Document:

EX-10.1

 

Exhibit 10.1

March 14, 2008                    

Mr. Randy Stephen

c/o Town Sports International Holdings, Inc.

5 Penn Plaza — 4th Floor

New York, NY 10001

Dear Randy:

     This letter agreement (the “Agreement”) confirms the terms that Town Sports International, LLC
(the “Company”) is offering you in connection with your resignation of employment from the Company
and its affiliates and from all officer and other positions that you currently hold with the
Company and its affiliates, including Town Sports International Holdings, Inc. (“TSI Holdings”).

     1. Termination Date. The employment relationship between the you and the Company and
its subsidiaries and affiliates, as applicable, terminated on January 14, 2008 (the “Termination
Date”).

     2. Separation Benefits. In return for your agreement to, and compliance with, your
commitments and obligations set forth in this Agreement following your execution and delivery of
this Agreement (and the expiration of the Revocation Period (defined below) without revocation by
you), and subject to the terms of this Agreement:

     (a) Subject to your compliance with the non-compete and non-solicitation covenants
set forth in Paragraph 5(b) of this Agreement, the Company shall continue to pay you the
equivalent of your base salary pay rate (at the rate in effect on the Termination Date) for a
twelve (12) month period commencing on the Termination Date and ending on the first anniversary of
the Termination Date (the “Severance Period”), payable in accordance with the Company’s prevailing
payroll practices and subject to deduction for all required income and payroll taxes.

     (b) You shall receive $121,232, which is the amount equivalent to your annual bonus with
respect to the fiscal year ending December 31, 2007 that you would have been entitled to receive
had you remained in the employ of the Company through the payment date of such bonus based upon the
Company’s actual results for 2007, which amount shall be payable within ten (10) days of your
execution of this Agreement. This bonus payment shall be subject to all other terms of the
Company’s bonus plan and shall be subject to deduction for all required income and payroll taxes.

     (c) The Company shall continue your health and dental coverage (or provide comparable
substitute coverage), and continue to pay that portion of the premium that it pays for active
employees at such times as the Company makes such payments for its active employees on a monthly
basis until the earlier of the end of the Severance Period and the date on which you are eligible
for coverage under another group health and dental insurance plan. You agree to promptly notify
the Company in writing in the event that you are eligible for coverage under

 

 

another such plan. If not otherwise covered by a group health or dental plan as of the last
date of the Severance Period, you shall be eligible for COBRA continuation coverage effective as of
such date on the same terms and conditions as offered to other eligible plan participants, and, if
you elect such coverage, you shall be fully responsible for the associated premiums.

     (d) Each of you, your wife and children may continue to utilize a Passport Membership (or its
equivalent) at no cost, and be entitled to receive Personal Training sessions at employee rates,
(provided however that such memberships and discount rates for Personal Training sessions shall
cease in the event you commence employment or a consulting role with a competitor of the Company or
in the event of your material breach of this Agreement). The aforementioned memberships are
subject to all of the Company’s membership rules, regulations and policies currently in effect and
as may be amended from time to time (the “Rules”).

     (e) During the Severance Period, you agree to be available to the Company to provide certain
consulting and advisory services at such times as may be reasonably requested by the Company. The
Company will reimburse you for any reasonable out-of-pocket expenses incurred by you in connection
with the performance of such services; provided that such expenses shall not be required to be
incurred by you, and shall not be reimbursed, unless such expenses have been approved in writing in
advance by the Chief Executive Officer or Chief Financial Officer of the Company. It is agreed that
if the Company requires more than ten (10) hours of your time during any calendar month for
consulting or advising, then the Company agrees to pay you a reasonable hourly rate of compensation
for services above ten such (10) hours, which rate shall be negotiated by the parties and shall be
further subject to the prior written consent of the Chief Executive Officer of the Company.

     (f) The Company shall provide you with outplacement assistance with an outplacement firm of
your choice for a period of one year, but in no event shall the Company pay in the aggregate more
than $15,000.

     (e) The Company shall reimburse you for all actual, out-of-pocket legal fees incurred by you
in connection with this Agreement in the amount of $5,000 to be paid within ten (10) days of your
execution of this Agreement.

     4. Release.

     (a) In consideration of the obligations contained in Section 2 of this Agreement and for other
valuable consideration, you (for yourself, your heirs, legal representatives, executors or
administrators (collectively, your “Representatives”)) hereby release and forever discharge the
Company, TSI Holdings, their respective subsidiaries and affiliates and each of their respective
officers, employees, directors and agents (collectively, the “Released Parties”) from any and all
claims and rights which you may have against them, and you hereby specifically release, waive and
forever hold them harmless from and against any and all such claims, liability, causes of action,
compensation, benefits, damages, attorney fees, costs or expenses, of whatever nature or kind and
whether known or unknown, fixed or contingent, and by reason of any matter, cause, charge, claim,
right or action whatsoever, which have arisen at any time up to and including the date of execution
of this Agreement, including, but not limited to, those arising during or in any manner out of your
employment with, or your resignation from, the Company, or anything else

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that may have happened up to and including the day you sign this Agreement. The rights, claims,
causes of action, and liabilities that you are releasing and waiving include, but are not limited
to, those that concern, relate to, or might arise out of the following: salary, overtime, bonuses,
equity and severance arrangements, benefit plans; and commissions; tort; breach of express or
implied contract or promise; harassment, intentional injury or intentional tort, fraud,
misrepresentation, battery, assault, defamation, breach of fiduciary duty, tort or public policy
claims, whistleblower claims, negligence (including negligent hiring, retention and/or
supervision), wrongful or retaliatory discharge, infliction of emotional injury, or any other facts
or claims; retirement, stock option or any other benefits; the Equal Pay Act (29 U.S.C. §206(d), et
seq.); the Age Discrimination in Employment Act (ADEA) (29 U.S.C. §621, et seq.); Title VII of the
Civil Rights Act of 1964 (42 U.S.C. §2000e, et seq.); ERISA (the Employee Retirement Income
Security Act of 1974 (29 U.S.C. §1001, et seq.) other than any vested ERISA benefit; COBRA (the
Consolidated Omnibus Budget Reconciliation Act of 1986, 29 U.S.C. §21161, et seq.); the federal
WARN Act; the American with Disabilities Act (42 U.S.C. §12101, et seq.); the National Labor
Relations Act and the Labor Management Relations Act, 29 U.S.C. §141 et seq.; the Family and
Medical Leave Act (29 U.S.C. §2601, et seq.); the United States Constitution; the Civil Rights Act
of 1991; the Civil Rights Acts of 1866 or 1871 (42 U.S.C. §§1981,1983,1985, et seq.); retaliation
under any federal, state, or local law; any claims for costs or attorney fees; the fair employment
practices (FEP) laws and employment-related laws of any federal, state, or local jurisdiction
(including the New York State Human Rights Law, New York Administrative Code), and any other
federal, state, city, county or other common law, law, or ordinance, including but not limited to
those where you work and/or reside. For purposes of the ADEA only, you are not releasing any
rights or claims that arise following the effective date of this Agreement.

