Document:

Exhibit 10.6

 

ASSET PURCHASE AND SALE AGREEMENT

 

 

By and Between

 

Jones Energy Holdings, LLC,

a Delaware limited liability company (the “Purchaser”),

 

and

 

Southridge Energy, LLC,

a Texas limited liability company (the “Seller”)

 

 

Dated as of April 12, 2011

 

 

ASSET PURCHASE AND SALE AGREEMENT

 

CONTENTS

 

ARTICLE 1
 INTENT, STRUCTURE OF AGREEMENT
 AND DEFINITION OF TERMS

 

	
1.1
    	
Intent and Structure of Agreement
    	
 
    	
1
    
	
1.2
    	
Defined Terms
    	
 
    	
1
    
	
1.3
    	
References and Titles
    	
 
    	
11
    
	
 
    	
 
    	
 
    	
 
    
	
ARTICLE 2
    
	
PURCHASE   AND SALE
    
	
 
    	
 
    	
 
    	
 
    
	
2.1
    	
Assignment
    	
 
    	
12
    
	
2.2
    	
Purchase Price
    	
 
    	
12
    
	
2.3
    	
Adjustments to Purchase Price
    	
 
    	
12
    
	
2.4
    	
Purchase Price Adjustment Statement
    	
 
    	
13
    
	
2.5
    	
Final Settlement
    	
 
    	
13
    
	
2.6
    	
Allocation of Purchase Price
    	
 
    	
13
    
	
 
    	
 
    	
 
    	
 
    
	
ARTICLE 3
    
	
CLOSING
    
	
 
    	
 
    	
 
    	
 
    
	
3.1
    	
Closing Date
    	
 
    	
14
    
	
3.2
    	
Actions at Closing
    	
 
    	
14
    
	
3.3
    	
Remedies for Failure to Close
    	
 
    	
14
    
	
 
    	
 
    	
 
    	
 
    
	
ARTICLE 4
    
	
REPRESENTATIONS   AND WARRANTIES OF SELLER
    
	
 
    
	
4.1
    	
Certain Representations, Warranties and Covenants of Seller
    	
 
    	
15
    
	
 
    	
 
    	
 
    	
 
    
	
ARTICLE 5
    
	
REPRESENTATIONS   AND WARRANTIES OF PURCHASER
    
	
 
    
	
5.1
    	
Representations and Warranties of Purchaser
    	
 
    	
23
    
	
 
    	
 
    	
 
    	
 
    
	
ARTICLE 6
    
	
DUE   DILIGENCE AND TITLE EXAMINATION
    
	
 
    
	
6.1
    	
Due Diligence
    	
 
    	
25
    
	
6.2
    	
Title Matters
    	
 
    	
25
    
	
6.3
    	
Adjustments to Purchase Price for Title Defects
    	
 
    	
27
    

 

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6.4
    	
Poolings and Communitizations
    	
 
    	
28
    
	
6.5
    	
Consents to Assignment and Preferential Rights to Purchase
    	
 
    	
29
    
	
6.6
    	
Environmental Defects and Adjustments to Purchase Price
    	
 
    	
29
    
	
6.7
    	
Purchaser Indemnification
    	
 
    	
32
    
	
 
    	
 
    	
 
    	
 
    
	
ARTICLE 7
    
	
COVENANTS
    
	
7.1
    	
Certain Covenants of Seller
    	
 
    	
33
    
	
7.2
    	
Conduct of Business Prior to Closing
    	
 
    	
34
    
	
7.3
    	
Suspense Accounts
    	
 
    	
35
    
	
7.4
    	
Non-Consent Election
    	
 
    	
35
    
	
7.5
    	
Consents and Approvals
    	
 
    	
36
    
	
7.6
    	
Casualty Loss
    	
 
    	
36
    
	
7.7
    	
Confidentiality
    	
 
    	
37
    
	
7.8
    	
Non-Competition Agreement
    	
 
    	
37
    
	
7.9
    	
Imbalances
    	
 
    	
38
    
	
7.10
    	
Successor Operator
    	
 
    	
38
    
	
7.11
    	
Tax Matters
    	
 
    	
38
    
	
7.12
    	
Certain Restrictions
    	
 
    	
39
    
	
7.13
    	
Abandoned Wells
    	
 
    	
40
    
	
 
    	
 
    	
 
    	
 
    
	
ARTICLE 8
    
	
CONDITIONS   TO CLOSING
    
	
 
    
	
8.1
    	
Conditions to Obligations of Purchaser
    	
 
    	
40
    
	
8.2
    	
Conditions to Obligations of Seller
    	
 
    	
42
    
	
 
    	
 
    	
 
    	
 
    
	
ARTICLE 9
    
	
POST-CLOSING OBLIGATIONS; SURVIVAL OF   REPRESENTATIONS, WARRANTIES AND COVENANTS; INDEMNIFICATION
    
	
9.1
    	
Receipts
    	
 
    	
43
    
	
9.2
    	
Expenses
    	
 
    	
43
    
	
9.3
    	
Assumed Obligations
    	
 
    	
43
    
	
9.4
    	
Survival
    	
 
    	
44
    
	
9.5
    	
Seller’s Indemnification Obligations
    	
 
    	
45
    
	
9.6
    	
Purchaser’s Indemnification Obligations
    	
 
    	
45
    
	
9.7
    	
Net Amounts
    	
 
    	
46
    
	
9.8
    	
Tax Treatment
    	
 
    	
46
    
	
9.9
    	
Indemnification Proceedings
    	
 
    	
46
    
	
9.10
    	
Indemnification Exclusive Remedy
    	
 
    	
47
    
	
9.11
    	
Limited to Actual Damages
    	
 
    	
47
    
	
9.12
    	
Indemnification Despite Negligence
    	
 
    	
47
    
	
9.13
    	
Limited Survivability
    	
 
    	
47
    

 

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ARTICLE   10
    
	
DISPUTES
    
	
 
    
	
10.1
    	
Dispute Resolution
    	
 
    	
47
    
	
10.2
    	
Negotiation between Executives
    	
 
    	
48
    
	
10.3
    	
Mediation
    	
 
    	
48
    
	
10.4
    	
Litigation
    	
 
    	
48
    
	
10.5
    	
Choice of Forum and Venue
    	
 
    	
48
    
	
10.6
    	
Waiver of Jury Trial
    	
 
    	
48
    
	
10.7
    	
Provisional Remedies
    	
 
    	
49
    
	
10.8
    	
Tolling Statute of Limitations
    	
 
    	
49
    
	
10.9
    	
Performance to Continue
    	
 
    	
49
    
	
10.10
    	
Exclusive Remedies In Failure to Close
    	
 
    	
49
    
	
 
    	
 
    	
 
    	
 
    
	
ARTICLE   11
    
	
TERMINATION,   AMENDMENT AND WAIVER
    
	
 
    
	
11.1
    	
Termination
    	
 
    	
49
    
	
11.2
    	
Effect of Termination
    	
 
    	
50
    
	
11.3
    	
Amendment
    	
 
    	
50
    
	
11.4
    	
Waiver
    	
 
    	
50
    
	
 
    	
 
    	
 
    	
 
    
	
ARTICLE   12
    
	
MISCELLANEOUS
    
	
 
    
	
12.1
    	
Expenses
    	
 
    	
50
    
	
12.2
    	
Further Assurances
    	
 
    	
51
    
	
12.3
    	
Binding Agreement; Assignment; Parties in Interest
    	
 
    	
51
    
	
12.4
    	
Notices
    	
 
    	
51
    
	
12.5
    	
Publicity
    	
 
    	
52
    
	
12.6
    	
Exhibits and Schedules
    	
 
    	
52
    
	
12.7
    	
Entire Agreement; Amendments; Waivers
    	
 
    	
52
    
	
12.8
    	
Severability
    	
 
    	
52
    
	
12.9
    	
Counterparts
    	
 
    	
52
    
	
12.10
    	
Mutual Waiver of Certain Remedies
    	
 
    	
53
    
	
12.11
    	
Preparation of Agreement
    	
 
    	
53
    

 

iii

 

EXHIBITS AND SCHEDULES

 

	
Exhibits
    	
Topic
    
	
 
    	
 
    
	
A-1   (i)
    	
Properties   — Producing Properties
    
	
A-1   (ii)
    	
Properties   — Equipment
    
	
A-2
    	
Represented   Interests
    
	
A-3
    	
Allocated   Values
    
	
A-4
    	
Excluded   Assets
    
	
A-5
    	
Undeveloped   Properties
    
	
B
    	
Form   of Assignment and Bill of Sale
    
	
C
    	
Non-Competition   Area
    
	
D
    	
Amendment   between Atoka Midstream LLC and Pablo Energy II, LLC
    
	
 
    	
 
    
	
Schedules
    	
Topic
    
	
 
    	
 
    
	
1.2
    	
Permitted Encumbrances
    
	
3.3(c)
    	
Purchaser Hedges
    
	
4.1(f)
    	
Approvals
    
	
4.1(h)
    	
Pending   or Threatened Investigations/Review by Governmental Entities
    
	
4.1(j)
    	
Environmental   Laws
    
	
4.1(k)(i)
    	
Exceptions   to Contracts
    
	
4.1(k)(ii)
    	
Contracts
    
	
4.1(l)
    	
Commitments   or Proposals
    
	
4.1(m)
    	
Production   Sales Contracts
    
	
4.1(n)
    	
Exceptions   to Payment of Expenses and Royalties
    
	
4.1(o)
    	
Prepayments;   Imbalances
    
	
4.1(p)
    	
Fees   and Commissions
    
	
4.1(r)
    	
Exceptions   to Oil and Gas Operations
    
	
4.1(v)
    	
Consents   and Preferential Purchase Rights
    
	
4.1(w)
    	
Bonds
    
	
4.1(x)
    	
AMI   and Farmout Obligations
    
	
7.2(a)(iv)
    	
Permitted   Agreements
    
	
7.3
    	
Suspended   Funds
    
	
7.13
    	
Abandoned   Wells
    

 

iv

 

ASSET PURCHASE AND SALE AGREEMENT

 

THIS ASSET PURCHASE AND SALE AGREEMENT (this “Agreement”) is dated as of the 12th day of April, 2011, by and between, Jones Energy Holdings, LLC, a Delaware limited liability company (the “Purchaser”), and Southridge Energy, LLC, a Texas limited liability company (the “Seller”).

 

W I T N E S S E T H:

 

WHEREAS, Seller owns undivided leasehold working interests in and to certain Producing Properties (as hereinafter defined); and

 

WHEREAS, Seller owns the Undeveloped Properties (as hereinafter defined); and

 

WHEREAS, Seller  desires to sell to Purchaser and Purchaser desires to purchase from Seller (a) all of Seller’s interest in the Producing Properties and (b) fifty percent (50%) of Seller’s right, title and interest in and to the Undeveloped Properties, for the consideration and upon the terms and conditions set forth herein; and

 

WHEREAS, concurrently with the execution and delivery of this Agreement, Seller and Purchaser have entered into the Farmout Acquisition Agreement (as hereinafter defined); and

 

NOW, THEREFORE, for and in consideration of the premises and the mutual covenants contained herein, the parties hereto agree as follows:

 

ARTICLE 1
 INTENT, STRUCTURE OF AGREEMENT
 AND DEFINITION OF TERMS

 

1.1                               Intent and Structure of Agreement.  It is the intent of the parties that, for the consideration set forth herein, Purchaser acquire the Assets.  In consideration of the transaction contemplated by this Agreement, Purchaser shall pay to Seller at the Closing cash in the amount specified in Section 2.2.  The Purchase Price, as adjusted pursuant to Article 2, is herein referred to as the “Adjusted Purchase Price.”

 

1.2                               Defined Terms.  Unless the context otherwise requires, the following terms used in this Agreement shall have the meanings assigned to them in this Section 1.2 or in the Sections referred to below:

 

“Abandoned Well” shall have the meaning set forth in Section 7.13.

 

“Adjustment Period” shall have the meaning set forth in Section 2.3.

 

“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 

 

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control with, such Person.  “Control” means ownership of fifty percent (50%) or more of the voting interest (stock or otherwise) of such Person.

 

“Aggregate Environmental Defect Threshold” shall have the meaning set forth in Section 6.6(a)(ii).

 

“Allocated Value” means the allocated value of each Producing Property as shown on Exhibit A-3.  Purchaser shall prepare  the allocated value data on Exhibit A-3 and shall present Exhibit A-3 to Seller for its review and approval.

 

“Alternative Transaction” shall have the meaning set forth in the Exclusivity Letter.

 

“Applicable Law” means any statute, law, principle of common law, rule, regulation, judgment, order, ordinance, requirement, code, writ, injunction, or decree of any Governmental Entity.

 

“Arkoma Woodford” means the full and entire Woodford Formation, or its stratigraphic equivalent, as found between the depths of 8,008 and 8,180 on the Schlumberger Litho Density/Compensated Neutron Log, conducted on June 29, 2006 in the Pablo-operated Denson 1H-15 (API# 35-029-20744) having a surface location approximately 660 feet from the north line and 1,520 from the west line of Section 15, Township 1 North, Range 10 East in Coal County, Oklahoma.

 

“Assets” means all of Seller’s right, title and interest in and to the following:

 

(i)                                     the Producing Properties;

 

(ii)                                  an undivided fifty percent (50%) of Seller’s interest in the Undeveloped Properties (together with the Producing Properties, the “Properties”);

 

(iii)                               all of the following items insofar as they cover and include the Producing Properties and an undivided fifty percent (50%) of the following items insofar as they cover and include the Undeveloped Properties:

 

a.                                      the Contracts;

 

b.                                      all surface fee interests, easements, permits, licenses, servitudes, rights-of-way, surface leases and other surface rights or interests appurtenant to, and used or held for use in connection with, the Properties;

 

c.                                       all equipment, machinery, fixtures and other tangible personal property and improvements located on the Properties or used or held for use in connection with the operation of the Properties or the production of oil or gas from the Properties;

 

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d.                                      the materials and equipment inventory, if any, used or held for use by Seller with respect to the Properties;

 

e.                                       all Hydrocarbons within, produced from or attributable to the Properties;

 

f.                                        the Property Records;

 

g.                                       to the extent transferable, any federal, state and local governmental licenses, permits, franchises, orders, exemptions, variances, waivers, authorizations, certificates, consents, rights, privileges and applications therefor, in each case with respect to the Assets;

 

h.                                      to the extent assignable, all right to indemnities and releases from third Persons relating to the Assets and, to the extent not assignable, the benefit of such indemnities and releases; and

 

i.                                          to the extent transferable, all other assets, properties or rights of every kind and description, whether real, personal or mixed, tangible or intangible, that are owned, licensed or otherwise held or used by Seller related to the Properties; and

 

(iv)                              for the avoidance of doubt, the Assets shall not include the Excluded Assets.

 

“Assignment” means the Assignment and Bill of Sale to be entered into by the parties hereto, which shall be in the form attached hereto as Exhibit B.

 

“Assumed Obligations” shall have the meaning set forth in Section 9.3.

 

“Citibank Lien” means that certain Loan Agreement, dated as of May 31, 2007, as amended, from Southridge Energy, LLC, as successor in interest to Pablo Energy II, LLC, to Citibank, N.A., in its capacity as administrative agent thereunder and successor in interest to Great Plains Ag Credit, PCA, as well as any existing Mortgage, Security Agreement, Financing Statement and Assignment of Proceeds of Sale of Production, as the same may be amended, which has been entered into pursuant to the Loan Agreement.

 

“Closing” and “Closing Date” shall have the meanings given to such terms in Section 3.1.

 

“Code” means the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder by the Treasury Department of the United States.

 

“Consultant” shall have the meaning set forth in Section 6.6(b).

 

“Contracts” means any and all existing operating agreements, unit agreements, gas purchase and sales contracts, oil sales contracts, gas transportation and processing contracts, 

 

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farmin agreements, farmout agreements, exploration agreements, leasehold acquisition agreements (including associated area of mutual interest rights and provisions), pooling orders (including any associated agreements among parties to such orders) and all other agreements (i) to the extent related to or associated with the Properties, and (ii) customary in the oil and gas exploration, development, production or extraction business or in the business of processing and/or marketing of hydrocarbons produced therefrom, including, without limitation, those set forth in Schedules 4.1(k)(i) and 4.1(k)(ii).  For the avoidance of doubt, the Contracts shall not include any agreements effecting Hedging Transactions.

 

“Cure Period” shall have the meaning set forth in Section 6.3.(b).

 

“Defect Threshold” means, for the Producing Properties taken as a whole, Title Defects asserted by Purchaser that adversely affect the Producing Properties by an aggregate amount equal to or in excess of one percent (1%) of the Allocated Value of the Producing Properties taken as a whole.

