHAREHOLDERS, PARTNERS, INSURERS, HEIRS,
PREDECESSORS-IN-INTEREST, ADVISORS, SUCCESSORS AND ASSIGNS (COLLECTIVELY, THE “RELEASED
PARTIES”) FROM, AND COVENANTS NOT TO SUE OR PROCEED AGAINST ANY OF THE
FOREGOING ON THE BASIS OF, ANY AND ALL PAST OR PRESENT CAUSES OF ACTION, SUITS,
AGREEMENTS OR OTHER RIGHTS OR CLAIMS WHICH THE EXECUTIVE, HIS DEPENDENTS,
RELATIVES, HEIRS, EXECUTORS, ADMINISTRATORS, SUCCESSORS AND ASSIGNS HAS OR HAVE
AGAINST ANY OF THE RELEASED PARTIES UPON OR BY REASON OF ANY MATTER ARISING OUT
OF HIS EMPLOYMENT BY THE COMPANY AND THE CESSATION OF SAID EMPLOYMENT, AND
INCLUDING, BUT NOT LIMITED TO, ANY ALLEGED VIOLATION OF THE CIVIL RIGHTS ACTS
OF 1964 AND 1991, THE EQUAL PAY ACT OF 1963, THE AGE DISCRIMINATION IN
EMPLOYMENT ACT OF 1967 (INCLUDING THE OLDER WORKERS BENEFIT PROTECTION ACT OF
1990), THE REHABILITATION ACT OF 1973, THE FAMILY AND MEDICAL LEAVE ACT OF
1993, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE EMPLOYMENT RETIREMENT
INCOME SECURITY ACT OF 1974, THE NEVADA FAIR EMPLOYMENT PRACTICES ACT, THE
LABOR LAWS OF THE UNITED STATES AND NEVADA, AND ANY OTHER FEDERAL, STATE OR
LOCAL LAW, REGULATION OR ORDINANCE, OR PUBLIC POLICY, CONTRACT OR TORT LAW,
HAVING ANY BEARING WHATSOEVER ON THE TERMS AND CONDITIONS OR CESSATION OF HIS
EMPLOYMENT WITH THE COMPANY.

 

2.                                       DUE CARE.  THE
EXECUTIVE ACKNOWLEDGES THAT HE HAS RECEIVED A COPY OF THIS RELEASE PRIOR TO ITS
EXECUTION AND HAS BEEN ADVISED HEREBY OF HIS OPPORTUNITY TO REVIEW AND CONSIDER
THIS RELEASE FOR TWENTY-ONE (21) DAYS PRIOR TO ITS EXECUTION.  THE 

 

 

EXECUTIVE
FURTHER ACKNOWLEDGES THAT HE HAS BEEN ADVISED HEREBY TO CONSULT WITH AN
ATTORNEY PRIOR TO EXECUTING THIS RELEASE. 
THE EXECUTIVE ENTERS INTO THIS RELEASE HAVING FREELY AND KNOWINGLY
ELECTED, AFTER DUE CONSIDERATION, TO EXECUTE THIS RELEASE AND TO FULFILL THE
PROMISES SET FORTH HEREIN.  THIS RELEASE
SHALL BE REVOCABLE BY THE EXECUTIVE DURING THE SEVEN (7) DAY PERIOD
FOLLOWING ITS EXECUTION, AND SHALL NOT BECOME EFFECTIVE OR ENFORCEABLE UNTIL
THE EXPIRATION OF SUCH SEVEN (7) DAY PERIOD.  IN THE EVENT OF SUCH A REVOCATION, THE
EXECUTIVE SHALL NOT BE ENTITLED TO THE CONSIDERATION FOR THIS RELEASE SET FORTH
ABOVE.

 

3.                                       RELIANCE BY THE EXECUTIVE. 
THE EXECUTIVE ACKNOWLEDGES THAT, IN HIS DECISION TO ENTER INTO THIS
RELEASE, HE HAS NOT RELIED ON ANY REPRESENTATIONS, PROMISES OR ARRANGEMENT OF
ANY KIND, INCLUDING ORAL STATEMENTS BY REPRESENTATIVES OF THE COMPANY, EXCEPT
AS SET FORTH IN THIS RELEASE.

 

4.                                       MISCELLANEOUS. 
THE EXECUTIVE SHALL NOT DISCLOSE THE EXISTENCE OR CONTENTS OF THIS
RELEASE TO ANYONE OTHER THAN HIS IMMEDIATE FAMILY, ACCOUNTANTS OR ATTORNEYS,
AND THE EXECUTIVE SHALL INSTRUCT SUCH THIRD PARTIES NOT TO DISCLOSE THE
SAME.  THIS RELEASE SHALL BE GOVERNED BY
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEVADA WITHOUT REFERENCE TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF.  IF ANY PROVISION OF THIS RELEASE IS HELD
INVALID OR UNENFORCEABLE FOR ANY REASON, THE REMAINING PROVISIONS SHALL BE
CONSTRUED AS IF THE INVALID OR UNENFORCEABLE PROVISION HAD NOT BEEN INCLUDED.

 

This
GENERAL RELEASE AND COVENANT NOT TO SUE is executed by the Executive and
delivered to the Company on                                         .

 

	
   

  	
  “Executive”

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  KEVIN L. KELLEY

  

 

 

	
  STATE OF 

  	
  )

  
	
   

  	
  ) ss:

  
	
  COUNTY OF 

  	
  )

  

 

On this        day of                           ,
     , before me, a Notary Public of the State of                                 ,
personally appeared Kevin L. Kelley, to me known and known to me to be the
person described and who executed the foregoing release and did then and there
acknowledge to me that he voluntarily executed the same.

 

 

	
   

  	
   

  
	
  NOTARY PUBLIC

  

 

[Not to
be signed or notarized upon execution of Employment Agreement]

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