     (b) Notwithstanding the foregoing, the release set forth in Section 4(a), shall not apply to
(i) the obligations of the Company under this Agreement, (ii) your vested benefits under the
Company’s 401(k) plan, and (iii) the Company’s obligations under the Option Plans (as defined and
set forth below in Section 5), and any related option agreement or vested benefit(s) to which you
are legally entitled. You further agree that the payments and benefits described in this Agreement
shall be in full satisfaction of any and all claims for payments or benefits, whether express or
implied, that you may have against the Company, TSI Holdings or any of their respective
subsidiaries or affiliates arising out of your employment relationship, your service as an employee
or officer of the Company, TSI Holdings or any of their respective subsidiaries or affiliates and
your resignation therefrom. You hereby acknowledge and confirm that you are providing the release
and discharge set forth in this Section 4 only in exchange for consideration in addition to
anything of value to which you are already entitled.

     (c) You represent and agree that you have not filed any lawsuits against any Released Party,
or filed or caused to be filed any charges or complaints against any Released Party with any
municipal, state or federal agency charged with the enforcement of any law. Pursuant to and as a
part of your release and discharge of the Released Parties, you agree, except for your right, if
any, to bring a proceeding pursuant to the Older Workers Benefit Protection Act to challenge the
validity of the release of claims pursuant to the Age Discrimination in Employment Act contained in
paragraph 3 of this Release, and consistent with the EEOC Enforcement Guidance On Non-Waivable
Employee Rights Under EEOC-Enforced Statutes dated April 11,1997, and

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otherwise to the maximum extent permitted by applicable law, not to sue or file a charge or
complaint against any Released Party in any forum or assist or otherwise participate willingly or
voluntarily in any claim, suit, action, investigation or other proceeding of any kind which relates
to any matter that involves any Released Party, and that occurred up to and including the date of
your execution of this Agreement, unless as required to do so by court order, subpoena or other
directive by a court, administrative agency or legislative body, other than to enforce this
Agreement. With respect to the claims you are waiving herein, you are waiving any right to receive
money or any other relief in any action instituted on your behalf by any other person, entity or
government agency.

     (d) You expressly understand and acknowledge that it is possible that unknown losses or claims
exist or that present losses may have been underestimated in amount or severity, and that you
explicitly took that into account in determining the amount of consideration to be paid for the
giving of this Release, and a portion of said consideration and the mutual covenants contained
herein, having been agreed between the parties with the knowledge of the possibility of such
unknown claims, were given in exchange for a full satisfaction and discharge of all such claims.

     (e) Nothing in this release shall affect the Company and TSI Holdings’ obligation to
indemnify, defend and hold you harmless to the fullest extent allowable by applicable law and their
respective charter and by-laws with respect to your acts or omissions in your capacity as an
officer of the Company, TSI Holdings and their respective subsidiaries and affiliates. The Company
shall continue to maintain directors’ and officers’ liability insurance with respect to actions or
omissions by you as an officer of TSI Holdings, the Company (or any of its subsidiaries) to the
fullest extent permitted by law in the same manner that it maintains such insurance for other
officers and directors.

     5. Options; Non-Compete; Non-Solicitation.

          (a) Your options to purchase TSI Holdings common stock granted pursuant to the Company stock
option incentive plans, the 2004 Stock Option Plan, as amended, and the 2006 Stock Option Incentive
Plan, as amended (collectively, the “Option Plans”), to the extent vested as of the Termination
Date, shall remain outstanding for the post-termination exercise period specified in Option Plans
and the applicable option agreements. Such vested options will expire at the conclusion of such
post-termination exercise period to the extent not previously exercised. That portion of the stock
options that remain unvested as of the Termination Date shall be forfeited on the Termination Date
without any payment.

          (b) You hereby acknowledge that the Company is making the payments to you pursuant to Section
2 above, in part, based on your compliance with the non-compete and non-solicitation covenants set
forth in the 2006 Stock Option Incentive Plan, as amended, and the related stock option agreement,
dated August 4, 2006 and August 7, 2007, evidencing the grant of stock options to you under that
option plan. You hereby covenant and agree that, during the Severance Period, you shall comply
with the non-compete and non-solicitation provisions set forth in the 2006 Stock Option Incentive
Plan.

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     6. No Other Compensation or Benefits. Except as otherwise specifically
provided herein, you shall not be entitled to any compensation or benefits or to participate in any
past, present or future employee benefit programs or arrangements of the Company, TSI Holdings or
any of their respective subsidiaries or affiliates on or after the Termination Date.

     7. Return of Company Property. As of the date of this Agreement, you hereby represent
that you have delivered to the Company all Company property and equipment in your possession or
control, including, but not limited to, any and all records, manuals, customer lists, notebooks,
computers, computer programs and files, Company credit cards, papers, electronically stored
information and documents kept or made by you in connection with your employment and you shall not
retain any copies thereof. You also represent that you have left intact all electronic Company
documents or files, including those that you developed or helped develop. You are required to
return all such property whether or not you sign this Agreement. Notwithstanding the foregoing,
you shall be permitted to retain the cell phone (and number) provided by the Company, at your
expense after the Termination Date if you so choose.