 

“Defensible Title” to a Property means such title and right of Seller to those Hydrocarbons produced from the Arkoma Woodford play that, subject to and except for the Permitted Encumbrances:

 

(i)                                     Entitles Seller to receive not less than the net revenue interest (“Net Revenue Interest”) set forth for each Property (e.g., well interest, unit interest or leasehold interest, as applicable) on Exhibit A-2, subject to the limitations as to depths or formations, if any, set forth in Exhibit A-1;

 

(ii)                                  Obligates Seller to bear costs and expenses relating to the maintenance, development, operation and the production of oil and gas from each Property (e.g., well interest, unit interest or leasehold interest, as applicable) in an amount not greater than the working interest (“Working Interest”) therefore as set forth in Exhibit A-2 without a corresponding increase in the Net Revenue Interest for such Property; and

 

(iii)                               Is free and clear of encumbrances, liens and defects (including the lack of sufficient surface rights to access the Properties) that would create an impairment of use and enjoyment of or loss of interest in the affected Property.

 

“Effective Date” means 12:01 a.m. on December 1, 2010.

 

“Environmental Laws” shall have the meaning set forth in Section 4.1(j).

 

“Environmental Claims” shall have the meaning set forth in Section 4.1(j)(ii).

 

“Environmental Cure Period” shall have the meaning set forth in Section 6.6(a)(iii).

 

“Environmental Defect” means a violation of applicable Environmental Laws or condition involving Hazardous Substances that presently exists on a Property that requires reporting to a governmental authority, investigation, removal, remediation, restoration or 

 

4

 

correction under Environmental Laws or any contract or agreement relating to the environmental condition of the Property or the operation thereof.

 

“Environmental Defect Notice” shall have the meaning set forth in Section 6.6(a).

 

“Examination Period” shall have the meaning set forth in Section 6.1(a).

 

“Excluded Assets” means the Pontotoc Interest, the Payne Properties, any interests excluded by either party hereto pursuant to Sections 6.3(c) or 6.6(c), or reconveyed to Seller pursuant to Section 6.4, as the case may be, all rights to severance tax refunds for severance taxes paid prior to the Effective Date, all rights to recoup income overpaid to interest owners prior to the Effective Date, including but not limited to all rights to recoup the amounts set forth on Exhibit A-4, and any other assets described on Exhibit A-4.

 

“Exclusivity Letter” means that certain letter agreement dated February 17, 2011, by and between Purchaser and Seller.

 

“Farmout Acquisition Agreement” means that certain Farmout Acquisition Agreement of even date herewith between Purchaser and Seller.

 

“Farmout Agreement” means that certain Farmout Agreement to be entered into by and between Purchaser and Seller pursuant to the terms and conditions of the Farmout Acquisition Agreement.

 

“Final Settlement Date” shall have the meaning set forth in Section 2.7(a).

 

“Final Settlement Period” shall have the meaning set forth in Section 2.7(a).

 

“Final Settlement Price” shall have the meaning set forth in Section 2.7(a).

 

“Final Statement” shall have the meaning set forth in Section 2.7(a).

 

“Governmental Entity” means any court or tribunal in any jurisdiction (domestic or foreign) or any public, governmental, or regulatory body, agency, department, commission, board, bureau, or other authority or instrumentality (domestic or foreign).

 

“Hazardous Substances” means any “hazardous waste,” “hazardous substance,” “extremely hazardous substance,” “toxic chemical,” “hazardous chemical,” “toxic pollutants,” “contaminants,” “chemical,” “chemical substance,” “exploration and production wastes” or “asbestos,” as such terms are defined in any of the Environmental Laws, or related substances, in such quantities or concentrations as are regulated by such Environmental Laws or other Applicable Laws, or which may be declared to constitute a material threat to human health or to the environment.

 

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“Hedging Transaction” means any futures, hedge, swap collar, put, call, floor, cap, option or other contract that is intended to benefit from, relate to or reduce or eliminate the risk of fluctuations in the price of commodities, including hydrocarbons, interest rates, or currencies.

 

“Hydrocarbons” means oil, condensate, gas, casinghead gas and other liquid or gaseous hydrocarbons or any combination thereof.

 

“Imbalance” or “Imbalances” means over-production or under-production or over-deliveries or under-deliveries with respect to oil or gas produced from or allocated to the Producing Properties, regardless of whether such over-production or under-production or over-deliveries or under-deliveries arise at the platform, wellhead, pipeline, gathering system, transportation or other location.

 

“Indemnifying Party” and “Indemnified Parties” have the meanings as set forth in Section 9.5.

 

“Individual Environmental Defect Threshold” shall have the meaning set forth in Section 6.6(a)(i).

 

“Interim Period” means the time between the Effective Date and the Closing Date.

 

“Knowledge” of a specified Person (or similar references to a Person’s knowledge) means all information actually or constructively known to (a) in the case of a Person who is an individual, such Person, or (b) in the case of a Person which is corporation or other entity, an executive officer or employee who devoted substantive attention to matters of such nature during the ordinary course of his employment by such Person.  A Person has “constructive knowledge” of those matters which the individual involved could reasonably be expected to have as a result of undertaking an investigation of such a scope and extent as a reasonably prudent man would undertake concerning the particular subject matter.

 

“Leases” means the oil, gas or other Hydrocarbon leases (and any other rights to Hydrocarbons and other minerals in place) that are part of the Properties.

 

“Lien” means any claim, lien, mortgage, security interest, pledge, charge, option, right-of-way, easement, encroachment, or encumbrance of any kind.

 

“Material Adverse Effect” means any detrimental change, development, or effect (individually or in the aggregate) on the ownership, operation or value of the Properties, as currently operated, that (a) is or is likely to be material to the ownership, operation or value of the Properties, taken as a whole, for purposes of determining whether the conditions to Closing have been satisfied or (b) exceeds five percent (5%) of the Purchase Price in value for all other purposes under this Agreement; provided, however, that the following shall not be deemed to constitute, create or cause a Material Adverse Affect: any changes, circumstances or effects (i) that affect generally the oil and gas industry, such as fluctuations in the price of oil and gas, and that result from international, national, regional, state or local economic conditions; from changes in laws, rules or regulations applicable to Seller or the Properties or from other general

 

6

 

economic conditions, facts or circumstances that are not subject to the control of Seller; or (ii) that result from the effects of conditions or events resulting from an outbreak or escalation of hostilities (whether nationally or internationally), or the occurrence of any other calamity or crisis (whether nationally or internationally), including, without limitation, the occurrence of one or more terrorist attacks.

 

“Mowdy #1 SWD Well” means the Mowdy No. 1 salt water disposal well (API# 35-029-20060-A) described on Exhibit A-1(i) and having a surface location within Section 6, Township 1 South, Range 10 East in Coal County, Oklahoma.

 

“Net Revenue Interest” shall have the meaning set forth in this Section 1.2 within the definition of Defensible Title.

 

“Ordinary Course of Business” means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency) and in compliance in all material respects with Applicable Laws.

 

“Organizational Documents” means (i) the articles or certificate of incorporation and the bylaws of a corporation; (ii) the partnership agreement and any statement of partnership of a general partnership; (iii) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (iv) the articles of organization and regulations of a limited liability company; and (v) any charter or similar document adopted or filed in connection with the creation, formation, or organization of a partnership (limited or general), corporation, association, joint stock company, trust, joint venture or limited liability company; and (vi) any amendment to the foregoing.

 

“Payne Properties” means Sections 35 and 36, Township 1 North, Range 9 East and Section 32, Township 1 North, Range 10 East, all in Coal County, Oklahoma.

 

“Permitted Encumbrances” means:

 

(i)                                                                                     Liens for taxes which are not yet delinquent or which are being contested in good faith and for which adequate reserves have been established in each case as specifically set forth in Schedule 1.2;

 

(ii)                                                                                  Normal and customary Liens of co-owners under operating agreements, unitization agreements, and pooling orders relating to the Producing Properties, which obligations are not yet due and pursuant to which Seller is not in default;

 

(iii)                                                                               Mechanic’s and materialman’s Liens relating to the Producing Properties, which obligations are not yet due and pursuant to which Seller is not in default;

 

(iv)                                                                              Liens in the Ordinary Course of Business consisting of minor defects and irregularities in title or other restrictions (whether created by or arising out of

 

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joint operating agreements, farm-out agreements, leases and assignments, contracts for purchases of hydrocarbons or similar agreements, or otherwise in the ordinary course of business) that are of the nature customarily accepted by prudent purchasers of oil and gas properties and do not decrease the Net Revenue Interest, increase the Working Interest (without a proportionate increase in the Net Revenue Interest) and affect the value of any property encumbered thereby by less than TEN THOUSAND Dollars ($10,000);

 

(v)                                 All approvals required to be obtained from Governmental Entities that are lessors under leases forming a part of the Properties (or who administer such leases on behalf of such lessors) which are customarily obtained post-closing;

 

(vi)                              Subject to compliance with Sections 6.5 and 7.5, the preferential rights to purchase any of the Producing Properties and consents to assignment listed on Schedule 4.1(v);

 

(vii)                           Conventional rights of reassignment normally actuated by an intent to abandon or release a lease and requiring notice to the holders of such rights;

 

(viii)                        Lessors’ royalties, overriding royalties; other royalty interests, reversionary interests and similar burdens if the net cumulative effect of such burdens does not operate to reduce the Net Revenue Interests of any of the Properties to less than the Net Revenue Interest set forth in Exhibit A-2;

 

(ix)                              The terms and conditions of any leases identified on Exhibit A-1;

 

(x)                                 Easements, rights-of-way, servitudes, permits, surface leases and other rights in respect of surface operations, pipelines, grazing, or the like; and easements for streets, alleys, highways, pipelines, telephone lines, power lines, railways and other easements, and rights-of-way, on, over or in respect of any of the Producing Properties to the extent that they do not interfere with the operation of the Producing Properties  as they were being operated as of the Effective Date;

 

(xi)                              Rights reserved to or vested in any municipality or governmental, statutory or public authority to control or regulate any of the Properties in any manner, and all Applicable Laws, rules and orders of any governmental authority;

 

(xii)                           Such Title Defects (as defined below) or other defects as Purchaser has waived in writing; and

 

(xiii)                        Liens to be released at Closing.

 

“Person” means any individual, corporation, partnership, joint venture, association, limited liability company, joint-stock company, trust, enterprise, unincorporated organization, or Governmental Entity.

 

“Phase I environmental assessment” shall have the meaning set forth in Section 6.1(c).

 

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“Pontotoc Interest” means the interest of Seller as described in that certain Assignment, Conveyance and Bill of Sale recorded in Book 767, Pages 196-217 in the official public records of Coal County, Oklahoma.

 

“Pontotoc JOA” means that certain AAPL Form 610-1989 Operating Agreement, dated effective as of June 1, 2008, by and between Pablo Energy II, LLC, as operator, and Pontotoc Production Company, Inc. in respect of the Powell 1H-26 well, the Bonnie 1H-24 well and the Tomlinson 1H-23 well, and all lands and oil and gas interests described in Exhibit “A” thereto (Coal County, Oklahoma).

 

“Post-Closing Defect” shall have the meaning set forth in Section 6.3(b).

 

“Proceedings” means all proceedings, actions, claims, suits, arbitration or mediation proceedings, investigations and inquiries by or before any arbitrator or Governmental Entity.

 

“Producing Properties” means, collectively, all of Seller’s interest in the oil and gas leases, wells, and units on the lands described on Exhibit A-1(i), limited to the wellbore only of the wells described on Exhibit A-1(i) (including, for the avoidance of doubt, the Mowdy #1 SWD Well) together with all associated equipment located thereon or used in connection therewith, including the equipment described on Exhibit A-1(ii), and all other properties, rights and interests owned, legally or beneficially, by Seller as of the Effective Date which are associated with the wells described on Exhibit A-1(i); but excluding the Excluded Assets.

 

“Properties” shall have the meaning set forth in this Section 1.2 within the definition of Assets.

 

“Property Costs” means all operating expenses (including without limitation costs of insurance and ad valorem, property, severance, production and similar Taxes based upon or measured by the ownership or operation of the Properties or the production of Hydrocarbons therefrom that are not actually reimbursed by the purchaser of production, but excluding any other Taxes) and capital expenditures incurred in the ownership and operation of the Properties in the Ordinary Course of Business and, where applicable, in accordance with the relevant operating or unit agreement, if any, and overhead costs charged to the Properties under the relevant operating agreement or unit agreement, if any, but excluding without limitation liabilities, losses, costs, and expenses attributable to (i) Claims for personal injury or death, property damage or violation of any Law, (ii) obligations to plug wells, dismantle facilities, close pits and restore the surface around such wells, facilities and pits, (iii) obligations to remediate any contamination of groundwater, surface water, soil or equipment under applicable Environmental Laws, (iv) obligations to furnish make-up gas according to the terms of applicable gas sales, gathering or transportation contracts, (v) gas balancing obligations, (vi) obligations to pay working interests, royalties, overriding royalties or other interests held in suspense, all of which are addressed in Article 9 and (vii) any overhead not chargeable to other joint interest owners under the applicable operating agreements.

 

“Property Records” means, collectively, (i) the Contracts, lease files, title opinions, production records, well files, maps, surveys, and electric logs and geological data, together with

 

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all other land files, third-party contracts, documents and records, of Seller related to the Properties, and (ii) copies of accounting and tax records of Seller relating to the Properties, in each case including electronic records.

 

“Purchase Price” shall have the meaning specified in Section 2.2.

 

“Purchase Price Adjustment Statement” shall have the meaning set forth in Section 2.5.

 

“Purchaser” shall have the meaning set forth in the preamble.

 

“Purchaser Hedges” shall have the meaning set forth in Section 3.3(c).

 

“Purchaser Indemnitees” shall have the meaning set forth in Section 9.2.

 

“Purchaser’s Losses” shall have the meaning set forth in Section 9.2.

 

“Purchaser’s Title Review” shall have the meaning set forth in Section 6.2(a).

 

“Release” or “Released” means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, migrating or disposing (including the abandoning or discarding of barrels, containers and other closed receptacles containing any Hazardous Substance) of a substance into the environment.

 

“Remedies for Title Defects” shall have the meaning set forth in Section 6.2(b).

 

“Representatives” means, as to any Person, its officers, directors, equity owners, employees, counsel, accountants, financial advisors, consultants and lenders and their counsel, advisers and consultants.

 

“Seller Indemnitees” shall have the meaning set forth in Section 9.6.

 

“Seller” shall have the meaning set forth in the preamble.

 

“Seller’s Losses” shall have the meaning set forth in Section 9.3.

 

“Seller Transaction Representations” shall have the meaning set forth in Section 9.4(a).

 

“Survival Period” shall have the meaning set forth in Section 9.1(a).

 

“Taxes” means (i) taxes of any kind, levies or other like assessments, customs, duties, imposts, charges or fees, including income, gross receipts, ad valorem, value added, excise, real or personal property, asset, sales, use, federal royalty, license, payroll, transaction, capital stock, paid-up capital, profits, registration, goods and services, capital, net worth, business, alternative or add-on minimum and franchise taxes, taxes under section 59A of the Code, estimated taxes, withholding, employment, social security, workers compensation, utility, severance, production, unemployment compensation, occupation, premium, transfer, stamp, unclaimed property and gains taxes or other governmental taxes imposed or payable to the United States, any state, local

 

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or foreign government, any governmental subdivision thereof, or any Governmental Entity and in each instance such term shall include any interest, penalties or additions to tax attributable thereto, including penalties for the failure to file any Tax Return or report, and (ii) liability for the payment of any amounts of the type described in clause (i) as a result of Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise.

 

“Tax Contest” shall have the meaning given such term in Section 7.11(d).

 

“Tax Returns” means all reports, returns, declarations, statements, claims for refunds, elections, forms or other information required to be supplied to a Taxing authority in connection with Taxes, including any schedule or attachment thereto.

 

“Termination Date” shall have the meaning set forth in Section 3.1.

 

“Title Defect” shall have the meaning set forth in Section 6.2(d).

 

“Title Defect Amount” shall have the meaning set forth in Section 6.2(c).

 

“Title Defect Notice” shall have the meaning set forth in Section 6.2(b).

 

“Title Defect Property” shall have the meaning set forth in Section 6.2(b).

 

“Title Increase” shall have the meaning given such term in Section 6.3(c).