     8. Waiver of Rights. No delay or omission by the Company in exercising any right
under this Agreement shall operate as a waiver of that or any other right. A waiver or consent
given by the Company on any one occasion shall be effective only in that instance and shall not be
construed as a bar or waiver of any right on any other occasion.

     9. Nondisclosure of Confidential Information. You acknowledge and agree that in the
course of your employment with the Company, you have acquired certain confidential company
information which you knew or understood was confidential or proprietary to the Company and which,
as used in this Agreement, means: information belonging to or possessed by the Company which is not
available in the public domain or not released by some third-party through no fault of yours,
including, without limitation (i) information received from the customers, suppliers, vendors,
employees or agents of the Company under confidential conditions; (ii) customer and prospect lists,
and details of agreements and communications with customers and prospects; (iii) sales plans and
projections, product pricing information, acquisition, expansion, marketing, financial and other
business information and existing and future products and business plans of the Company; (iv) the
Company’s confidential accounting, tax, or financial information, results, procedures and methods;
(v) information relating to existing claims, charges and litigations; (vi) sales proposals,
demonstrations systems, sales material; and (vii) employee information (including, but not limited
to, personnel, payroll, compensation and benefit data and plans), including all such information
recorded in manuals, memoranda, projections, reports, minutes, plans, drawings, sketches, designs,
formula books, data, specifications, software programs and records, whether or not legended or
otherwise identified by the Company as confidential information, as well as such information that
is the subject of meetings and discussions and not recorded. You understand that such confidential
company information has been disclosed to you for the Company’s use only. You understand and agree
that you (i) shall not disclose or communicate confidential information to any person or persons;
and (ii) shall not make use of confidential information on your own behalf, or on behalf of any
other person or persons. You shall give immediate notice to the Company if you are ordered by a
court or otherwise compelled by law to reveal any confidential information to any third party. In
view of the nature of your employment and the nature of the confidential information to which you
have had access to, you acknowledge and agree that any unauthorized

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disclosure to any person or persons of confidential information, or other violation or
threatened violation of this Agreement shall cause irreparable damage to the Company and that,
therefore, the Company shall, in addition to any other available remedy, be entitled to an
injunction prohibiting you from any further disclosure, attempted disclosure, violation or
threatened violation of this Agreement.

     10. Non-Disparagement; Cooperation.

     (a) You understand and agree that as a condition for payment to you of the consideration
herein described, you, on your behalf and on behalf of your Representatives, shall not (and your
Representatives shall not) at any time engage in any form of conduct, or make any statements or
representations that disparage or otherwise impair the reputation, goodwill, or commercial
interests of the Company, its management, stockholders, subsidiaries, parent, and/or other
affiliates. The Company agrees that no member of its senior management will make any comment or
statement that is defamatory or derogatory against you.

     (b) From and after the Termination Date, you shall (i) cooperate in all reasonable respects
with the Company and its affiliates and their respective directors, officers, attorneys and experts
in connection with the conduct of any dispute, action, proceeding, investigation or litigation
involving the Company or any of its affiliates, including, without limitation, any such dispute,
action, proceeding, investigation or litigation in which you are called to testify and (ii)
promptly respond to all reasonable requests by the Company and its affiliates relating to
information concerning the Company which may be in your possession. The Company shall, as a
condition to your obligations under this Section 10(b), reimburse you for any reasonable out of
pocket expenses and costs incurred as a result of such cooperation (including all actual,
out-of-pocket attorney fees), provided that such expenses have been approved in writing in advance
by an executive officer of the Company. Further, you hereby consent to the disclosure of
information about you that the Company is required to disclose in its Annual Report on Form 10-K,
its Proxy Statement and in any other report(s) required to be filed with the Securities and
Exchange Commission under the Securities Act of 1933, the Securities Exchange Act of 1934, and the
rules and regulations promulgated thereunder.

     11. Applicable Law. This Agreement shall be interpreted and construed by the laws of
the State of New York, without regard to conflict of laws provisions. You hereby irrevocably
submit to and acknowledge and recognize the jurisdiction of the courts of the State of New York,
or, if appropriate, a federal court within New York (which courts, together with all applicable
appellate courts, for purposes of this agreement, are the only courts of competent jurisdiction),
over any suit, action or other proceeding arising out of, under or in connection with this
Agreement or the subject matter hereof.

     12. Entire Agreement/Severability. You understand and agree that this Agreement
contains the entire understandings and agreements between the parties hereto with respect to the
subject matter hereof. This Agreement constitutes the sole and complete understanding and
agreement between the parties with respect to the matters set forth herein, and there are no other
agreements or understandings, whether written or oral and whether made contemporaneously or
otherwise (other than any confidentiality and/or non-competition provisions and related

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covenants set forth in any agreement granting you options under the Company’s options plans that
you executed during your employment with the Company the terms of which will survive execution of
this Agreement). No term, condition, covenant, representation or acknowledgment contained in this
Release may be amended unless in a writing signed by both parties. If any section of this
Agreement is determined to be void, voidable or unenforceable, it shall have no effect on the
remainder of the Agreement which shall remain in full force and effect.

     13. Acceptance. You shall have twenty-one (21) days from the date set forth above to
consider the terms of this Agreement. In order to receive the benefits and payments provided for
by Section 2 of this Agreement, you must execute this Agreement, have your signature notarized and
return the executed Agreement to the Company, addressed to the Company, Attention: General Counsel,
at the address specified in Section 22 so that it is received any time on or before the expiration
of the twenty-one (21) day period. After executing the Agreement, you shall have seven (7) days
(the “Revocation Period”) to revoke it by indicating your desire to do so in writing addressed to
and received by the General Counsel at the address set forth in Section 22 no later than the
seventh (7th) day following the date you executed the Agreement. In the event you do
not accept this Agreement or in the event you revoke this Agreement during the Revocation Period,
the obligations of the Company to make the payments and provide the benefits set forth herein shall
automatically be deemed null and void. No payments or benefits shall be paid or provided under
Section 2 of this Agreement following the Termination Date, until you have signed this Agreement,
had your signature notarized and the Revocation Period has expired without a revocation by you.