 

“Undeveloped Properties” means Seller’s interest in all of the oil, gas or other Hydrocarbon leases and other rights to Hydrocarbons and other minerals in place on the lands described on Exhibit A-5, including, without limitation, those Leases set forth in Exhibit A-5, together with each and every kind and character of right, title, claim and interest that Seller has in and to such leases and other rights, or the lands covered thereby or lands currently pooled, unitized, communitized or consolidated therewith; provided, for the avoidance of doubt, that such leases and other rights shall not include the Pontotoc Interest or the Payne Properties.

 

“Working Interest” shall have the meaning set forth in this Section 1.2 within the definition of Defensible Title.

 

1.3                               References and Titles.  All references in this Agreement to Exhibits, Schedules, Articles, Sections, subsections and other subdivisions refer to the corresponding Exhibits, Schedules, Articles, Sections, subsections and other subdivisions of or to this Agreement unless expressly provided otherwise.  Titles appearing at the beginning of any Articles, Sections, subsections or other subdivisions of this Agreement are for convenience only, do not constitute any part of this Agreement, and shall be disregarded in construing the language hereof.  The words “this Agreement,” “herein,” “hereby,” “hereunder” and “hereof,” and words of similar import, refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited.  The words “this Article,” “this Section” and “this subsection,” and words of similar import, refer only to the Article, Section or subsection hereof in which such words occur.  The

 

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word “or” is not exclusive, and the word “including” (in its various forms) means including without limitation.  Pronouns in masculine, feminine or neuter genders shall be construed to state and include any other gender, and words, terms and titles (including terms defined herein) in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires.

 

ARTICLE 2
 PURCHASE AND SALE

 

2.1                               Assignment.  Subject to the terms and conditions set forth herein, Seller shall sell, transfer, convey, assign, and deliver all of its interest in the Producing Properties and an undivided 50% of its interest in the Undeveloped Properties to Purchaser by delivery of the Assignment.  The Assignment shall be made on the Closing Date, but shall be effective as of the Effective Date, and shall provide a special warranty of title, subject to any Permitted Encumbrances, by, through and under Seller.

 

2.2                               Purchase Price.  The purchase price for the Assets to be transferred to Purchaser shall be the sum of ONE HUNDRED SIXTY-FIVE MILLION Dollars ($165,000,000) (the “Purchase Price”), plus or minus the adjustments determined pursuant to Section 2.3.

 

2.3                               Adjustments to Purchase Price.  The Purchase Price shall be adjusted based on the following:

 

(a)                       Reduced by the aggregate amount of the following proceeds received by Seller between the Effective Date and the Closing Date (with the period between the Effective Date and the Closing Date referred to as the “Adjustment Period”): (i) proceeds from the sale of Hydrocarbons (net of any royalties, overriding royalties or other burdens on or payable out of production, gathering, processing and transportation costs and any sales or excise Taxes with respect thereto that are incurred during the Adjustment Period and paid by Seller, to the extent not reimbursed to Seller by the purchaser of production, but excluding any other Taxes) produced from or attributable to the Producing Properties during the Adjustment Period, and (ii) other proceeds earned with respect to the Producing Properties during the Adjustment Period, all of which shall be retained by the Seller;

 

(b)                       Reduced in accordance with Section 6.5, by an amount equal to the Allocated Value of those Producing Properties (i) with respect to which preferential purchase rights have been exercised prior to Closing or (ii) that cannot be transferred at Closing due to unwaived or unexpired requirements for consent to the assignments contemplated hereby;

 

(c)                        Reduced in accordance with Sections 6.3 and 6.6;

 

(d)                       Increased by the amount of all Property Costs which are paid by Seller and incurred at or after the Effective Date (except to the extent such costs are netted against the proceeds from the sale of Hydrocarbons pursuant to Section 2.3(a));

 

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(e)                        Increased or reduced, as appropriate, pursuant to the provisions of Section 7.9; and

 

(f)                         Any other amount agreed upon by Seller and Purchaser in writing.

 

2.4                               Purchase Price Adjustment Statement.  Seller shall submit a Closing statement (the “Purchase Price Adjustment Statement”) to Purchaser not fewer than five (5) full business days prior to Closing, and shall afford Purchaser access to Seller’s and the Company’s records pertaining to the computations contained in the Purchase Price Adjustment Statement.  At least two (2) full business days prior to Closing, Purchaser shall deliver to Seller a written report containing such changes, if any, which Purchaser proposes be made to the Purchase Price Adjustment Statement.  Seller and Purchaser shall each make every reasonable effort to agree prior to the Closing Date on a mutually agreed Purchase Price Adjustment Statement.

 

2.5                               Final Settlement.  Subject to the provisions of Sections 6.3 and 6.4, as soon as practicable after the Closing Date, but in any event within ninety (90) calendar days thereafter (the “Final Settlement Period”), Purchaser shall prepare and submit to Seller a proposed statement (herein called the “Final Statement”), which shall show the final calculation of the Purchase Price (herein called the “Final Settlement Price”).  As soon as possible after receipt of the Final Statement, but in any event within thirty (30) calendar days after receipt thereof, Seller shall deliver to Purchaser a written report containing the changes, if any, which Seller proposes being made to the Final Statement.  In the event no response is made by Seller within such thirty (30) day period, it shall be conclusively presumed that Seller concurs with the Final Statement, and such Final Statement shall be the basis for the Final Settlement Price.  In the event that Seller submits a response, the parties shall exercise all reasonable efforts to agree upon a mutually acceptable Final Settlement Price and the calculation of the amount, if any, due in connection therewith not later than one hundred twenty (120) calendar days after the Closing (herein called the “Final Settlement Date”).  After agreement upon a Final Settlement Price setting forth the amount by which the Purchase Price shall be adjusted (either upward or downward) has been reached, the amount due shall be paid within five (5) business days thereafter by the party owing the same by confirmed wire transfer to a bank account or accounts to be designated by the appropriate party.  In the event Purchaser and Seller are unable to agree with respect to the amounts due pursuant to this Section 2.5 before the Final Settlement Date, then either Seller or Purchaser may refer the issues in dispute to Ernst & Young LLP, Fort Worth, Texas (or such other recognized firm of public accountants as Seller and Purchaser may mutually agree) and the resolution of such issues by such firm shall be final and binding on Seller and Purchaser.  The costs of such public accountants shall be borne equally by Seller and Purchaser.

 

2.6                               Allocation of Purchase Price.  For United States federal income tax purposes, the Purchase Price shall be allocated among the Properties consistent with the allocations set forth in Exhibit A-3.  Purchaser and Seller agree to prepare Form 8594 within 180 days of the Closing Date.  Purchaser and Seller agree to file Internal Revenue Service Form 8594, and all federal, state, local and foreign tax returns, in a manner consistent with any such agreed upon allocation.  Purchaser and Seller agree to provide the other promptly with any information required to complete Form 8594.  Purchaser and Seller shall notify and provide the other with

 

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reasonable assistance in the event of an examination, audit or other proceeding regarding any allocation of the Purchase Price agreed to pursuant to this Section 2.6.

 

ARTICLE 3
 CLOSING

 

3.1                               Closing Date.  Subject to the terms and conditions of this Agreement, the closing hereunder (the “Closing”) shall take place at 10:00 a.m., local time, on a date selected by Purchaser which is (a) not earlier than the first to occur of (i) the date on which all conditions to Closing have been satisfied and (ii) thirty (30) days from the date of this Agreement, and (b) not later than April 14, 2011 (the “Termination Date”) (provided, that Purchaser may elect to extend the Termination Date by not more than thirty (30) days (and in the event of such extension the Effective Date shall be extended by the same number of days)), at the offices of Sprouse Shrader Smith PC, 701 S. Taylor, Suite 500, Amarillo, TX 79105, or at such other place and time as may be mutually agreed upon by the parties (the “Closing Date”).

 

3.2                               Actions at Closing.(a)

 

(a)                                         The Purchase Price shall be delivered to Seller by wire transfer; and

 

(b)                                         All documents required by Sections 8.1 and 8.2 shall be delivered by the parties hereto.

 

3.3                               Remedies for Failure to Close.

 

(a)                                         In the event at Closing all conditions to the obligations of Purchaser to close have been satisfied or waived and Purchaser fails or refuses to close other than for Seller’s default, Seller shall be entitled, as Seller’s sole remedies at law or in equity, either to enforce specific performance of Purchaser’s obligations or to terminate this Agreement pursuant to Article 11.  In the event at Closing all conditions to the obligations of Seller to close have been satisfied or waived and Seller fails or refuses to close other than for Purchaser’s default, Purchaser shall be entitled, as Purchaser’s sole remedies, (1), at its election, either to enforce specific performance of Seller’s obligations or to terminate this Agreement pursuant to Article 11, and, in addition, (2) to obtain reimbursement from Seller for of the costs of its Purchaser Hedges, as provided in (c) below.

 

(b)                                         Purchaser and Seller agree and stipulate, as a matter of contract, that specific performance will be an available remedy for an unexcused failure to close, without regard to whether specific performance would otherwise be available under the laws of the State of Texas regarding remedies.  A party claiming injury by a failure to close may immediately file suit under this section in state district court in Tarrant County, Texas, for specific performance and, if the party claiming injury is the Purchaser, for the cost of the Purchaser Hedges, without the need to pursue dispute resolution or provide advance notice as otherwise required by Article 10.

 

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(c)                                          Seller acknowledges that in connection with the execution and delivery of this Agreement Purchaser will be entering into Hedging Transactions at current NYMEX strip prices for the quantities of Hydrocarbons set forth in Schedule 3.3(c) (the “Purchaser Hedges”).  In the event at Closing all conditions to the obligations of Seller to close have been satisfied or waived and Seller fails or refuses to close, or Purchaser terminates this Agreement pursuant to Section 11.1(f), Seller shall promptly pay to Purchaser (in addition to any other damages that Purchaser may be entitled to receive) the aggregate cost to Purchaser for the termination or unwinding of the Purchaser Hedges.

 

ARTICLE 4
 REPRESENTATIONS AND WARRANTIES OF SELLER

 

4.1                         Certain Representations, Warranties and Covenants of Seller.  Seller represents and warrants to Purchaser, and covenants with Purchaser, as follows:

 

(a)                                         Power and Authority of Company.  Seller has all requisite power and authority to execute, deliver, and perform this Agreement and each other agreement, instrument, or document executed or to be executed by Seller in connection with the transactions contemplated hereby and to consummate the transactions contemplated hereby and thereby.  The execution, delivery, and performance by Seller of this Agreement and each other agreement, instrument, or document executed or to be executed by Seller in connection with the transactions contemplated hereby, and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary member action of Seller.

 

(b)                                         Organization and Existence; Valid and Binding Agreement.  Seller is a limited liability company duly formed and validly existing under the laws of the State of Texas.  This Agreement has been duly executed and delivered by Seller and constitutes, and each other agreement, instrument, or document executed or to be executed by Seller in connection with the transactions contemplated hereby to which Seller is a party has been, or when executed will be, duly executed and delivered by Seller and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of Seller, enforceable against it in accordance with their respective terms, except that such enforceability may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors’ rights generally and (b) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances.

 

(c)                                          Investment Company Act.  Seller is not an “investment company” or a company controlled by an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

 

(d)                                         Public Utility Holding Company Act.  Seller is not a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of a “holding company” or of “subsidiary company” of a “holding company” as such terms are defined in the Public Utility Holding Company Act of 1935, as amended.

 

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(e)                                          Non-Contravention.  Neither the execution, delivery, and performance by Seller of this Agreement and each other agreement, instrument, or document executed or to be executed by Seller in connection with the transactions contemplated hereby to which it is a party nor the consummation by it of the transactions contemplated hereby and thereby do and will (i) conflict with or result in a violation of any provision of Seller’s Organizational Documents, (ii) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation, or acceleration under, any bond, debenture, note, mortgage or indenture, or any material lease, contract, agreement, or other instrument or obligation to which Seller is a party or by which Seller or any of the Assets, may be bound, (iii) result in the creation or imposition of any Lien or other encumbrance upon the Assets, or (iv) violate any Applicable Law binding upon Seller, except, in the instance of clause (ii) or clause (iv) above, for any such conflicts, violations, defaults, terminations, cancellations or accelerations which would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Properties.

 

(f)                                           Approvals.  Except as specifically set forth in Schedule 4.1(f), no consent, approval, order, or authorization of, or declaration, filing, or registration with, any court or governmental agency or of any third party is required to be obtained or made by Seller in connection with the execution, delivery, or performance by Seller of this Agreement, each other agreement, instrument, or document executed or to be executed by Seller in connection with the transactions contemplated hereby to which Seller is a party or the consummation by Seller of the transactions contemplated hereby and thereby.

 

(g)                                          Pending Litigation.  There are no Proceedings pending or, to Seller’s Knowledge, threatened (i) against Seller or its Affiliates that might affect the execution and delivery of this Agreement by Seller or the consummation of the transactions contemplated hereby by Seller or (ii) involving any of the Properties.

 

(h)                                         Compliance with Laws.  Seller is not in violation of, or in default in any respect under, and no event has occurred that (with notice or the lapse of time or both) would constitute a violation of or default under: (i) its Organizational Documents; (ii) any Applicable Law; or (iii) any Contract to which Seller is a party or by which the Properties are bound, except (in the case of clause (ii) or (iii) above) for any violation or default that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Properties.  Seller has obtained, holds and is in compliance with all permits, licenses, variances, exemptions, orders, franchises, approvals and authorizations of all Governmental Entities necessary for the lawful ownership, use and operation of the Assets, except for those which the failure to obtain or hold would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Assets and are in compliance with such, except where the failure to comply would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Properties.  No investigation or review by any Governmental Entity with respect to the Assets is pending or, to the Knowledge of Seller, threatened, except as set forth in Schedule 4.1(h).

 

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(i)                                             Taxes.

 

(i)                                                                         Seller has timely filed with the appropriate Taxing authorities (a) all Tax Returns required to have been filed relating to, necessary for the operation of, or required in connection with, the Assets and (b) all Tax Returns required to have been filed, the non-filing or late filing of which could result in a Lien (other than a Permitted Encumbrance) upon an Asset or in liability to the Purchaser as a transferee or successor with respect to the Assets.  Each Tax Return referred to in the preceding sentence has been prepared in all material respects in compliance with all applicable laws and regulations and is true, accurate and complete in all material respects.

 

(ii)                                                                      Seller has paid in a timely manner to the appropriate Taxing authority (i) all Taxes (other than Taxes that are not yet due and payable) relating or attributable to the Assets or the operation thereof, whether or not shown on a Tax Return, and (ii) all other Taxes (other than Taxes that are not yet due and payable), whether or not shown on a Tax Return, the underpayment or nonpayment of which could result in a Lien (other than a Permitted Encumbrance) upon an Asset or in liability to the Purchaser as a transferee or successor with respect to the Assets.

 

(iii)                                                                   There are no pending or, to Seller’s Knowledge, threatened or proposed, examinations, audits, actions, proceedings, investigations, disputes, assessments or claims with respect to (i) any Taxes related or attributable to the Assets or (ii) any Taxes the underpayment or nonpayment of which could result in a Lien (other than a Permitted Encumbrance) upon an Asset or in liability to the Purchaser as a transferee or successor with respect to the Assets.

 

(iv)                                                                  There are no outstanding agreements or waivers that would extend the statutory period in which a Taxing authority may assess or collect (i) any Taxes related or attributable to the Assets or (ii) any Taxes the underpayment or nonpayment of which could result in a Lien (other than a Permitted Encumbrance) upon an Asset or in liability to the Purchaser as a transferee or successor with respect to the Assets.

 

(j)                                            Environmental Laws.

 

(i)                                                                         Except as specifically set forth in Schedule 4.1(j), to the Knowledge of Seller, the Properties and the operations thereon have been maintained in material compliance in all respects with any laws, common laws, ordinances, or regulations of any governmental authority, as well as any order, decree, permit, judgment or injunction issued, promulgated, approved or entered thereunder, which (a) regulate or relate to the protection or clean-up of the environment; the use, treatment, storage, transportation, handling, disposal or Release of Hazardous Substances, the preservation or protection of waterways, groundwater, drinking water, air, wildlife, plants or other natural resources; or the health and safety of persons or property, including without limitation protection of the health and safety of employees; or (b) impose liability with respect to any of the foregoing, including without limitation the Federal Water Pollution

 

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Control Act (33 U.S.C. § 1251 et seq.), Resource Conservation & Recovery Act (42 U.S.C. § 6901 et seq.), Safe Drinking Water Act (21 U.S.C. § 349, 42 U.S.C. § 300f 300j 26), Toxic Substances Control Act (15 U.S.C. § 2601 et seq.), Clean Air Act (42 U.S.C. § 7401 et seq.), Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. § 9601 et seq.), or any other similar federal, state or local law of similar effect.  (All of the above are, collectively, the “Environmental Laws”).

 

(ii)                                                                      There are no pending civil, criminal or administrative actions, lawsuits, written demands or claims, or litigation relating to an alleged breach of Environmental Laws on or with respect to Seller’s ownership or operation of the Properties, and Seller has not received any written notice of any environmental or health or safety claims, demands, filings, investigations, administrative proceedings, actions, suits or other legal proceedings relating to the Properties (an “Environmental Claim”) or written notice of any alleged violation or non-compliance with or response or remedial obligation under any Environmental Law, arising from, based upon, associated with or related to the Properties or the ownership or operation of any thereof.

 

(iii)                                                                   To the Knowledge of Seller, no Hazardous Substance is present or has been handled, managed, stored, transported, processed, treated, disposed of, released, migrated or escaped on, in, from, under or in connection with the Properties or the ownership or operation of any thereof, such as to cause a condition or circumstance that would reasonably be expected to result in an Environmental Claim or a violation of or response or remedial obligation under any Environmental Law.

 

(iv)                                                                  Seller has made available to Purchaser complete and accurate copies of all environmental, health or safety assessment and audit reports, studies, investigations and all similar documentation and correspondence in the possession of or control of Seller or any Affiliate of Seller and addressing environmental, health or safety liabilities, water rights (including water withdrawal, storage, discharge, treatment, injection, and disposal rights) or future compliance costs relating to ownership or operation of the Properties.

 

(k)                                         Contracts.

 

(i)                                                                         Except as disclosed on Schedule 4.1(k)(i), to Seller’s Knowledge (a) Seller has paid its share of all costs (including without limitation Property Costs) payable by it under the Leases and the Contracts, and (b) all of the Leases and the Contracts are in full force and effect and constitute valid and binding obligations of the parties thereto.  To Seller’s Knowledge, (y) Seller is not in breach or default (and no situation exists that, with the passing of time or giving of notice would create a breach or default) under any of the Leases or the Contracts, and (z) no breach or default by any third party (or situation that, with the passing of time or giving of notice would create a breach or default) exists, expect such defaults as would not, individually or in the aggregate have a Material Adverse Effect.

 

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(ii)                                                                      To Seller’s Knowledge, Schedule 4.1(k)(ii) sets forth all of the following contracts, agreements, and commitments (excluding oil and gas leases and surface contracts) to which any of the Properties will be bound as of the Closing: (a) any agreement with any Affiliate of Seller; (b) any agreement or contract for the sale, exchange, or other disposition of Hydrocarbons produced from or attributable to Seller’s interest in the Properties that is not cancelable without penalty or other material payment on not more than thirty (30) days prior written notice; (c) any agreement of or binding upon Seller to sell, lease, farmout, or otherwise dispose of any interest in any of the Properties after the date hereof, other than conventional rights of reassignment arising in connection with Seller’s surrender or release of any of the Properties; (d) any agreement that can reasonably be expected to result in aggregate payments by or revenues to Seller of more than TWENTY-FIVE THOUSAND Dollars ($25,000) during the current or any subsequent fiscal year; (e) any indenture, mortgage, loan, credit or sale-leaseback, guaranty of any obligation, bond, letter of credit or similar agreement; (f) any swap, forward, future or derivative transaction or option or other similar hedge agreement; (g) any non-competition agreement or any agreement that purports to restrict, limit or prohibit the manner in which, or the locations in which, Seller conducts business, including area of mutual interest agreements; (h) any agreement where the primary purpose thereof was to indemnify another Person; (i) any agreement that contains any “tag along” or similar rights allowing a third party to participate in future sales of any of the Properties; and (j) any tax partnership agreement of or binding upon Seller affecting any of the Properties.  Prior to the execution of this Agreement, Seller has made available to Purchaser true and complete copies of each agreement listed on Schedule 4.1(k)(ii) and all amendments thereto.  Seller has not received or given any written notice of default, amendment, waiver, price redetermination, market out, curtailment or termination with respect to any agreement listed on Schedule 4.1(k)(ii), the resolution of which is currently outstanding.

 

(l)                                             Commitments or Proposals.  Except as set forth in Schedule 4.1(l):  (a) Seller has incurred no expenses, and has made no commitments to make expenditures in connection with the ownership or operation of the Assets after the Effective Date, other than routine expenses incurred in the normal operation of existing wells on the Properties in accordance with generally accepted practices in the oil and gas industry; (b) no proposals are currently outstanding by Seller or, to Seller’s Knowledge, other working interest owners to drill additional wells, or to deepen, plug back, or rework existing wells, or to conduct other operations for which consent is required under the applicable operating agreement, or to conduct any other operations other than normal operation of existing wells on the Properties, or to abandon any wells, on the Properties; and (c) Seller has not failed to elect to participate in any operation or activity proposed with respect to the Properties which could result in any of Seller’s interests in any Property becoming subject to a penalty or forfeiture as a result of such election not to participate in such operation or activity, except to the extent reflected in the Net Revenue Interest and Working Interest set forth in Exhibit A-2.

 

(m)                                     Production Sales Contracts.  There exist no agreements or arrangements for the sale of Seller’s share of Hydrocarbons from the Properties (including calls on, or other

 

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rights to purchase, production, whether or not the same are currently being exercised) other than (a) production sales contracts disclosed in Schedule 4.1(m) or (b) agreements or arrangements which are cancelable on thirty (30) days notice or less without penalty or detriment.

 

(n)                                         Payment of Expenses  and Royalties.  As to the Properties operated by Pablo Energy II, LLC, all expenses (including all bills for labor, materials and supplies used or furnished for use in connection with the Properties, and all severance, production, ad valorem and other similar taxes) relating to the ownership or operation by Seller of its interest in the Properties and for which Seller has received an invoice, have been, and are being, paid (timely, and before the same become delinquent) by Seller, except such expenses and taxes as are disputed in good faith by Seller as specifically set forth in Schedule 4.1(n).  To Seller’s Knowledge, Seller is not delinquent with respect to its obligations to bear costs and expenses relating to the development and operation of the Properties. All royalties, overriding royalties, compensatory royalties and other payments due from or in respect of production with respect to the Properties, have been or will be, prior to the Closing, properly and correctly paid or provided for in all material respects.

 

(o)                                         Prepayments; Imbalances.  Seller is not obligated by virtue of a take or pay or other prepayment arrangement to deliver Hydrocarbons, or proceeds from the sale thereof, attributable to the Properties at some future time without receiving payment therefor at or after the time of delivery.  Schedule 4.1(o) sets forth all production Imbalances of Seller as of the date set forth in such schedule with respect to the Properties.

 

(p)                                         Fees and Commissions.  Except as set forth in Schedule 4.1(p), no broker, investment banker, financial advisor or other Person is entitled to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Seller.  The fees and other amounts payable to the Persons identified on Schedule 4.1(p) shall be paid by Seller.

 

(q)                                         Disclaimer of Warranties.  Other than those expressly set out in this Article 4 or in the Assignment, Seller hereby expressly disclaims any and all representations or warranties with respect to the Assets or the transaction contemplated hereby, and Purchaser agrees that the Assets are being sold by Seller “where is” and “as is”, with all faults.  Specifically as a part of (but not in limitation of) the foregoing, Purchaser acknowledges that the Seller has not made, and Seller hereby expressly disclaims, any representation or warranty (express, implied, under common law, by statute or otherwise) as to the title or condition of the Assets (INCLUDING ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS).  OTHER THAN THOSE EXPRESSLY SET OUT IN THIS ARTICLE 4 OR IN THE ASSIGNMENT, SELLER MAKES NO REPRESENTATION OR WARRANTY AS TO (I) THE AMOUNT, VALUE, QUALITY, QUANTITY, VOLUME, OR DELIVERABILITY OF ANY OIL, GAS, OR OTHER MINERALS OR RESERVES (IF ANY) IN, UNDER, OR ATTRIBUTABLE TO THE PROPERTIES, (II) THE PHYSICAL, OPERATING, REGULATORY COMPLIANCE, SAFETY, OR

 

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ENVIRONMENTAL CONDITION OF THE PROPERTIES, BOTH SURFACE AND SUBSURFACE, INCLUDING MATTERS RELATED TO THE PRESENCE, RELEASE OR DISPOSAL OF HAZARDOUS SUBSTANCES, SOLID WASTES, ASBESTOS OR NATURALLY OCCURRING RADIOACTIVE MATERIALS OR (III) THE GEOLOGICAL OR ENGINEERING CONDITION OF THE PROPERTIES OR ANY VALUE THEREOF.  OTHER THAN THOSE EXPRESSLY SET OUT IN THIS ARTICLE 4 OR IN THE ASSIGNMENT, SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS, STATUTORY, OR IMPLIED, AS TO (A) THE ACCURACY, COMPLETENESS, OR MATERIALITY OF ANY DATA, INFORMATION, OR RECORDS FURNISHED TO PURCHASER IN CONNECTION WITH THE ASSETS OR OTHERWISE CONSTITUTING A PORTION OF THE ASSETS; (B) THE PRESENCE, QUALITY, AND QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE PROPERTIES; (C) THE ABILITY OF THE PROPERTIES TO PRODUCE HYDROCARBONS, INCLUDING PRODUCTION RATES, DECLINE RATES, AND RECOMPLETION OPPORTUNITIES; (D) THE PRESENT OR FUTURE VALUE OF THE ANTICIPATED INCOME, COSTS, OR PROFITS, IF ANY, TO BE DERIVED FROM THE PROPERTIES, (E) THE ENVIRONMENTAL CONDITION OF THE PROPERTIES, (F) ANY PROJECTIONS AS TO EVENTS THAT COULD OR COULD NOT OCCUR, AND (G) ANY OTHER MATTERS CONTAINED IN OR OMITTED FROM ANY INFORMATION OR MATERIAL FURNISHED TO PURCHASER BY SELLER OR OTHERWISE CONSTITUTING A PORTION OF THE ASSETS.  ANY DATA, INFORMATION, OR OTHER RECORDS FURNISHED BY SELLER ARE PROVIDED TO PURCHASER AS A CONVENIENCE AND PURCHASER’S RELIANCE ON OR USE OF THE SAME IS AT PURCHASER’S SOLE RISK.

 

(r)                                            Oil and Gas Operations.

 

(i)                                                                         All wells included in the Properties have been drilled and (if completed) completed, operated and produced in accordance with generally accepted oil and gas field practices and in compliance in all material respects with applicable oil and gas leases, pooling and unit agreements, and Applicable Laws except where the failure to take any such action or comply would not reasonably be expected to have a Material Adverse Effect on the applicable Property.  Except as set forth in Schedule 4.1(r) or as would not reasonably be expected to have a Material Adverse Effect on the Properties:

 

(A)                                                                                           there are no wells that Seller is currently obligated by Law or contract to plug and abandon, nor are there any abandoned wells that Seller will be obligated to plug and abandon with the lapse of time;

 

(B)                                                                                           there are no wells that are subject to exceptions to a requirement to plug and abandon issued by a Governmental Entity having jurisdiction over the applicable Property;

 

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(C)                                                                                           there are no wells that have been plugged and abandoned but have not been plugged in accordance, in all material respects, with all applicable requirements of each Governmental Entity having jurisdiction over the Properties; and

 

(D)                                                                                           all such wells have been produced in compliance with allowables allocated thereto by the applicable Governmental Entity.

 

(ii)                                                                      Proceeds from the sale of hydrocarbons produced from Seller’s interest in the Properties are being received by Seller in a timely manner and are not being held in suspense for any reason.

 

(iii)                                                                   Except as set forth in Schedule 4.1(r), no Person has any call upon, option to purchase, or similar rights with respect to the Seller’s interest in the Properties or to the production therefrom.

 

(s)                                           Bankruptcy.  There is no bankruptcy, reorganization, receivership or arrangement proceedings pending, being contemplated by, or to the best of Seller’s Knowledge, threatened against Seller, and neither Seller nor any of its Affiliates is insolvent or generally not paying its debts as they become due.

 

(t)                                            Unrecorded Documents.  Except as provided in any schedule to this Agreement, to Seller’s Knowledge, there exists no unrecorded document or agreement which would result in the impairment or loss of Seller’s title to the Properties or the value thereof or impede the operations thereof by Purchaser.

 

(u)                                         Hedging Transactions.  Except for the Purchaser Hedges set forth in Schedule 3.3(c), none of the Properties are the subject of any Hedging Transactions that will be binding on Purchaser following the Closing.

 

(v)                                         Consents and Preferential Purchase Rights.  None of the Assets, or any portion thereof, is subject to any preferential rights to purchase or restrictions on assignment or required third-party consents to assignment, which may be applicable to the transactions contemplated by this Agreement, except for (i) governmental consents and approvals of assignments that are customarily obtained after Closing, (ii) preferential rights, consents and restrictions listed on Schedule 4.1(v).

 

(w)                                       Bonds.  Schedule 4.1(w) sets forth all bonds, letters of credit and guarantees posted by Seller or any of its Affiliates with Governmental Authorities and relating to the Properties.

 

(x)                                         No AMI or Farmout Obligations.  Except as set forth in Schedule 4.1(x), no portion of the Properties is subject to any area of mutual interest agreement, any farm-out agreement under which a party thereto is entitled to receive assignments not yet made, or any similar agreements.

 

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(y)                                         Surface Condition and Rights.  No physical condition exists upon any of the Properties which prevents the customary operation thereof or production of Hydrocarbons therefrom.  The Leases and Contracts contain sufficient rights for Purchaser to access and utilize the surface of the Properties.

 

ARTICLE 5
 REPRESENTATIONS AND WARRANTIES OF PURCHASER

 

5.1                               Representations and Warranties of Purchaser.  Purchaser represents and warrants to Seller that:

 

(a)                                         Organization and Existence.  Purchaser is a limited liability company duly organized, legally existing and in good standing under the laws of its state of formation, and is qualified to do business in the State of Delaware.

 

(b)                                         Power and Authority.  Purchaser has all requisite power and authority to execute, deliver, and perform this Agreement and each other agreement, instrument, or document executed or to be executed by Purchaser in connection with the transactions contemplated hereby to which it is a party, and to consummate the transactions contemplated hereby and thereby.  The execution, delivery, and performance by Purchaser of this Agreement and each other agreement, instrument, or document executed or to be executed by Purchaser in connection with the transactions contemplated hereby to which it is a party, and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary limited liability company action of Purchaser.

 

(c)                                          Valid and Binding Agreement.  This Agreement has been duly executed and delivered by Purchaser and constitutes, and each other agreement, instrument, or document executed or to be executed by Purchaser in connection with the transactions contemplated hereby to which it is a party has been, or when executed will be, duly executed and delivered by Purchaser and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of Purchaser, enforceable against it in accordance with their respective terms, except that such enforceability may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors’ rights generally and (b) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances.

 

(d)                                         Non-Contravention.  The execution, delivery, and performance by Purchaser of this Agreement and each other agreement, instrument, or document executed or to be executed by Purchaser in connection with the transactions contemplated hereby to which it is a party and the consummation by it of the transactions contemplated hereby and thereby do not and will not (a) conflict with or result in a violation of any provision of Purchaser’s Organizational Documents, (b) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation, or acceleration under, any bond, debenture, note, mortgage, indenture, lease, contract, agreement, or other instrument or obligation to which Purchaser is a party or by

 

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which Purchaser or any of its properties may be bound, (c) result in the creation or imposition of any Lien or other encumbrance upon the properties of Purchaser, or (d) violate any Applicable Law binding upon Purchaser.

 

(e)                                          Approvals.  No consent, approval, order, or authorization of, or declaration, filing, or registration with, any court or governmental agency or of any third party is required to be obtained or made by Purchaser in connection with the execution, delivery, or performance by Purchaser of this Agreement and each other agreement, instrument, or document executed or to be executed by Purchaser in connection with the transactions contemplated hereby to which it is a party or the consummation by it of the transactions contemplated hereby and thereby.

 

(f)                                           Pending Litigation.  There are no Proceedings pending or to, the Knowledge of Purchaser, threatened against Purchaser or its subsidiaries or any of its properties that might delay, prevent or hinder the consummation of the transactions contemplated hereby.

 

(g)                                          Fees and Commissions.  No broker, investment banker, financial advisor or other Person is entitled to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Purchaser.

 

(h)                                         Confidentiality.  Purchaser covenants and agrees with Seller that, in the event that this Agreement is terminated or, if not terminated, until the Closing, the confidentiality of any confidential data or confidential information received by Purchaser regarding the business and properties of Seller shall be maintained by Purchaser and its representatives.