     14. Voluntary Assent. By your signature on this Agreement, you affirm and acknowledge
that:

          (i) you have read this Agreement, and understand all of its terms, including the full and
final release of claims set forth in Section 4;

          (ii) you have voluntarily entered into this Agreement and that you have not relied upon any
representation or statement, written or oral, not set forth in this Agreement;

          (iii) the only consideration for signing this Agreement is as set forth herein and that the
consideration received for executing this Agreement is greater than that to which you may otherwise
be entitled;

          (iii) you have been given the opportunity and you have been advised by the Company to have
this Agreement reviewed by your attorney and/or tax advisor; and

          (iv) you have been given up to twenty-one (21) days to consider this Agreement and that you
understand that you have seven (7) days after executing it to revoke it in writing, and that, to be
effective, such written revocation must be received by the Company within the seven (7) day
Revocation Period.

     15. No Admission. Nothing contained in this Agreement, or the fact of its submission
to you, shall constitute or be construed as an admission of liability or wrongdoing by either
party.

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     16. Counterparts. The Agreement may be executed in two (2) signature counterparts,
each of which shall constitute an original, but all of which taken together shall constitute but
one and the same instrument.

     17. Taxes; Section 409A. It is intended that the payments provided for herein are
intended to comply with the terms of Section 409A (“Section 409A”) of the Internal Revenue Code of
1986, as amended, and the regulations promulgated thereunder. In the event, however, that any such
payments are determined to be subject to Section 409A, then the Company may make such adjustments
as are reasonably required to comply with such section, including delaying any such payments that
would have been required to be paid to you pursuant to this Agreement during the first six months
following the Termination Date until the end of such six-month period in accordance with the
requirements of Section 409A. In addition, any expense reimbursement under Section 2(e), 3(a) or
13(b) hereof shall be made on or before the last day of the taxable year following the taxable year
in which such expense was incurred by you, and no such reimbursement or the amount of expenses
eligible for reimbursement in any taxable year shall in any way affect the expenses eligible for
reimbursement in any other taxable year. The termination of your employment on January 14, 2008 is
intended to constitute an “involuntary termination” for purposes of Section 409A. Without limiting
the generality of the foregoing, the amount of time that you will provide to the Company as
consultant in paragraph 2(d) shall be less than 20% of the time spent by you in performing services
for TSI Holdings and the Company for the thirty-six months preceding the Termination Date.
Notwithstanding any of the preceding, the Company makes no representations regarding the tax
treatment of any payments hereunder, and you shall be responsible for any and all applicable taxes,
other than the Company’s share of employment taxes on the payments during the Transition Period
described in Section 2.

     18. Third Party Beneficiaries. You acknowledge and agree that TSI Holdings and all
its direct and indirect subsidiaries (other than the Company) are third party beneficiaries of this
letter agreement. Without limiting the foregoing sentence, TSI Holdings and such subsidiaries may
enforce this letter agreement against you. This Agreement may be assigned by the Company to a
person or entity which is an affiliate, and shall be assigned to any successor in interest to
substantially all of the business operations of the Company. Upon such assignment, the rights and
obligations of the Company hereunder shall become the rights and obligations of such affiliate or
successor person or entity. This Agreement shall be binding upon the successors, and assigns of the
Company.

     19. Notices. Any notices required or made pursuant to this Agreement will be in
writing and will be deemed to have been given when delivered or mailed by United States certified
mail, return receipt requested, postage prepaid, as follows: if to you, to the address in

the Company’s payroll records; if to the Company, at 5 Penn Plaza, 4th Floor, New York,
NY 10001, Attn: General Counsel, or to such other address as either
party may furnish to the other in

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 writing in accordance with this Section 22. Notices of change of address will be effective only
upon receipt.

	 	 	 	 	 
	 	Acknowledged and accepted by:

TOWN SPORTS INTERNATIONAL, LLC

 	 
	 	By:  	/s/ James M. Rizzo	 
	 	Name:  James M. Rizzo 	 
	 	Title:  Senior Vice President
— Human Resources 	 
	 

	 	 	 	 	 
	 
	 	/s/ Randall Stephen	 	 
	 
	 	Randall Stephen	 	 

	 	 	 	 	 	 	 
	STATE OF NEW YORK
	 	 	)	 	 	 
	 
	 	:  ss.:	 	 
	COUNTY OF NEW YORK
	 	 	)	 	 	 

               On
the 14th day of March, 2008, personally came Randy Stephen and being duly sworn,
acknowledged that he is the person described in and who executed the foregoing Agreement and
acknowledged that he executed same.

	 	 	 	 	 
	 

	 	/s/ Laura A. Watanabe	 	 
	 

	 	Laura A. Watanabe

Notary Public
	 	 

9exv10w1

 

Exhibit 10.1

SETTLEMENT AGREEMENT

          This SETTLEMENT AGREEMENT (this “Agreement”) is made and entered into on March 15,
2008, by and between TXCO Resources Inc., a Delaware corporation (the “Company”); Third
Point LLC, a Delaware limited liability company (“Third Point”), Daniel S. Loeb, an
individual, Third Point Offshore Fund, Ltd., a Cayman Islands limited liability exempted company
(“Offshore”), Third Point Ultra Ltd., a British Virgin Islands limited liability company,
Third Point Partners LP, a Delaware limited partnership, Third Point Partners Qualified LP, a
Delaware limited partnership, Lyxor/Third Point Fund Limited, a Jersey public company with limited
liability (each, including Third Point, a “Holder” and, collectively, the
“Holders”); Jacob Roorda, an individual (“Roorda”); Anthony Tripodo, an individual
(“Tripodo” and, together with Roorda, the “Third Point Nominees”); and James E.
Sigmon (“Sigmon”).