 

(i)                                             Knowledgeable Purchaser.  Purchaser is a knowledgeable purchaser, owner and operator of oil and gas properties, has the ability to evaluate the Assets for purchase, and is acquiring the Assets for its own account and not with the intent to make a distribution within the meaning of the Securities Act (and the rules and regulations pertaining thereto) or a distribution thereof in violation of any other applicable securities laws.  Purchaser will have access to the Assets and the books, records, and files of Seller relating to the Assets, and has had the opportunity to meet with Seller, its representatives and consultants to review and discuss the status of the Assets.  In reviewing the Assets, determining the value thereof and making the decision to enter into this Agreement and to consummate the transactions contemplated hereby, Purchaser has relied on (i) its knowledge of, and familiarity with, the Assets, (ii) its own independent due diligence investigation of the Assets, (iii) its own expertise and that of legal, land, tax, and other professional counsel concerning this transaction and (iv) Seller’s express representations and warranties in Article 4 and in the Assignment.

 

(j)                                            Funds.  Purchaser has, or at the Closing will have, sufficient cash and other sources of immediately available funds, as are necessary in order to pay the Purchase Price to Seller at the Closing and otherwise consummate the transactions contemplated hereby.

 

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ARTICLE 6
 DUE DILIGENCE AND TITLE EXAMINATION

 

6.1                               Due Diligence.

 

(a)                                         From the date of this Agreement until 5:00 p.m. CST on the date which is four (4) days prior to the Closing Date (the “Examination Period”), Seller agrees to disclose and make available to Purchaser and its representatives, at Seller’s office and during Seller’s normal business hours, all records as may be reasonably requested by Purchaser for the purpose of permitting Purchaser to complete its due diligence review.  Purchaser shall maintain any such report in confidence, unless and to the extent otherwise required by Applicable Laws.

 

(b)                                         Seller shall permit Purchaser to inspect its records only to the extent that it may do so without violating legal constraints or any obligation of confidence or other contractual commitment of Seller to a third party.  Subject to the consent and cooperation of third parties, Seller will cooperate with Purchaser in Purchaser’s reasonable efforts to obtain, at Purchaser’s sole expense, such additional information relating to the Assets as Purchaser may reasonably desire, to the extent in each case that Seller may do so without violating legal constraints or any obligation of confidence or other contractual commitment of Seller to a third party.

 

(c)                                          As part of its pre-Closing diligence review, Purchaser will have the right to conduct a Phase I environmental assessment of the Properties, subject to the terms set forth in this Section 6.1.  Purchaser’s Phase I environmental assessment must be conducted by an agent or representative of Purchaser reasonably acceptable to both Seller and Purchaser.  For purposes of this Agreement, a “Phase I environmental assessment” means (i) a review of Seller’s and the government’s environmental records, (ii) the submission of pre-inspection questionnaires to Seller, (iii) a site visit to visually inspect the Properties accompanied by a representative of Seller, and (iv) interviews with corporate and site personnel of Seller.  A Phase I environmental assessment does not include soil or groundwater sampling, subsurface testing or invasive sampling or testing of any kind, nor shall any such sampling or testing be permitted without the prior written approval of Seller, which approval shall not be unreasonably withheld or delayed.  Seller shall be entitled to receive a copy of any final Phase I inspection reports for the Properties.

 

6.2                               Title Matters.

 

(a)                                         During the Examination Period, Seller shall afford to Purchaser and its authorized representatives reasonable access during normal business hours to the office, personnel and books and records of Seller in order for Purchaser to conduct a title examination as it may in its sole discretion choose to conduct with respect to the Properties in order to determine whether Title Defects exist (“Purchaser’s Title Review”).  Such books and records shall include all abstracts of title, title opinions, title files, ownership maps, lease files, assignments, division orders, operating records and agreements, well files, financial and accounting records, geological data and engineering records, in each case insofar as same may now be in existence and in the possession of Seller, excluding, however, any information that Seller is prohibited from disclosing by bona fide, third party confidentiality restrictions; provided, that if requested by

 

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Purchaser, Seller shall use its commercially reasonable efforts to obtain a waiver of any such restrictions in favor of Purchaser.  The cost and expense of Purchaser’s Title Review, if any, shall be borne solely by Purchaser.

 

(b)                                         If Purchaser discovers any Title Defect affecting any of the Properties, Purchaser shall notify Seller of such alleged Title Defect as soon as reasonably possible after the discovery thereof by Purchaser, and in any event Purchaser shall provide Seller with weekly updates, in either oral or written reports, on the status of Purchaser’s title review and developments with respect thereto, which may in each case be preliminary in nature and supplemented in any subsequent Title Defect Notice.  To be effective, such notice (“Title Defect Notice”) must (i) be in writing, (ii) be received by Seller prior to the expiration of the Examination Period, (iii) describe the Title Defect in reasonable detail (including any alleged variance in the Net Revenue Interest), (iv) identify the specific Property affected by such Title Defect, and (v) include the value of such Title Defect as determined by Purchaser in good faith.  Subject to Seller’s special warranty of title set forth in the Assignments, any matters that may otherwise constitute Title Defects, but of which Seller has not been specifically notified by Purchaser in accordance with the foregoing, shall be deemed to have been waived by Purchaser for all purposes.  Upon the receipt of such effective Title Defect Notice from Purchaser, Seller shall have the option, in addition to the remedies set forth in Section 6.2(c) (the “Remedies for Title Defects”), but not the obligation, to attempt to cure such Title Defect at any time prior to the Closing.  The Property affected by such uncured Title Defect shall be a “Title Defect Property.”

 

(c)                                          With respect to each Title Defect attributable to the Producing Properties that is not cured on or before the Closing, the Purchase Price shall be reduced, subject to this Article 6, by the Title Defect Amount with respect to such Title Defect Property.  The “Title Defect Amount” shall mean, with respect to a Title Defect Property, the amount by which such Title Defect Property is impaired as a result of the existence of one or more Title Defects, which amount shall be determined as follows:

 

(i)                                                                         The Title Defect Amount with respect to a Title Defect Property shall be determined by taking into consideration the Allocated Value of the Producing Property subject to such Title Defect, the portion of the Property subject to such Title Defect, and the legal effect of such Title Defect on the Property or portion thereof affected thereby; provided, however, that:  (A) if such Title Defect is in the nature of Seller’s Net Revenue Interest in a Property being less than the Net Revenue Interest set forth in Exhibit A-2 hereto and the Working Interest remains the same, then the Title Defect Amount shall be equal to the Allocated Value for the affected Producing Properties multiplied by the percentage reduction in such Net Revenue Interest as a result of such Title Defect or (B) if such Title Defect is in the nature of a Lien, then the Title Defect Amount shall equal the amount required to fully discharge such Lien; and

 

(ii)                                                                      If the Title Defect results from any matter not described in Section 6.2(c)(i), the Title Defect Amount shall be an amount equal to the difference between the value of the Title Defect Property affected by such Title Defect with such

 

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Title Defect and the value of such Title Defect Property without such Title Defect (taking into account the portion of the Allocated Value of the Title Defect Property).

 

(d)                                         As used in this Section 6.2, “Title Defect” shall mean any particular defect in or failure of Seller’s title and right to those Hydrocarbons produced from the Arkoma Woodford by virtue of Seller’s ownership of any Producing Property:

 

(i)                                                                         That causes Seller to not have Defensible Title to such Property;

 

(ii)                                                                      That has attributable thereto a Title Defect Amount in excess of TWENTY-FIVE THOUSAND Dollars ($25,000) (provided, that with regard to a particular well, a series of defects in or failures to Seller’s title meeting the requirements of clauses (d)(i) and (d)(iii) of this Section 6.2 may be aggregated in respect of the threshold contemplated by this clause (d)(ii)); and

 

(iii)                                                                   Regarding which a Title Defect Notice has been timely and otherwise validly delivered.

 

Notwithstanding any other provision in this Agreement to the contrary, the following matters shall not constitute, and shall not be asserted as, a Title Defect:

 

(x)                                                                     Defects or irregularities that have been cured or remedied by the applicable statutes of limitation or statutes for prescription;

 

(y)                                                                     Defects or irregularities in the chain of title consisting of the failure to recite marital status in documents or omissions of heirship proceedings; or

 

(z)                                                                      Any matter which is not considered an encumbrance or defect under the Title Examination Standards adopted as of the Effective Date by the Oklahoma Bar Association.

 

(e)                                          If Seller and Purchaser are unable to reach an agreement as to whether a Title Defect exists or, if it does exist, the Title Defect Amount attributable such Title Defect, the provisions of Article 10 shall be applicable.

 

6.3                               Adjustments to Purchase Price for Title Defects.

 

(a)                                         Notwithstanding anything to the contrary contained in this Agreement, no adjustment of the Purchase Price shall be made for Title Defects unless the aggregate of the Title Defect Amounts attributable to the Producing Properties, as determined in accordance with this Agreement, equals or exceeds the Defect Threshold, in which event the Purchase Price shall be adjusted downward by the amount such Title Defect Amounts exceed the Defect Threshold.  Only the portion of a Producing Property subject to an asserted Title Defect shall be subject to adjustment, and the portion not affected by an asserted Title Defect shall not be included in calculating any defects.

 

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(b)                                         Notwithstanding anything herein to the contrary, if Seller is unable to cure a Title Defect attributable to the Producing Properties on or prior to Closing, Seller shall have the option, by notice in writing to Purchaser on or before Closing, to attempt to cure such Title Defect attributable to the Producing Properties (a “Post-Closing Defect”) within the one hundred eighty (180) day period commencing on the Closing Date (the “Cure Period”).  In such event, the transactions contemplated hereby will close as provided herein and the Purchase Price shall be reduced by the applicable Title Defect Amount in respect of such Post-Closing Defect as provided in Sections 6.2 and 6.3(a).  If, during or upon the expiration of the Cure Period, Seller and Purchaser mutually agree that a Post-Closing Defect has been cured, then within two Business Days after such determination, Purchaser shall tender to Seller an amount equal to the Title Defect Amount (and, for the avoidance of doubt, without interest)  in respect thereof.  If, during or upon the expiration of the Cure Period, Seller and Purchaser are unable to agree whether there has been a satisfactory cure of a Post-Closing Defect, then such disagreement shall be resolved as provided in Article 10.  If Seller is unable to cure a Title Defect attributable to any of the Producing Properties within the Cure Period, Seller will retain such Producing Property or portion thereof, and Purchaser shall have no further obligation in regard to such Producing Property or portion thereof.

 

(c)                                          If Seller determines (or should Purchaser, in the course of Purchaser’s Title Review, determine) prior to Closing that Seller’s Net Revenue Interest in a Producing Property is greater than the Net Revenue Interest set forth in Exhibit A-2 and the Working Interest remains the same, then the parties agree that an amount equal to the Allocated Value for the relevant Producing Property multiplied by the percentage increase in such Net Revenue Interest (a “Title Increase”) may be used to offset any downward adjustment to the Purchase Price pursuant to Section 6.3(a), insofar and only insofar as each Title Increase equals or exceeds TWENTY-FIVE THOUSAND Dollars ($25,000) (each a “Qualifying Increase”).  Notwithstanding anything to the contrary contained in this Agreement, no adjustment of the Purchase Price shall be made for Title Increases except as provided in the immediately preceding sentence.  To the extent the aggregate of the Qualifying Increases exceeds the aggregate of the downward adjustments to the Purchase Price pursuant to Section 6.3(a), by an amount greater than one percent (1%) of the Purchase Price, those portions of the Producing Properties that are the subject of the Qualifying Increases (which portions equal the amount of such net Qualifying Increases exceeding one percent (1%) of the Purchase Price) shall be deemed Excluded Assets and not transferred to Purchaser pursuant to this Agreement.

 

6.4                               Poolings and Communitizations.  In connection with any wells spudded on the Properties prior to the Effective Date, if as a result of any final pooling or communitization order issued by the Oklahoma Corporation Commission, the Working Interest and Net Revenue Interest of Seller is increased in a governmental section, Seller shall be entitled to request the reconveyance from Purchaser (without payment by Seller) of an interest in such Properties equal to the amount by which the Working Interest and Net Revenue Interest is increased beyond the applicable represented interests set forth in Exhibit A-2.

 

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6.5                               Consents to Assignment and Preferential Rights to Purchase.

 

(a)                                         Seller shall promptly prepare and send (i) notices to the holders of any required consents to assignment of any Asset requesting such holder’s consent to assign such Asset to Purchaser, (ii) notices to the holders of any applicable preferential rights to purchase any Asset requesting waivers of such preferential rights to purchase and (iii) requests for consent to the waiver of any existing maintenance of uniform interest or area of mutual interest provisions with regard to any Property.  The consideration payable under this Agreement for any particular Producing Property for purposes of preferential purchase right notices shall be the Allocated Value for such Producing Property.  Seller shall use commercially reasonable efforts to cause such consents and waivers of preferential rights to purchase (or the exercise thereof) to be obtained and delivered prior to Closing.  Purchaser shall cooperate with Seller in seeking to obtain such consents and waivers of preferential rights.

 

(b)                                         Seller shall notify Purchaser at least five (5) days prior to Closing of all required third-party consents to the assignment of the Assets to Purchaser which have not been obtained and the Asset to which they pertain.  In no event shall there be included in the Assignments at Closing any Asset subject to a consent requirement that provides that transfer of the Asset without consent will result in a termination or other material impairment of any rights in relation to such Asset.  In cases where the Asset subject to such a requirement is a Contract and Purchaser is assigned the Properties to which the Contract relates, but the Contract is not transferred to Purchaser due to the unwaived consent requirement, Seller shall continue after Closing to use commercially reasonable efforts to obtain such consent so that such Contract can be transferred to Purchaser upon receipt of such consent.  In cases where a third-party consent to the sale and transfer of an Asset is not obtained prior to the Closing Date, Purchaser may elect to treat the unsatisfied consent requirement as a Title Defect by giving Seller notice thereof in accordance with Section 6.2, except that such notice must be given at least one (1) day prior to the Closing Date.  If an unsatisfied consent requirement with respect to which a Purchase Price adjustment is made under Section 6.2 is subsequently satisfied prior to the date of the final adjustment to the Purchase Price under Section 2.5, Seller shall be paid the amount of the previous reduction in the Purchase Price and the provisions of this Section 6.5 shall no longer apply.

 

(c)                                          If any preferential rights to purchase any Assets are exercised prior to Closing, those Assets transferred to a third party as a result of the exercise of such preferential rights shall be treated as if subject to a Title Defect resulting in the complete loss of title and the Purchase Price shall be reduced under Section 2.3(b) by the Allocated Value for the affected Producing Properties.  Seller shall retain the consideration paid by the third party.

 

6.6                               Environmental Defects and Adjustments to Purchase Price.

 

(a)                                         If Purchaser discovers any Environmental Defect affecting any of the Properties, Purchaser shall notify Seller of such alleged Environmental Defect as soon as reasonably possible after the discovery thereof by Purchaser.  To be effective, such notice (“Environmental Defect Notice”) must (i) be in writing, (ii) be received by Seller prior to the expiration of the Examination Period, (iii) describe the Environmental Defect in reasonable detail, (iv) identify the specific Property affected by such Environmental Defect, and (v) include

 

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the value of such Environmental Defect as determined by Purchaser in good faith.  Any matters that may otherwise constitute Environmental Defects, but of which Seller has not been specifically notified by Purchaser in accordance with the foregoing, shall be deemed to have been waived by Purchaser as Environmental Defects.  Upon timely delivery of a notice of an Environmental Defect in accordance with the requirements of this Section 6.6(a), the parties will in good faith negotiate the validity of the claim and the amount of any adjustment to the Purchase Price using the following criteria:

 

(i)                                                                         No single Environmental Defect shall be taken into account unless the value of such defect is determined to be more than TWENTY THOUSAND Dollars ($20,000) (each an “Individual Environmental Defect Threshold”), in which event the full amount of such defect shall be taken into account from the first dollar.

 

(ii)                                                                      No adjustment will be made to the Purchase Price for uncured Environmental Defects unless the total of all such Environmental Defects that exceed the Individual Environmental Defect Threshold exceeds one percent (1%) of the Purchase Price in the aggregate (the “Aggregate Environmental Defect Threshold”).  In the event that the aggregate uncured Environmental Defects exceed the Aggregate Environmental Defect Threshold, the adjustment to the Purchase Price shall be the amount all such Environmental Defects exceed the Aggregate Environmental Defect Threshold.  If the Aggregate Environmental Defect Threshold is exceeded then at the Purchaser’s option, any Property that Purchaser designates that is affected by specific Environmental Defects in excess of the Individual Environmental Defect Threshold (which Environmental Defect Seller has not elected to cure) will not be conveyed at the Closing.

 

(iii)                                                                   If the adjustment is based on a liability to remediate or otherwise cure a liquidated Environmental Defect related to a Property, then the adjustment is an amount equal to the lesser of (y) the lowest cost reasonably necessary for the reporting, investigation, monitoring, removal, cleanup, remediation, restoration or correction or to otherwise cure such Environmental Defect in a manner that does not materially interfere with the use or operation of such Property and consistent with applicable Environmental Law and prudent industry practices or (z) the Allocated Value of the affected Producing Properties.

 

(iv)                                                                  If the adjustment is based on an obligation, burden or liability upon a Property for which the Purchaser’s economic detriment is not liquidated but can be estimated with reasonable certainty, then, subject to the other provisions hereof, the adjustment is the amount equal to the lesser of the amount of such economic detriment or the Allocated Value of the affected Producing Properties.

 

(v)                                                                     If an Environmental Defect is reasonably susceptible of being cured or remediated, as applicable, the Seller will provide notice to the Purchaser within thirty (30) days following receipt of notice of the Environmental Defect stating whether or not the Seller will attempt to cure such Environmental Defect.  If the Seller provides

 

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notice electing to attempt to cure such Environmental Defect, the Purchaser and the Seller agree that the Seller will have the right to cure such defect for a period of up to ninety (90) days after the date of Seller’s receipt of the notice of such Environmental Defect (each, an “Environmental Cure Period”).  If the parties are unable to agree on the adjustment relative to an uncured Environmental Defect, then either party shall have until the date ninety (90) days after the end of the applicable Environmental Cure Period to submit the dispute to an expert for resolution as provided in Section 6.6(b).  If the parties dispute whether any such Environmental Defect has been cured, then the matter shall be resolved in the manner described in Section 6.6(b).

 

(vi)                                                                  If the Seller does not elect to cure an Environmental Defect in accordance with Section 6.6(a), and the Seller and the Purchaser are not in agreement as to whether an Environmental Defect exists or the amount thereof, then either party may submit the dispute to an expert for resolution as provided in Section 6.6(b) until the date ninety (90) days after the end of the applicable Environmental Cure Period.  With respect to Environmental Defects which the Seller elects to cure, if the Seller and the Purchaser are not in agreement as to whether an Environmental Defect has been cured, either party shall have until the date ninety (90) days after the end of the applicable Environmental Cure Period to submit the dispute to an expert for resolution as provided in Section 6.6(b).

 

(b)                                         If there is a dispute between the Seller and the Purchaser involving: (i) Environmental Defects, (ii) the cure of an Environmental Defect or (iii) the value attributable to Environmental Defects or the adjustment to the Purchase Price with respect thereto, the Seller and the Purchaser will submit the dispute to an expert for determination as provided in this Section following written notice from one party to the other party that such party is initiating dispute resolution in accordance with this Section 6.6(b), such notice to describe in reasonable detail the nature and specifics of the dispute.  Environmental dispute matters to be resolved under this Section 6.6(b) shall be submitted to a mutually agreed, suitably qualified environmental expert in the energy industry with experience in environmental issues selected by the Seller and the Purchaser (each such environmental expert hereinafter, a “Consultant”).  In the event the Seller and the Purchaser are unable to agree on a single Consultant within thirty (30) days after receipt of the initiating notice, the Seller and the Purchaser will each appoint one Consultant within ten (10) business days thereafter and the two Consultants so appointed will appoint a third Consultant within thirty (30) days after the second Consultant is appointed.  If the two Consultants are unable to agree on a third Consultant within such thirty (30) day period, then a third Consultant shall be selected by the AAA office in Ft. Worth, Texas consistent with the selection criteria set forth in this Section and with due regard given to input from the parties and the other Consultants.  Any Consultant appointed pursuant to this Agreement (y) shall not have worked as an employee of or performed other material work for any party hereto or its affiliates within the preceding five (5) year period or have any financial interest in the dispute and (z) shall agree in writing to keep strictly confidential the specifics and existence of the dispute as well as all proprietary records of the parties reviewed by the Consultants in the process of resolving such dispute.  The mutually agreed Consultant or the three Consultants so appointed will resolve such matter.  The costs and expenses of each Consultant shall be paid fifty percent (50%) by the Seller

 

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and fifty percent (50%) by the Purchaser.  The Seller and the Purchaser shall each present to the Consultant(s), with a simultaneous copy to the other party, a single written statement of its position on the defect, benefit or dispute in question, together with a copy of this Agreement and any supporting material that such party desires to furnish, not later than ten (10) business days after appointment of the Consultant(s).  In making their determination, the Consultant(s) shall be bound by the terms of this Agreement and, without any additional or supplemental submittals by either party, may consider available legal and industry matters as in their opinion are necessary or appropriate to make a proper determination.  Additionally, any Consultant may consult with and engage disinterested third parties to advise him, including petroleum engineers or environmental engineers.  Within sixty (60) days following the submission of such written statements to the Consultant(s), applying the principles set forth in this Section 6.6, the Consultant(s) shall make a determination of the matter submitted based solely on the single written statement of each party.  The decision of the Consultant(s) shall be in writing and conclusive and binding on the Seller and the Purchaser and shall be enforceable against the parties in any court of competent jurisdiction.  Any adjustments owing by one party hereto as a result of such determination by the Consultant(s) will be made as provided in Sections 9.1 and 9.2 hereof.  The Consultant(s) shall act as experts for the limited purpose of determining the specific dispute presented to them, shall not act as arbitrators, and may not award damages, interest, costs or penalties to either party.

 

(c)                                          In any event, either Purchaser or Seller can elect to exclude from the transactions contemplated hereby any Property affected by an Environmental Defect, and such Property will be deemed an Excluded Asset and the Purchase Price will be reduced by the Allocated Value of the affected Producing Properties.

 

6.7                               Purchaser Indemnification.  PURCHASER HEREBY INDEMNIFIES AND SHALL DEFEND AND HOLD SELLER, AFFILIATES THEREOF, AND ITS AND THEIR RESPECTIVE OWNERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, CONTRACTORS, SUCCESSORS, AND ASSIGNS HARMLESS FROM AND AGAINST ANY AND ALL OF THE FOLLOWING CLAIMS ARISING FROM PURCHASER’S (OR ANY OF ITS AFFILIATE’S) INSPECTING AND OBSERVING THE PROPERTIES:  (I) CLAIMS FOR PERSONAL INJURIES TO OR DEATH OF EMPLOYEES OF PURCHASER, ITS AFFILIATES OR ANY OF THEIR RESPECTIVE CONTRACTORS, AGENTS, CONSULTANTS, AND REPRESENTATIVES, AND DAMAGE TO THE PROPERTY OF PURCHASER, ANY OF ITS AFFILIATES OR OTHERS ACTING ON BEHALF OF PURCHASER OR ANY OF ITS AFFILIATES, EXCEPT FOR INJURIES OR DEATH CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SELLER, AFFILIATES THEREOF OR ITS OR THEIR RESPECTIVE EMPLOYEES, CONTRACTORS, AGENTS, CONSULTANTS, OR REPRESENTATIVES; AND (II) CLAIMS FOR PERSONAL INJURIES TO OR DEATH OF EMPLOYEES OF SELLER OR THIRD PARTIES, AND DAMAGE TO THE PROPERTY OF SELLER OR THIRD PARTIES, TO THE EXTENT CAUSED BY THE GROSS NEGLIGENCE, OR WILLFUL MISCONDUCT OF PURCHASER OR ANY OF ITS AFFILIATES.  TO THE EXTENT PROVIDED ABOVE, THE FOREGOING INDEMNITY INCLUDES, AND THE PARTIES INTEND IT TO INCLUDE, AN INDEMNIFICATION OF THE INDEMNIFIED PARTIES

 

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FROM AND AGAINST CLAIMS ARISING OUT OF OR RESULTING, IN WHOLE OR PART, FROM THE CONDITION OF THE PROPERTY OR THE SOLE, JOINT, COMPARATIVE, OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY OF ANY OF THE INDEMNIFIED PARTIES.  THE PARTIES HERETO AGREE THAT THE FOREGOING COMPLIES WITH THE EXPRESS NEGLIGENCE RULE AND IS CONSPICUOUS.

 

ARTICLE 7
 COVENANTS

 

7.1                               Certain Covenants of Seller.  Seller covenants and agrees with Purchaser that:

 

(a)                                         Access to Records.  During the Examination Period, Seller will make and continue to make available to Purchaser for examination at Seller’s offices in Amarillo, Texas, the Property Records and will cooperate with Purchaser in Purchaser’s efforts to obtain, at Purchaser’s expense, such additional information relating to the Assets as Purchaser may reasonably desire.  Seller shall permit Purchaser, at Purchaser’s expense, to inspect and photocopy such information and records at any reasonable time but only to the extent, in each case, that Seller may do so without violating any contractual commitment to a third party.

 

(b)                                         New Agreements.  Except as provided in Section 7.2, without the prior written consent of Purchaser, Seller shall not enter into any new agreements or commitments with respect to the Assets.

 

(c)                                          Access to Employees, Properties and Technical Information.  Seller will permit Purchaser’s authorized representatives to consult with Seller and its agents and employees during reasonable business hours and to conduct, at Purchaser’s sole risk and expense, on-site inspections, tests and inventories of the Properties and inspect and examine all well logs, geological data relating to the Properties and other technical information.  In the event that any information or data of Seller is subject to confidentiality restrictions with third parties, Seller shall use its commercially reasonable efforts to obtain consent for representatives of Purchaser to review.

 

(d)                                         Tax on Sale.  Any Taxes resulting from the sale of the Assets by Seller to Purchaser will be the responsibility of Seller.

 

(e)                                          Transfer Taxes.  All excise, sales, use, transfer (including real property transfer or gains), stamp, documentary, filing, recordation and other similar taxes, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties, resulting directly from the sale and transfer by Seller to Purchaser of the Assets (the “Transfer Taxes”), shall be borne fully by Seller.  Any Tax Returns that must be filed in connection with Transfer Taxes shall be prepared and filed when due by the party primarily or customarily responsible under the applicable local law for filing such Tax Returns, and such party will use its commercially reasonable efforts to provide such Tax Returns to the other party at least ten (10) days prior to the due date for such Tax Returns.  Seller and Purchaser agree to cooperate with each other in demonstrating that the requirements for exemptions, if any, from such Transfer Taxes have been satisfied.

 

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7.2                               Conduct of Business Prior to Closing.  Seller covenants and agrees that prior to Closing:

 

(a)                                         Negative Covenants.  Seller covenants and agrees that, during the period from the date of this Agreement to the Closing, Seller shall not, except with the prior written consent of Purchaser which shall not be unreasonably withheld, conditioned or delayed:

 

(i)                                                                         Sell, lease, dispose of or abandon any of the Properties, or allow any of such Properties to be subjected to any mortgage, pledge, lien, security interest or encumbrance of any kind;

 

(ii)                                                                      Do any act or omit to do any act, or permit any act or omission to act, which would cause a breach of any Contract or commitment with respect to the Properties or any of them;

 

(iii)                                                                   Elect not to participate (i.e., go “non-consent”) in any new well, recompletion, rework, sidetrack or other well operation proposed under applicable joint operating agreements or other Contracts with respect to the Properties or any of them;

 

(iv)                                                                  Except as set forth in Schedule 7.2(a)(iv), enter into any lease, contract, agreement, commitment, arrangement or transaction outside the Ordinary Course of Business consistent with past practice with respect to the Properties or any of them;

 

(v)                                                                     Enter into an agreement that, if entered into prior to the date of this Agreement, would be required to be listed in a Schedule to this Agreement;

 

(vi)                                                                  Amend, modify or change in any material respect any existing lease, contract or agreement with respect to the Properties of any of them;

 

(vii)                                                               Make or change any election, adopt or change any accounting method, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment, or consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment, if, in each case, such election, adoption, amendment, agreement, settlement or consent relates to the Assets and would have the effect of materially increasing the Tax liability of the Purchaser or its Affiliates with respect to the Assets for any taxable period or portion thereof ending after the Effective Date; or

 

(viii)                                                            Agree, in writing or otherwise, to effect any of the changes or transactions described in clauses (i) through (vii) above.

 

(b)                                         Affirmative Covenants.  In addition, Seller shall, throughout the period from the date of this Agreement to Closing;

 

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(i)                                                                         Continue to own, produce, maintain and (where applicable) operate the Assets in the Ordinary Course of Business;

 

(ii)                                                                      Maintain, or cause to be maintained, the books of account and Property Records relating to the Properties in the Ordinary Course of Business and in accordance with the usual accounting practices of Seller;

 

(iii)                                                                   Maintain insurance coverage on the Properties in the amounts in force prior to the Effective Date;

 

(iv)                                                                  Not grant or create any preferential right to purchase, right of first opportunity or other transfer restriction or requirement with respect to the Properties;

 

(v)                                                                     Use commercially reasonable efforts to maintain in full force and effect all Properties and all permits, licenses, orders, approvals, variances, waivers, franchises, rights and authorizations held by it and issued by any Governmental Authority with respect to the Properties;

 

(vi)                                                                  Maintain the Properties in compliance with all applicable Environmental Laws and maintain in full force and effect any permits required under applicable Environmental Laws for the operation of the Properties; and

 

(vii)                                                               Give prompt written notice to Purchaser of any material damage or destruction of any of the Properties or material notice of violation of Applicable Law, including Environmental Laws, or claim, including Environmental Claims, received or made with respect to the Properties.

 

7.3                               Suspense Accounts.  The parties agree that all suspended royalties and other proceeds which are held by Seller (or by a third-party designee on behalf of Seller) in suspense for third parties attributable to production from the Properties shall be transferred to Purchaser at the Closing.  A complete list of all such suspended royalties and other proceeds is attached as Schedule 7.3.  From and after the Closing, Purchaser shall become responsible for the payment of all suspended revenues to third parties entitled to the same and shall and does hereby hold Seller harmless from and against any loss, liability, cost or expense from and after the Closing (other than those that may be attributed to Seller’s improper placement of such revenues in suspense).

 

7.4                               Non-Consent Election.  In the event that Seller desires to elect to not participate (non-consent) in any new well, recompletion, rework, sidetrack or other well operation proposed under applicable joint operation agreements or other Contracts with respect to the Properties and Purchaser will not agree to a non-consent election as required by Section 8.2(a)(iii), Seller may make a wellbore assignment of the Property involved to Purchaser in lieu of Seller electing not to participate; provided that Seller shall have solicited and received all necessary consents or waivers with regard to any restrictions applicable to such transfer to Purchaser.

 

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7.5                               Consents and Approvals.

 

(a)                                         Seller shall use its commercially reasonable efforts to obtain all consents, approvals, orders, authorizations and waivers of, and to effect all declarations, filings and registrations with, all third parties (including Governmental Entities) that are necessary or required to satisfy the conditions to Closing in Section 8.1 and to otherwise consummate the transactions contemplated hereby.  All costs and expenses of obtaining or effecting any and all of the consents, approvals, orders, authorizations, waivers, declarations, filings and registrations referred to in this Section 7.5 shall be borne by Seller.

 

(b)                                         Should a third party fail to exercise its preferential right to purchase as to any portion of the Assets prior to Closing and the time for exercise or waiver has not yet expired, subject to the remaining provisions of this Section 7.5, such Assets shall be included in the transaction at Closing and the following procedures shall be applicable:

 

(i)                                                                         Seller shall, at its sole expense, continue to use commercially reasonable efforts to obtain the waiver of the preferential rights and shall continue to be responsible for the compliance therewith; and

 

(ii)                                                                      Should the holder of the preferential right exercise same, (y) Purchaser shall cause the affected Assets to be transferred to such holder on the terms and provisions set out herein and in the applicable preferential right provision and Purchaser shall be entitled to retain the consideration paid by the third party and (z) Seller shall assume all obligations assumed by Purchaser with respect to such Assets under Section 9.3, and shall indemnify, defend and hold harmless Purchaser from any and all claims, obligations, actions, liabilities, damages or expenses incurred by Purchaser caused by or arising out of or resulting from the ownership, use or operation of such Assets from the Closing Date to the date of the reconveyance.