RECITALS

          WHEREAS, Offshore has given notice of its intention, at the next Annual or Special Meeting of
Stockholders of the Company (including the currently scheduled May 9, 2008 Annual Meeting) at which
directors are to be elected and at any and all adjournments, postponements, reschedulings or
continuations thereof (collectively, the “2008 Annual Meeting”), to propose nominees to be
elected as Class A directors on the Company’s board of directors (the “Board”) and to
solicit proxies in favor of such nominations (the “Solicitation”);

          WHEREAS, the Company and the Holders have each determined that it is in their respective best
interests and in the best interests of their stockholders and/or investors to enter into this
Agreement whereby, among other things, (i) the Company will add the Third Point Nominees to the
Board and (ii) the Holders will abandon the Solicitation, in each case as more fully provided
herein;

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

ARTICLE I.

AGREEMENTS

          Section 1.1. Board Matters; Nominations at 2008 Annual Meeting.

          (a) The Company shall as promptly as practicable, and in any event within two business days
after the date hereof, take all action necessary (including the calling of a special meeting of the
Board to approve such actions) to:

          (i) obtain the resignations of two current members of the Board so that there shall be
two vacancies on the Board;

          (ii) reclassify the remaining five directors, to the extent required (but minimizing
the number of directors whose classifications change), so that (A) the two vacancies on the
Board shall be in Class A, with terms expiring in 2008, and (B) there shall be one incumbent
director and two vacancies in Class A, with terms expiring in

 

 

2008, two directors in Class B, with terms expiring in 2009, and two directors in Class
C, with terms expiring in 2010; and

          (iii) appoint each of the Third Point Nominees as a Class A director, so as to fill the
two vacancies thus created.

          (b) For the avoidance of doubt, after the actions specified in Section 1.1(a) hereof are
taken, the composition of the Board shall be as follows:

          (i) Class A directors, with terms to expire in 2008: Dennis B. Fitzpatrick, Roorda and
Tripodo;

          (ii) Class B directors, with terms to expire in 2009: Alan L. Edgar and Jon Michael
Muckleroy; and

          (iii) Class C directors, with terms to expire in 2010: Michael J. Pint and James E.
Sigmon.

          (c) At the 2008 Annual Meeting, the Company shall nominate the Third Point Nominees as Class A
directors for terms commencing at the close of the 2008 Annual Meeting and expiring in 2011, and
the Company shall include the Third Point Nominees on the Board’s proposed slate of nominees for
election at the 2008 Annual Meeting. Prior to the 2008 Annual Meeting, (i) the Board shall
recommend (and shall not change such recommendation in a manner adverse to the Third Point Nominees
unless required to do so by the Board’s fiduciary duties) that the Company’s stockholders vote in
favor of the Board’s entire slate (including the Third Point Nominees) and (ii) the Company shall
solicit proxies for the election of the Board’s slate of nominees (including the Third Point
Nominees) at the 2008 Annual Meeting.

          (d) Should any Third Point Nominee resign from the Board (other than pursuant to Section 1.3
hereof), be rendered unable to serve on the Board by reason of death or disability, or, prior to
the 2008 Annual Meeting, decide not to seek election to the Board at the 2008 Annual Meeting, Third
Point shall, with the consent of the Company (which consent shall not be unreasonably withheld or
delayed), be entitled to designate a reasonably qualified replacement for such Third Point Nominee
as a Class A director (or nominee for Class A director), and the Company shall take all necessary
action to implement the foregoing as promptly as practicable. Any such designated replacement who
becomes a Board member shall be deemed to be a Third Point Nominee for all purposes under this
Agreement and, prior to his or her appointment to the Board ,shall be required to agree in writing,
to the extent applicable, to the provisions of Sections 1.1(d) and 1.3 of this Agreement.

          (e) Each Third Point Nominee agrees to provide to the Company, without unreasonable delay,
true and complete information regarding such Third Point Nominee required by law to be included in
the Company’s proxy materials relating to the 2008 Annual Meeting.

          (f) The Company agrees that each Third Point Nominee shall receive (i) the same benefits of
director and officer insurance, and any indemnity and exculpation arrangements

2

 

available generally
to the directors on the Board and (ii) the same compensation for his or her service as a director
as the compensation received by other directors on the Board.

          Section 1.2. Board Committees. The Company agrees that the Third Point Nominees shall be
offered the opportunity to become a member of each committee of the Board now existing and each
committee of the Board created in the future, so that at least one Third Point Nominee shall be a
member of each committee of the Board (unless both Third Point Nominees, in their sole discretion,
decline to serve on any such committee), provided in all such cases that each Third Point Nominee
shall be entitled to be a member of any committee of the Board only if he or she meets any
independence or other requirements under applicable law and the rules and regulations of the Nasdaq
Global Select Market or other securities exchange that the Company’s securities may then be traded
for service on such committee. Notwithstanding the foregoing, the Board shall not be required to
seat more than one Third Point Nominee on any committee of the Board.

          Section 1.3. Resignations. Notwithstanding any other provision of this Agreement to the
contrary, (a) Roorda hereby irrevocably resigns as a director of the Company, effective immediately
upon adoption of a resolution of the Board (adopted by a majority of the directors who are not
Third Point Nominees), which resolution is adopted on or following the first date on which any
Holder sells, transfers or otherwise disposes of securities of the Company such that the Holders’
aggregate beneficial ownership of the Company’s common stock (the “Common Stock”) is
reduced to less than five percent (5%) of the outstanding shares of Common Stock, and (b) Tripodo
hereby irrevocably resigns as a director of the Company, effective immediately upon adoption of a
resolution of the Board (adopted by a majority of the directors who are not Third Point Nominees),
which resolution is adopted on or following the first date on which any Holder sells, transfers or
otherwise disposes of securities of the Company such that the Holders’ aggregate beneficial
ownership of the Common Stock is reduced to less than three percent (3%) of the outstanding shares
of Common Stock, in each case calculated in accordance with Rule 13d-3(d)(1)(i) promulgated under
the Exchange Act of 1934, as amended (the “Exchange Act”). Third Point shall promptly
notify the Company of any sale, transfer or other disposition of securities of the Company that
would cause the aggregate ownership of the Holders to drop below the thresholds specified in the
preceding sentence. The parties hereto agree and acknowledge that the preceding sentence shall
serve as Roorda’s and Tripodo’s formal (but conditional) irrevocable resignations delivered to the
Company and that no additional agreement, notice or action shall be necessary to immediately
effectuate such resignations in accordance therewith. Roorda and Tripodo each agrees that he shall
not contest or seek to contest the validity or effectiveness of such resignations. In the event of
any resignation required pursuant to this Section 1.3, the next tranche of unvested grants of
equity or other consideration awarded to the Third Point Nominee or Nominees resigning shall
immediately become vested and not subject to forfeiture. For the avoidance of doubt, it is
contemplated that, in accordance with existing Company policy, each Third Point Nominee will
receive a grant of 40,000 restricted shares of Common Stock, vesting ratably on the first, second
and third anniversaries of grant. If, for example, a Third Point Nominee resigns prior to the
first anniversary of grant, there shall vest pursuant to this Section 1.3 only that tranche (13,333
shares) of Common Stock that