 

(c)                                          Should any third party bring any suit, action or other proceeding seeking to restrain, enjoin or otherwise prohibit the consummation of the transactions contemplated hereby in connection with a claim to enforce preferential rights, or, in the event the applicable preferential right provision prohibits transfer prior to the waiver or expiration of such right, the Asset affected by such suit, action or other proceeding shall be excluded from the Assets transferred at Closing and the Purchase Price shall be reduced by the Allocated Value of any affected Producing Properties.  Promptly after the suit, action or other proceeding is dismissed or settled or a judgment is rendered, or the right is waived or expires, Seller shall sell to Purchaser and Purchaser shall purchase from Seller all such Assets not being sold to the third party for a purchase price equal to the Allocated Value of the affected Producing Properties, adjusted as provided in Section 2.3.

 

7.6                               Casualty Loss.  If, after the date of this Agreement but prior to the Closing, all or any portion of the Properties are destroyed or damaged by fire, flood, earthquake, storm, theft, vandalism, explosion, blowout, riot, sabotage, accident or other casualty of a similar nature or shall be taken by condemnation or under the right of eminent domain (all of which are herein called “Casualty Loss”), Purchaser may elect on or before Closing: (i) to treat the Casualty Loss as a Title Defect in accordance with Article 6; or (ii) to proceed with the Closing notwithstanding

 

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any such destruction or taking (without reduction of the Purchase Price) in which case Seller shall, at  the Closing, pay to Purchaser all sums paid to Seller by third parties by reason of the destruction, damage or taking of such Properties and shall assign, transfer and set over unto Purchaser or subrogate Purchaser to all of the right, title and interest of Seller in and to any claims against or unpaid proceeds or other payments from third parties arising out of such destruction or taking, including, but not limited to, insurance proceeds.  Prior to Closing, Seller shall not voluntarily compromise, settle or adjust any amounts payable by reason of any Casualty Loss during the aforementioned period without first obtaining the written consent of Purchaser.

 

7.7                               Confidentiality.  Purchaser and Seller agree not to use or disclose to any Person any Confidential Information.  “Confidential Information” means any information concerning the Assets or the transactions contemplated by this Agreement, except for any such information that (a) is generally available to the public, (b) is published or otherwise becomes generally available to the public through no fault of the disclosing party, any of their Affiliates or any of their Representatives, or (c) becomes available to the disclosing party, any of their Affiliates or any of their Representatives on a non-confidential basis from a source that did not acquire such information (directly or indirectly) from the non-disclosing party, any of their Affiliates or any of their Representatives on a confidential basis.  Notwithstanding the foregoing, Purchaser and Seller may make disclosures required by Applicable Law, court rule or regulation and in connection with disputes hereunder; provided that the disclosing party, to the extent practicable, shall provide the non-disclosing party with prompt notice thereof so that the non-disclosing party may seek a protective order or other appropriate remedy or waive compliance with the provisions of this Section 7.7.  In the event that such protective order or other remedy is not obtained or the non-disclosing party waives compliance with the provisions of this Section 7.7, the disclosing party shall or shall cause the Person required to disclose such confidential information to furnish only that portion of the information that such Person is advised by the non-disclosing party’s counsel is legally required to be disclosed.

 

7.8                               Non-Competition Agreement.  In the event Seller, any of its Affiliates or any of the Persons who are members of Seller or its Affiliates, either directly or indirectly, acquires any interest in the oil or gas rights to explore for and produce oil or gas in an area of mutual interest with a boundary two (2) miles outside the Properties (as such area is identified in Exhibit C) for a period of one (1) year from the date hereof, insofar and only insofar as any such acquired interest covers the Arkoma Woodford, (the term “interest” as used herein shall include any interest whatsoever in the oil or gas, including but not limited to, royalties, overriding royalties, leases, renewals or extensions of existing leases, farmins, fee interests, etc.), Seller shall notify Purchaser immediately after any such acquisition, giving complete information as to the interests acquired, along with copies of the instrument or instruments by which the interest was acquired, and the consideration to be given or paid.  Purchaser shall have thirty (30) days following receipt of such notice to notify Seller of its desire to acquire all or any party of any such interest by paying Seller (or its Affiliates or any of the Persons who are members of Seller or its Affiliates, as applicable) for its cost to acquire such interest or part thereof.  Thereupon, Seller (or its Affiliates or any of the Persons who are members of Seller or its Affiliates, as applicable) shall immediately assign such interest to Purchaser, without warranty of title, except by, through and under Seller (or its Affiliates or any of the Persons who are members of Seller or its Affiliates, as

 

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applicable), in an instrument in form and substance approved by Purchaser in writing, which approval shall not be unreasonably withheld.  Seller and Purchaser agree that this Section 7.8 does not apply to the Excluded Assets (other than the Payne Properties which shall be subject to all the restrictions set forth in this Section 7.8).

 

7.9                               Imbalances.  Purchaser expressly assumes any and all obligations attributable to Imbalances, to the extent disclosed by Seller, associated with the Producing Properties.  Should Purchaser discover any inaccuracy in Schedule 4.1(o) attributable to the Producing Properties prior to the Effective Date, Purchaser may assert a claim for an adjustment under this Section 7.9 by delivering a written notice to Seller at least two (2) days prior to Closing.  If it is determined that there is an inaccuracy as of the Effective Date in the Imbalances set forth in Schedule 4.1(o), then an adjustment to the Purchase Price, will be made as follows:

 

(a)                                         Should Seller’s total net Imbalance reflect that the Seller is overproduced, then the Purchase Price shall be reduced by the net change in the total Imbalance times $3.00 per MMBtu; or

 

(b)                                         Should Seller’s total net Imbalance reflect that the Seller is underproduced, then the Purchase Price shall be increased by the net change in the total Imbalance times $3.00 per MMBtu.

 

7.10                        Successor Operator.  Seller agrees that as to the Properties that Seller operates, it shall use commercially reasonable efforts to support Purchaser’s efforts to become successor operator (to the extent permitted under any applicable joint operating agreement), effective as of the Closing (at Purchaser’s sole cost and expense), and to designate or appoint by assignment, to the extent legally possible and permitted under the applicable Contracts, Purchaser as successor operator effective as of the Closing.  In furtherance of the foregoing, as soon as reasonably practicable but no later than five (5) days after the date hereof, Seller shall send notices (in form and substance reasonably acceptable to Purchaser) to all participating parties and co-owners of the Properties that Seller or any of its Affiliates currently operate indicating that it is resigning as operator contingent upon and effective at Closing, and nominating and recommending Purchaser (or an Affiliate designated by Purchaser) as successor operator.

 

7.11                        Tax Matters.

 

(a)                                         Seller’s Liability for Certain Taxes.  Seller shall be solely liable for, and shall indemnify and hold the Purchaser Indemnitees harmless against, any Taxes, other than Property Costs and sales and excise Taxes (to the extent such sales and excise Taxes are reflected in the adjustment to the Purchase Price following the final adjustment pursuant to Section 2.5), attributable to the direct or indirect ownership or operation of the Assets during any taxable period or portion thereof ending on or prior to the Closing Date, including pursuant to Sections 7.1(d) and 7.1(e).

 

(b)                                         Allocation of Taxes.  For purposes of this Agreement, in cases where a taxable period begins before and ends after the Closing Date or begins before and ends after the Effective Date, as applicable, the portion of Taxes payable with respect to such taxable period

 

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that is attributable to the direct or indirect ownership or operation of the Assets for the portion of the taxable period ending on the Closing Date or Effective Date, as applicable, shall be determined as follows:  (i) in the case of Taxes such as property Taxes, ad valorem Taxes, and similar Taxes imposed on a periodic basis, the portion of any such Tax that is attributable to (or incurred in) the portion of the period ending on the Closing Date (or Effective Date, as applicable) shall be considered to equal the amount of such Taxes for such taxable period, multiplied by a fraction, the numerator of which is the number of days in the portion of such taxable period that ends immediately prior to the Closing Date (or Effective Date, as applicable) and the denominator of which is the number of days in the entire taxable period and (ii) in the case of all other Taxes that are imposed on, or are based in whole or in part on, income, gross receipts or operations of Seller or the Purchaser (such as income and franchise Taxes, and sales and use, value added, and goods and services Taxes), the portion of such Taxes which is attributable to (or incurred in) the portion of such taxable period ending on the Closing Date (or Effective Date, as applicable) shall be determined by closing the books of Seller or the Purchaser, as applicable, as of the end of the day immediately preceding the Closing Date (or Effective Date, as applicable).

 

(c)                                          Cooperation on Tax Matters.  The Purchaser and Seller and their respective Affiliates shall cooperate in the preparation of all Tax Returns for any Tax periods for which any such party could reasonably require the assistance of another such party in obtaining any necessary information.  Such cooperation and information shall include promptly forwarding copies of appropriate notices and forms or other communications received from or sent to any applicable Governmental Entity responsible for the imposition of Taxes which relate to the Assets.  The Purchaser and Seller and their respective Affiliates shall make their respective employees and facilities available on a mutually convenient basis to explain any documents or information provided hereunder.

 

(d)                                         Tax Contests.  Notwithstanding anything to the contrary in Article 9, Tax Contests shall be subject to the following provisions.  Seller shall be entitled to manage, conduct and control any Tax audits, examinations, appeals, litigation, or other Tax proceedings involving Taxes relating to the Assets for which Seller is liable under this Section 7.11 or Section 9.2 (each, a “Tax Contest”).  However, to the extent the Purchaser could reasonably be expected to have successor or other liability for the Taxes that are the subject of such Tax Contest, then the parties shall jointly control the Tax Contest.  In any event, any settlement or other disposition of any Tax Contest controlled by one party pursuant to this paragraph, which could result in an increase in any Taxes payable or reimbursable by another party may only be entered into with the written consent of such other party, which consent will not be unreasonably withheld or delayed.

 

7.12                        Certain Restrictions.

 

(a)                                         Further Acquisitions.  From the date of this Agreement until the Closing, Seller shall not acquire, either directly or indirectly, any oil, gas or other Hydrocarbon leases or other rights to Hydrocarbons or other minerals in place on the lands described on Exhibit C, or

 

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allow any of its Affiliates or any of the Persons who are members of Seller or its Affiliates to do so.

 

(b)                                         Alternative Transactions.  From the date of this Agreement until the Closing, Seller shall not, and shall not allow any of its Affiliates or any of the Persons who are members of Seller or its Affiliates to, directly or indirectly, (i) engage in, enter into or solicit any discussions, negotiations, proposals, inquiries, offers or agreements with any person with respect to an Alternative Transaction, or (ii) release or disclose any information the purpose or the result of which would be to assist in the preparation of an offer with respect to an Alternative Transaction.  If Seller or any of its Affiliates or any of the Persons who are members of Seller or its Affiliates receive any inquiry, offer or proposal relating to an Alternative Transaction, Seller will promptly notify Purchaser thereof, communicate to Purchaser in reasonable detail the terms of any such indication, request or proposal and provide Purchaser with copies of all written communications relating to any such indication, request or proposal.  Thereafter, Seller shall keep Purchaser promptly informed regarding any further communications relating to such inquiry, offer or proposal.

 

7.13                        Abandoned Wells.  Seller and Purchaser agree that, at any time on or before April 14, 2014, Purchaser shall have the right to undertake the plugging and abandonment of any of the wells set forth in Schedule 7.13 (each an “Abandoned Well”), in accordance with all applicable requirements of each Governmental Authority having jurisdiction over such wells and at the sole expense of Seller; provided, however, that no such election shall be made in respect of an Abandoned Well which Purchaser has re-entered with the intention of resuming drilling operations.  If Purchaser desires to plug and abandon an Abandoned Well prior to April 14, 2014, it will provide Seller with an authorization for expenditure covering such plugging and abandonment prior to such date.  Seller shall have thirty (30) days from receipt of any such authorization for expenditure to approve the proposed plugging and abandonment, which approval shall not be unreasonably withheld.  If Seller approves such authorization for expenditure, Seller shall promptly reimburse Purchaser for all costs and expenses associated with the plugging and abandoning of the Abandoned Well referenced in such authorization for expenditure.  Seller shall have no liability for the costs of plugging and abandoning any Abandoned Well for which an authorization for expenditure is delivered after April 14, 2014.

 

ARTICLE 8
 CONDITIONS TO CLOSING

 

8.1                               Conditions to Obligations of Purchaser.  The obligations of Purchaser under this Agreement are subject to the satisfaction at or prior to the Closing Date of the following conditions, compliance with which may be waived by Purchaser:

 

(a)                                         Warranties and Agreement of Seller; Officer’s Certificate.  All representations and warranties of Seller contained in this Agreement shall be true and correct in all respects without regard to materiality (or qualified as to a Material Adverse Effect) at and as of the Closing Date with the same effect as though such representations and warranties were made at and as of the Closing Date, except to the extent that such representations and warranties

 

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expressly relate to any earlier date; provided, however, that Seller shall be deemed to have satisfied the conditions of this Section 8.1(a) with respect to the accuracy of its representations and warranties so long as the aggregate effect of any breaches of Seller’s representations and warranties would not reasonably be expected to have a Material Adverse Effect; and Seller shall have performed and complied, in all material respects, with all the covenants and agreements and satisfied all the conditions required by this Agreement to be performed, complied with or satisfied by them at or prior to the Closing Date; and Purchaser shall have received a certificate dated the Closing Date and signed by the President of the Seller to the foregoing effect.

 

(b)                                         Approval of Documentation.  The form and substance of all certificates, instruments of transfer and other documents required to be delivered to Purchaser hereunder shall be satisfactory to Purchaser and its counsel in all reasonable respects.

 

(c)                                          Additional Information.  Seller shall have furnished to Purchaser and its counsel such information, certificates and other documents as they shall have reasonably requested for the purpose of enabling them to pass upon the matters referred to in this Section 8.1.

 

(d)                                         No Suit or Action.  No suit, action or other proceedings shall, on the date of Closing, be pending or threatened before any court or Governmental Entity seeking to restrain, prohibit or obtain damages in connection with the consummation of the transactions contemplated by this Agreement.

 

(e)                                          Prior Actions Completed.  All actions to have been completed by Seller pursuant to this Agreement and the transactions contemplated hereby prior to Closing, including actions under Section 3.2 or Article 7, shall have been completed; and the consummation of the transactions contemplated by the Farmout Acquisition Agreement shall occur contemporaneously with Closing.

 

(f)                                           Receipt of Documents.  Purchaser shall have also received the certificates, instruments, and documents listed below:

 

(i)                                                                         The Assignment in the form attached hereto as Exhibit B, duly executed by Seller, in sufficient duplicate originals to allow recording in all appropriate jurisdictions and offices;

 

(ii)                                                                      A certificate of non-foreign status in form, date and content reasonably acceptable to Purchaser, executed and delivered by Seller pursuant to Section 1445 of the Code and the regulations promulgated thereunder;

 

(iii)                                                                   Duly executed copies of all consents to assignment and waivers of preferential purchase rights identified on Schedule 4.1(v);

 

(iv)                                                                  Written waivers of any maintenance of uniform interest provision or area of mutual interest provision applicable to the Properties as of the Effective Date;

 

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(v)                                                                     Written confirmation that Purchaser or its designee has been designated operator pursuant to each joint operating agreement applicable to the Properties under which Seller or any of its Affiliates served as operator as of the Effective Date;

 

(vi)                                                                  Recordable release of the Citibank Lien, insofar as it affects the Assets;

 

(vii)                                                               Fully executed copies of the Amendment between Atoka Midstream LLC and Pablo Energy II, LLC attached hereto as Exhibit D;

 

(viii)                                                            Written confirmation that the Pontotoc JOA has been terminated; and

 

(ix)                                                                  All of the Property Records.

 

8.2                               Conditions to Obligations of Seller.  The obligations of Seller under this Agreement are subject to the satisfaction at or prior to the Closing Date of the following conditions, compliance with which may be waived by Seller:

 

(a)                                         Warranties and Agreements of Purchaser; Officer’s Certificate.  All representations and warranties of Purchaser contained in this Agreement shall be true and correct in all material respects at and as of the Closing Date with the same effect as though such representations and warranties were made at and as of the Closing Date, except to the extent that such representations and warranties expressly relate to an earlier date; and Purchaser shall have performed and complied, in all material respects, with all of the covenants and agreements and satisfied all the conditions required by this Agreement to be performed, complied with or satisfied by it at or prior to the Closing Date; and Seller shall have received a certificate dated the Closing Date and signed by the President or a Vice President of Purchaser to the foregoing effect.

 

(b)                                         Approval of Documentation.  The form and substance of all certificates and other documents required to be delivered to Seller hereunder shall be satisfactory in all reasonable respects to Seller and its counsel in all reasonable respects.

 

(c)                                          Additional Information.  Purchaser shall have furnished to Seller and its counsel such information, certificates and other documents as they shall have reasonably requested for the purpose of enabling them to pass upon the matters referred to in this Section 8.2.