3

 

would vest on the first anniversary of grant, and the remaining 26,667 shares granted would
remain unvested.

          Section 1.4. Termination of Litigation and Solicitation; Voting Agreement.

          (a) Concurrent with the execution and delivery of this Agreement, certain of the parties
hereto are joining in the execution and delivery of that certain Stipulation of Dismissal
terminating with prejudice Third Point LLC v. TXCO Resources, Inc. in the Delaware Chancery
Court (C.A. No. 3489-VCL) (the “Delaware Litigation”).

          (b) From the date hereof through the completion of the 2008 Annual Meeting, neither Third
Point nor any of its Affiliates (as defined below) nor the Third Point Nominees shall, directly or
indirectly, other than as contemplated by this Agreement and other than in a manner consistent with
the recommendations of the Board to the Company’s stockholders, solicit proxies or consents for the
voting of any voting or other securities of the Company or otherwise become a “participant,”
directly or indirectly, in any “solicitation” of “proxies” or consents to vote, or become a
“participant” in any “election contest” involving the Company or the Company’s securities (all
terms used herein and defined in Regulation 14A under the Exchange Act having the meanings assigned
to them therein), (ii) seek to advise or influence any person with respect to the voting of any
securities of the Company, (iii) initiate, propose or otherwise “solicit” the Company stockholders
for the approval of shareholder proposals, (iv) otherwise communicate with the Company’s
stockholders or others pursuant to Rule 14a-1(l)(2)(iv) under the Exchange Act, or (v) otherwise
engage in any course of conduct with the purpose of causing stockholders of the Company to vote
contrary to the recommendation of the Board on any matter presented to the Company’s stockholders
for their vote or challenging the policies of the Company. For purposes of this Agreement,
“Affiliate” means, with respect to any person, any other person that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is under common
control with, such first person, and any employees, officers and partners of Third Point.

          (c) At the 2008 Annual Meeting, the Holders shall cause all shares of Common Stock
beneficially owned by each of them to be present at such meeting for purposes of establishing a
quorum and to be voted (x) for the nominees recommended by the Board (provided such nominees
include the Third Point Nominees), (y) as Third Point determines is appropriate, on all other
proposals of the Board not covered by clause (z) below, and (z) in accordance with the
recommendation of the Board on the proposals contemplated by Sections 1.7 and 1.8 hereof.

          Section 1.5. Right to Information. For so long as there is a Third Point Nominee on the
Board or so long as Third Point is entitled to appoint a replacement Third Point Nominee, at Third
Point’s option, Third Point shall have the right from time to time to receive confidential
information from the Company (including any financial advisor or other expert retained by the
Company, the Board or any committee of the Board) and/or the Third Point Nominees, and to discuss
with appropriate representatives of the Company (including any financial advisor or other expert
retained by the Company, the Board or any committee of the Board) and/or the Third Point Nominees
all matters concerning the Company (whether or not

4

 

confidential), to the same extent as any
director of the Company. Third Point agrees to keep all
such information it may receive confidential and shall not disclose such information to any
third party other than its employees and legal counsel who have a need to know such information,
provided such employees and legal counsel agree to keep such information confidential and not
disclose the same. Third Point shall be responsible for any disclosure by its employees and legal
counsel of any such information. Notwithstanding the foregoing, Third Point, and its employees and
legal counsel, shall not be required to keep confidential any such information (i) that is made
public by the Company or any other person who is not known to Third Point to be subject to a
confidentiality obligation to the Company or (ii) that Third Point has developed on its own prior
to receiving such information from the Company (or any financial advisor or other expert retained
by the Company, the Board or any committee of the Board) or a Third Point Nominee. Third Point
acknowledges that it is aware that the United States securities laws prohibit any person who has
material nonpublic information about a company from purchasing or selling securities of such
company, or from communicating such information to any other person under circumstances in which it
is reasonably foreseeable that such person is likely to purchase or sell such securities. Third
Point agrees that, if it exercises its right to receive confidential information pursuant to this
Section 1.5, it will comply with the Company’s Insider Trading Policy and only trade in trading
windows in which Board members are permitted to trade; provided that, if Third Point should
exercise its right at any time not to receive further confidential information it will only be
required to comply with the Company’s Insider Trading Policy until the beginning of the next
trading window in which Board members are permitted to trade; and provided further
that if at any time or times Third Point shall subsequently exercise its right to receive
confidential information pursuant to this Section 1.5, it will once again comply with the Company’s
Insider Trading Policy, subject to termination of that obligation as provided in the first proviso
to this sentence. Notwithstanding anything in this Section 1.5 to the contrary, Third Point shall
not be entitled to receive pursuant to this Section any confidential information that counsel to
the Company determines in good faith is protected by the attorney-client privilege and cannot be
provided to Third Point in a manner that is reasonably likely not to cause a waiver of such
privilege.

          Section 1.6. Prohibited Actions. The Company agrees that it will not, prior to the holding
of the 2009 annual meeting of stockholders of the Company or any special meeting in lieu thereof
and any and all adjournments, postponements, reschedulings or continuations thereof (collectively,
the “2009 Annual Meeting”) and the time that the directors elected at the 2009 Annual
Meeting are seated on the Board for their respective terms expiring in 2012, (i) increase the size
of the Board to more than seven directors or reclassify any director’s position on the Board, other
than as required by Section 1.1 of this Agreement, (ii) change the advance notice provisions of the
Bylaws set forth in Section 12 of Article II thereof or impose any other notification requirement
on stockholders of the Company regarding business to be conducted at stockholder meetings, (iii)
amend, modify or prescribe any qualifications for directors of the Company or (iv) affect the right
of the stockholders of the Company to amend the Bylaws.

          Section 1.7. Royalty Buyback. The Company and Sigmon agree to negotiate in good faith the
purchase by the Company from Sigmon, for consideration consisting of Common

5

 

Stock, of that certain
overriding royalty interest granted by the Company to Mr. Sigmon in all leases acquired by the
Company (the “Royalty Buyback”). The Board and Sigmon shall jointly
choose (with the concurrence of the Third Point Nominees for so long as they are both serving
on the Board) an appraiser who shall provide an appraisal report to the Company and Sigmon in aid
of their negotiations in respect of the Royalty Buyback. The Company shall present to its
stockholders for approval at the 2008 Annual Meeting the terms of a stock plan designed
specifically for the purpose of providing the shares to be issued to Sigmon in the Royalty Buyback
if and when the terms of the Royalty Buyback are agreed, and any shares authorized under such plan
that are not required to fund the Royalty Buyback shall be removed from the plan and not added to
any other plan without further stockholder approval.

          Section 1.8. 2005 Stock Incentive Plan. Third Point and the Company agree that the Company
may present to stockholders for approval at the 2008 Annual Meeting amendments to the Company’s
2005 Stock Incentive Plan to provide that shares of the Company’s common stock that have been
issued or are issuable under the Company’s expired 1995 Flexible Incentive Plan will not be
deducted from the number of shares of the Company’s common stock that are reserved for issuance
under the 2005 Stock Incentive Plan. The parties hereto further agree and consent to such other
actions that Nasdaq may require of the Company in order to accomplish the intent and purpose of
this Section 1.8 of the Agreement.

          Section 1.9. Expenses. The Company shall reimburse Third Point and its Affiliates for all
reasonable, documented out-of-pocket costs and expenses in connection with (i) the Delaware
Litigation, (ii) the preparation of any proxy materials relating to the 2008 Annual Meeting by
Third Point and its Affiliates, and (iii) the preparation for and the solicitation of proxies for
such meeting, including without limitation legal fees and the fees of the proxy solicitation agent
retained by Third Point and its Affiliates for such meeting. In no event shall (x) the costs and
expenses to be paid or reimbursed by the Company pursuant to this Section 1.9 exceed $500,000 or
(y) Third Point be required to provide to the Company any documentation, such as the detail of
invoices of legal services, the provision of which could result in a waiver of the attorney-client
privilege.

          Section 1.10. 2008 Annual Meeting Date and Record Date. Third Point acknowledges, agrees and
consents to the Company (i) postponing the date of the 2008 Annual Meeting from May 9, 2008 to such
later date that is subsequently approved by the Board; provided, that the 2008 Annual Meeting is
not postponed to a date later than June 10, 2008, and (ii) resetting the current record date of the
2008 Annual Meeting from March 17, 2008 to such later date that is subsequently approved by the
Board and is otherwise in compliance with the Company’s Amended and Restated Bylaws.

          Section 1.11. Form 8-K. The Company agrees to disclose this Agreement in a Form 8-K filed
with the Securities and Exchange Commission in the time period required by applicable law and to
file this Agreement as an exhibit to such Form 8-K.

6

 

ARTICLE II.

MISCELLANEOUS PROVISIONS

          Section 2.1. Representations and Warranties.

          (a) Each of the parties hereto represents and warrants to the other party that:

          (i) such party has all requisite authority and power to execute and deliver this
Agreement and to consummate the transactions contemplated hereby;

          (ii) the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by all required
action on the part of such party and no other proceedings on the part of such party are
necessary to authorize the execution and delivery of this Agreement or to consummate the
transactions contemplated hereby;

          (iii) the Agreement has been duly and validly executed and delivered by such party and
constitutes the valid and binding obligation of such party enforceable against such party in
accordance with their respective terms; and

          (iv) this Agreement will not result in a violation of any terms or provisions of any
agreements to which such person is a party or by which such party may otherwise be bound or
of any law, rule, license, regulation, judgment, order or decree governing or affecting such
party.

          (b) The parties hereto acknowledge, warrant and represent that they have carefully read this
Agreement, understand it, have consulted with and received the advice of counsel regarding this
Agreement, agree with its terms, are duly authorized to execute it and freely, voluntarily and
knowingly execute it.

          Section 2.2 General.

          (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and the respective successors, personal representatives and assigns of the parties
hereto. None of the Holders may assign any of its rights or obligations under this Agreement to
any other person.

          (b) This Agreement contains the entire agreement between the parties with respect to the
subject matter hereof and thereof and supersedes all prior and contemplated arrangements and
understandings with respect thereto.

          (c) This Agreement may be signed in counterparts, each of which shall constitute an original
and all of which together shall constitute one and the same Agreement.

          (d) All notices and other communications required or permitted hereunder shall be effective
upon receipt and shall be in writing and may be delivered in person, by facsimile, electronic mail,
express delivery service or U.S. mail, in which event it may be mailed

7

 

by first-class, certified or
registered, postage prepaid, addressed to the party to be notified at the respective addresses set
forth below, or at such other addresses which may hereinafter be designated in writing:

If to the Company:

TXCO Resources Inc.

777 E. Sonterra Blvd., Suite 350

San Antonio, Texas 78258

Attention: James E. Sigmon

Fax No.: (210) 496-3232

with copies to:

Fulbright & Jaworski L.L.P.

300 Convent Street, Suite 2200

San Antonio, Texas 78205-3792

Attention: Daryl L. Lansdale, Jr.

Fax No.: (210) 270-7205

and

Morris, Nichols, Arsht & Tunnell LLP

Chase Manhattan Centre, 18th Floor

1201 North Market Street

Wilmington, DE 19899

Attention: Martin P. Tully

Fax No.: (302) 658-3989

If to Third Point or other Holder:

Third Point LLC

390 Park Avenue

New York, NY 10022

Attention: Daniel S. Loeb

Fax No.: (212) 224-7401

with a copy to:

Willkie Farr & Gallagher LLP

787 Seventh Avenue

New York, New York 10019

Attention: Michael A. Schwartz

Fax No.: (212) 728-9267

          (e) This Agreement and the legal relations hereunder between the parties hereto shall be
governed by and construed in accordance with the laws of the State of Delaware

8

 

applicable to
contracts made and performed therein, without giving effect to the principles of conflicts of law
thereof.

          (f) Whenever possible, each provision of this Agreement shall be interpreted in such manner as
to be effective and valid, but if any provision of this Agreement is held to be invalid or
unenforceable in any respect, such invalidity or unenforceability shall not render invalid or
unenforceable any other provision of this Agreement.

          (g) It is hereby agreed and acknowledged that it will be impossible to measure in money the
damages that would be suffered if the parties fail to comply with any of the obligations herein
imposed on them and that in the event of any such failure, an aggrieved person will be irreparably
damaged and will not have an adequate remedy at law. Any such person, therefore, shall be entitled
to injunctive relief, including specific performance, to enforce such obligations, without the
posting of any bond, and, if any action should be brought in equity to enforce any of the
provisions of this Agreement, none of the parties hereto shall raise the defense that there is an
adequate remedy at law.

          (h) Each party hereto shall do and perform or cause to be done and performed all such further
acts and things and shall execute and deliver all such other agreements, certificates, instruments
and documents as any other party hereto reasonably may request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the transactions contemplated
hereby.

          (i) Each of the parties hereto hereby irrevocably and unconditionally consents to submit to
the exclusive jurisdiction of the courts of the State of Delaware and of the United States of
America, in each case located in the County of New Castle, for any action, proceeding or
investigation in any court or before any governmental authority arising out of or relating to this
Agreement and the transactions contemplated hereby (and agrees not to commence any action,
proceeding or investigation relating thereto except in such courts), and further agrees that
service of any process, summons, notice or document by registered mail to its respective address
set forth in this Agreement shall be effective service of process for any action, proceeding or
investigation brought against it in any such court. Each of the parties hereto hereby irrevocably
and unconditionally waives any objection to the laying of venue of any action, proceeding or
investigation arising out of this Agreement or the transactions contemplated hereby in the courts
of the State of Delaware or the United States of America, in each case located in the County of New
Castle, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim
in any such court that any such action, proceeding or investigation brought in any such court has
been brought in an inconvenient forum.

[Signature pages follow]

9

 

          IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day and year first written above.

	 	 	 	 	 
	 	TXCO RESOURCES INC.

 	 
	 	By:  	/s/  JAMES E. SIGMON
 	 
	 	 	Name:  	James E. Sigmon 	 
	 	 	Title:  	Chairman, President and

Chief Executive Officer 	 
	 
	 	THIRD POINT LLC

 	 
	 	By:  	/s/  DANIEL S. LOEB
 	 
	 	 	Name:  	Daniel S. Loeb 	 
	 	 	Title:  	Chief Executive Officer 	 
	 
	 	 	 
	 	                                   /s/  DANIEL S. LOEB
 	 
	 	        Daniel S. Loeb 	 
	 	 	 
	 
	 	THIRD POINT OFFSHORE FUND, LTD.

 	 
	 	By:  	/s/  DANIEL S. LOEB
 	 
	 	 	Name:  	Daniel S. Loeb 	 
	 	 	Title:  	Director 	 
	 
	 	THIRD POINT ULTRA LTD.

By: Third Point LLC, its Investment Manager

 	 
	 	By:  	/s/  DANIEL S. LOEB
 	 
	 	 	Name:  	Daniel S. Loeb 	 
	 	 	Title:  	Chief Executive Officer 	 
	 

[SETTLEMENT AGREEMENT SIGNATURE PAGE]

 

 

	 	 	 	 	 
	 	THIRD POINT PARTNERS LP

By: Third Point Advisors LLC, its General Partner

 	 
	 	By:  	/s/  DANIEL S. LOEB
 	 
	 	 	Name:  	Daniel S. Loeb 	 
	 	 	Title:  	Chief Executive Officer 	 
	 
	 	THIRD POINT PARTNERS LP

By: Third Point Advisors LLC, its General Partner

 	 
	 	By:  	/s/  DANIEL S. LOEB
 	 
	 	 	Name:  	Daniel S. Loeb 	 
	 	 	Title:  	Managing Member 	 
	 
	 	THIRD POINT PARTNERS QUALIFIED LP

By: Third Point Advisors LLC, its General Partner

 	 
	 	By:  	/s/  DANIEL S. LOEB
 	 
	 	 	Name:  	Daniel S. Loeb 	 
	 	 	Title:  	Managing Member 	 
	 
	 	LYXOR/THIRD POINT FUND LIMITED

By: Third Point LLC, its Investment Manager

 	 
	 	By:  	/s/  DANIEL S. LOEB
 	 
	 	 	Name:  	Daniel S. Loeb 	 
	 	 	Title:  	Chief Executive Officer 	 
	 

[SETTLEMENT AGREEMENT SIGNATURE PAGE]

 

 

	 	 	 	 	 
	 	For purposes of Sections 1.1(d) and 1.3 hereof
only:

 	 
	 	/s/  JACOB ROORDA
 	 
	 	Jacob Roorda 	 
	 	 	 
	 
	 	For purposes of Sections 1.1(d) and 1.3 hereof
only:

 	 
	 	/s/  ANTHONY TRIPODO
 	 
	 	Anthony Tripodo 	 
	 	 	 
	 
	 	For purposes of Section 1.7 hereof only:

 	 
	 	/s/  JAMES E. SIGMON
 	 
	 	James E. Sigmon 	 
	 	 	 
	 

[SETTLEMENT AGREEMENT SIGNATURE PAGE]

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