 

(d)                                         No Suit or Action.  No suit, action or other proceedings shall, on the date of Closing, be pending or threatened before any court or Governmental Entity seeking to restrain, prohibit or obtain damages in connection with the consummation of the transactions contemplated by this Agreement by any person other than any Seller or any Affiliate, owner or beneficiary thereof.

 

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ARTICLE 9
 POST-CLOSING OBLIGATIONS; SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; INDEMNIFICATION

 

9.1                               Receipts.  Except as otherwise provided in this Agreement, any production from or attributable to the Properties (and all products and proceeds attributable thereto) and any other income, proceeds, receipts and credits attributable to the Properties which are not reflected in the adjustments to the Purchase Price following the final adjustment pursuant to Section 2.5 shall be treated as follows: (a) all production from or attributable to the Properties (and all products and proceeds attributable thereto) and all other income, proceeds, receipts and credits earned with respect to the Properties during and after the Adjustment Period shall be the sole property and entitlement of Purchaser, and, to the extent received by Seller, Seller shall fully disclose, account for and remit the same promptly to Purchaser, and (b) all production from or attributable to the Properties (and all products and proceeds attributable thereto) and all other income, proceeds, receipts and credits earned with respect to the Properties prior to the Adjustment Period shall be the sole property and entitlement of Seller and, to the extent received by Purchaser, Purchaser shall fully disclose, account for and remit  the same promptly to Seller.

 

9.2                               Expenses.  Except as otherwise provided in this Agreement, any Property Costs which are not reflected in the adjustments to the Purchase Price following the final adjustment pursuant to Section 2.5 shall be treated as follows: (a) all Property Costs incurred prior to the Adjustment Period shall be the sole obligation of Seller and Seller shall promptly pay, or if paid by Purchaser, promptly reimburse Purchaser for and hold Purchaser harmless from and against same; and (b) all Property Costs incurred during and after the Adjustment Period shall be the sole obligation of Purchaser and Purchaser shall promptly pay, or if paid by Seller, promptly reimburse Seller for and hold Seller harmless from and against same.  Seller is entitled to resolve all joint interest audits and other audits of Property Costs covering periods for which Seller is in whole or in part responsible, provided that Seller shall not agree to any adjustments to previously assessed costs for which Purchaser is liable without the prior written consent of Purchaser, such consent not to be unreasonably withheld.  Seller shall provide Purchaser with a copy of all applicable audit reports and written audit agreements received by Seller and relating to periods for which Purchaser is partially responsible.

 

9.3                               Assumed Obligations.  Without limiting Purchaser’s rights to indemnity under this Article 9, on the Closing Date Purchaser shall assume and hereby agrees to fulfill, perform, pay and discharge (or cause to be fulfilled, performed, paid or discharged) all of the obligations and liabilities of Seller, known or unknown, with respect to the Properties, regardless of whether such obligations or liabilities arose prior to, on or after the Effective Date, including but not limited to obligations to (i) furnish makeup gas according to the terms of applicable gas sales, gathering or transportation contracts, and to satisfy all other gas balancing obligations not adjusted under Section 7.9, (ii) pay working interests, royalties, overriding royalties and other interests held in suspense, (iii) properly plug and abandon any and all wells, including inactive wells or temporarily abandoned wells, drilled on the Properties or otherwise pursuant to the Contracts, (iv) replug any well, wellbore, or previously plugged well on the Properties to the extent required or necessary, (v) dismantle and remove any equipment structures, materials,

 

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platforms, flowlines, and property of whatever kind related to or associated with operations and activities conducted on the Properties or otherwise pursuant to the Contracts, (vi) clean up, restore or remediate the premises covered by or related to the Properties in accordance with applicable agreements and Laws, and (vii) perform all obligations applicable to or imposed on the lessee, owner, or operator under any leases covering the Properties and related contracts, or as required by Applicable Laws (all of said obligations and liabilities, subject to the exclusions below, herein being referred to as the “Assumed Obligations”); provided, however, that Purchaser does not assume any obligations or liabilities of Seller (y) to the extent that they are the continuing responsibility of the Seller under Sections 7.1, 7.10, 7.11, 9.1 or 9.2 or matters for which Seller is required to indemnify Purchaser under Sections 7.11 or 9.5 or (z) relating to any Hedging Transaction other than the Purchaser Hedges.

 

9.4                               Survival.

 

(a)                                         The representations, warranties and covenants of Seller regarding Taxes (including Sections 4.1(i), 7.1(e) and 7.11) shall each survive the Closing until 90 days following the expiration of the applicable statute of limitations.  The representations and warranties contained in Sections 4.1(a), 4.1(b), 4.1(e), 4.1(n) and 4.1(p) (the “Seller Transaction Representations”), and in Sections 5.1(a), 5.1(b), 5.1(c), 5.1(d) and 5.1(g), shall each survive the Closing without time limit.  The representations and warranties set forth in Section 4.1(j) shall survive the Closing for a period of eighteen (18) months.  The remaining representations and warranties of Seller contained in Article 4 and the representations and warranties of Purchaser contained in Article 5 shall survive until the twelve (12) month anniversary of the Closing Date.  Notwithstanding the foregoing, in no event shall any representation or warranty (or portion thereof, except the special warranty of title set forth in the Assignments) of Seller regarding title to any of the Properties survive the Closing, and for the avoidance of doubt, Purchaser’s sole and exclusive remedy for issues regarding title (including any Title Defect) shall be pursuant to Sections 6.2 and 6.3 and, to the extent applicable, Seller’s special warranty of title set forth in the Assignments.  The period, if any, for which a representation and warranty survives is called a “Survival Period.”  From and after the expiration of a Survival Period, no party hereto shall be under any liability with respect to any representation or warranty to which such Survival Period relates, except with respect to matters as to which notice has been received in accordance with Section 9.1(b).  Each covenant and agreement of the parties hereto contained in this Agreement shall survive the Closing indefinitely unless otherwise stated herein.

 

(b)                                         No party hereto shall have any indemnification obligation pursuant to this Article 9 or otherwise in respect of any representation, warranty or covenant unless (i) it shall have received from the party seeking indemnification written notice of the existence of the claim for or in respect of which indemnification in respect of such representation, warranty or covenant is being sought and (ii) with respect to a representation and warranty to which a Survival Period relates, such notice is received on or before the expiration of such Survival Period.  Such notice shall set forth with reasonable specificity (x) the basis under this Agreement, and the facts that otherwise form the basis of such claim, (y) the estimate of the amount of such claim (which estimate shall not be conclusive of the final amount of such claim) and an explanation of the calculation of such estimate, including a statement of any significant

 

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assumptions employed therein, and (z) the date on and manner in which the party delivering such notice became aware of the existence of such claim.

 

9.5                               Seller’s Indemnification Obligations.  Seller shall, on the date of Closing, agree (and, upon delivery to Purchaser of the Assignments, shall be deemed to have agreed), subject to the limitations and procedures contained in this Article 9, following the Closing, to indemnify and hold Purchaser, its Affiliates and its and their respective successors and permitted assigns and all of their respective stockholders, partners, members, managers, directors, officer, employees, agents and representatives (collectively, the “Purchaser Indemnitees”) harmless from and against any and all claims, obligations, actions, liabilities, damages or expenses (collectively, “Purchaser’s Losses”) incurred, suffered, paid by or resulting to any of the Purchaser Indemnitees and which results from, arises out of or in connection with, is based upon, or exists by reason of: (a) any breach of any representation, warranty, covenant or agreement of Seller contained in this Agreement (in each case without regard to materiality or any qualification as to Material Adverse Effect), (b) Seller’s non-compliance with Applicable Laws or agreements in respect of the Properties prior to the Closing, (c) all Property Costs incurred prior to the Effective Date (including with regard to joint interest billings by Seller and any participating party’s payments in respect thereof), (d) all costs and expenses incurred by Purchaser associated with the plugging and abandoning of each Abandoned Well pursuant to Section 7.13 or (e) the Excluded Assets; REGARDLESS OF THE NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OR RESPONSIBILITY OF PURCHASER, ANY OTHER PURCHASER INDEMNITEE, SELLER OR ANY OTHER PERSON.  Notwithstanding any other provision of this Agreement, (i) the maximum liability of Seller under the indemnity provisions of Article 9 or under any other provisions of this Agreement, in either case for a breach of any representation or warranty other than the Seller Transaction Representations and Section 4.1(i), shall not exceed ten percent (10%) of the Purchase Price and (ii) Seller shall have no liability under the indemnity provisions of this Section 9.5 by reason of any breach of any representation or warranty (other than the Seller Transaction Representations and Section 4.1(i)) until and unless the aggregate amount of the liability for all Purchaser Losses associated therewith exceeds ONE MILLION Dollars ($1,000,000), in which event Seller shall be liable for the amount of all Purchaser Losses, but in no event to exceed ten percent (10%) of the Purchase Price.  Seller agrees that any amounts owing to Purchaser under this Agreement may be set off against and withheld from any amounts owing to Seller in respect of its interest under the Farmout Agreement.

 

9.6                               Purchaser’s Indemnification Obligations.  Except (a) with respect to the matters for which Seller has provided an express indemnification as set forth in this Article 9, (b) Purchase Price adjustments covered by Article 2 to the extent such adjustments are provided for after Closing, (c) Title Defect adjustments covered by Article 6, and (d) Tax obligations covered by Section 4.1(i) and the covenants set forth in Sections 7.1(e) and 7.11, upon the Closing the Purchaser shall agree (and, upon the delivery by Seller to Purchaser of the Assignments, Purchaser shall be deemed to have agreed) to pay, defend, indemnify, reimburse, and hold harmless Seller, its Affiliates and their respective successors and permitted assigns and all of their respective stockholders, partners, members, managers, directors, officer, employees, agents and representatives (collectively, the “Seller Indemnitees”) from and against any and all claims, obligations, actions, liabilities, damages or expenses (collectively, “Seller’s Losses”) incurred,

 

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suffered, paid by or resulting to any of the Seller Indemnitees and which results from, arises out of or in connection with, is based upon, or exists by reason of:  (i) any breach or default in any representation or warranty set forth in this Agreement or in the performance by the Purchaser of any covenant or obligation set forth in this Agreement; and (ii) all of the Assumed Obligations; REGARDLESS OF THE NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OR RESPONSIBILITY OF SELLER, ANY OTHER SELLER INDEMNITEE, PURCHASER OR ANY OTHER PERSON.

 

9.7                               Net Amounts.  Any amounts recoverable by any party pursuant to this Article 9 with respect to any Purchaser’s Loss or Seller’s Loss, as the case may be, shall be decreased by insurance proceeds relating to such Purchaser’s Loss or Seller’s Loss, as the case may be, paid to such Indemnified Party by any person (other than any Affiliate of such Indemnified Party) not a party to this Agreement.

 

9.8                               Tax Treatment.  All indemnification payments made under this Agreement shall be treated by the parties as an adjustment to the Purchase Price for Tax purposes, unless otherwise required pursuant to a “determination” within the meaning of Section 1313(a) of the Code (or any comparable provision of any state, local or foreign law).

 

9.9                               Indemnification Proceedings.  In the event that any claim or demand for which a party hereto (an “Indemnifying Party”), would be liable to the other party hereto under Article 9 (an “Indemnified Party”) is asserted against or sought to be collected from an Indemnified Party by a third party, the Indemnified Party shall with reasonable promptness notify the Indemnifying Party of such claim or demand, but the failure so to notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations under this Article 9, except to the extent the Indemnifying Party demonstrates that the defense of such claim or demand is materially prejudiced thereby.  The Indemnifying Party shall have thirty (30) days from receipt of the above notice from the Indemnified Party (in this Section 9.10, the “Notice Period”) to notify the Indemnified Party whether or not the Indemnifying Party desires, at the Indemnifying Party’s sole cost and expense, to defend the Indemnified Party against such claim or demand; provided, that the Indemnified Party is hereby authorized prior to and during the Notice Period to file any motion, answer or other pleading that it shall deem necessary or appropriate to protect its interests or those of the Indemnifying Party and that is not prejudicial to the Indemnifying Party.  If the Indemnifying Party elects to assume the defense of any such claim or demand, the Indemnified Party shall have the right to employ separate counsel at its own expense and to participate in the defense thereof.  If the Indemnifying Party elects not to assume the defense of such claim or demand (or fails to give notice to the Indemnified Party during the Notice Period), the Indemnified Party shall be entitled to assume the defense of such claim or demand with counsel of its own choice, at the expense of the Indemnifying Party.  If the claim or demand is asserted against both the Indemnifying Party and the Indemnified Party and based on the advice of counsel reasonably satisfactory to the Indemnifying Party it is determined that there is a conflict of interest which renders it inappropriate for the same counsel to represent both the Indemnifying Party and the Indemnified Party, the Indemnifying Party shall be responsible for paying separate counsel for the Indemnified Party; provided, however, that the Indemnifying Party shall not be responsible for paying for more than one separate firm of attorneys to represent

 

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all of the Indemnified Parties, regardless of the number of Indemnified Parties.  If the Indemnifying Party elects to assume the defense of such claim or demand, (i) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnified Party’s written consent (which shall not be unreasonably withheld) unless the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (ii) the Indemnifying Party shall have no liability with respect to any compromise or settlement thereof effected without its written consent (which shall not be unreasonably withheld).

 

9.10                        Indemnification Exclusive Remedy.  Except as expressly set forth herein, indemnification pursuant to the provisions of this Article 9 shall be the exclusive remedy of the parties hereto for any misrepresentation or breach of any warranty, covenant or agreement contained in this Agreement or in any closing document executed and delivered pursuant to the provisions hereof or thereof, or any other claim arising out of the transactions contemplated by this Agreement.

 

9.11                        Limited to Actual Damages.  The indemnification obligations of the parties hereto pursuant to this Article 9 shall be limited to actual damages and shall not include incidental, consequential, indirect, punitive, or exemplary damages, provided that any incidental, consequential, indirect, punitive, or exemplary damages recovered by a third party (including a Governmental Entity, but excluding any Affiliate of any party) against a party entitled to indemnity pursuant to this Article 9 shall be included in the damages recoverable under such indemnity.

 

9.12                        Indemnification Despite Negligence.  IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PARTY TO BE INDEMNIFIED PURSUANT TO THIS ARTICLE 9 SHALL BE INDEMNIFIED AND HELD HARMLESS FROM AND AGAINST ALL DAMAGES AS TO WHICH INDEMNITY IS PROVIDED FOR UNDER THIS ARTICLE 9, NOTWITHSTANDING THAT ANY SUCH DAMAGES ARISE OUT OF OR RESULT FROM THE ORDINARY, STRICT, SOLE, OR CONTRIBUTORY NEGLIGENCE OF SUCH PARTY AND REGARDLESS OF WHETHER ANY OTHER PARTY (INCLUDING THE OTHER PARTIES TO THIS AGREEMENT) IS OR IS NOT ALSO NEGLIGENT.  THE PARTIES HERETO ACKNOWLEDGE THAT THE FOREGOING COMPLIES WITH THE EXPRESS NEGLIGENCE RULE AND IS CONSPICUOUS.

 

9.13                        Limited Survivability.  Any action by either party hereto to enforce any indemnification obligation of the other party must be commenced within thirty (30) days following the expiration of the applicable Survival Period for such representation, warranty or covenant.

 

ARTICLE 10
 DISPUTES

 

10.1                        Dispute Resolution.  Subject to the provisions of Section 10.5, and excepting disputes arising out of a failure to close, which shall be governed by Section 3.3, any dispute arising out of or relating to this Agreement, including, but not limited to, claims for indemnification pursuant to Article 9, shall be resolved in accordance with the procedures

 

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specified in this Article 10, which shall be sole and exclusive procedures for the resolution of any such disputes.

 

10.2                        Negotiation between Executives.  The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiation between executives of Seller and executives of Purchaser.  Any party may give the other party written notice of any dispute not resolved in the normal course of business.  Within fifteen (15) days after delivery of the notice, the receiving party shall submit to the other a written response.  The notice and response shall include (a) a statement of each party’s position, and (b) the name and title of the executive who will represent the party during negotiations.  Within thirty (30) days after delivery of the disputing party’s notice, the representatives of Seller and Purchaser shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary to attempt to resolve the dispute.  All reasonable requests for information made by one party to the other will be honored.  If the matter has not been resolved by these persons within sixty (60) days of the disputing party’s notice, or if the parties fail to meet within thirty (30) days, either party may initiate mediation as provided hereinafter.  All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of the Federal Rules of Evidence and State Rules of Evidence.

 

10.3                        Mediation.  If the dispute has not been resolved by negotiation as provided herein, the parties shall endeavor to settle the dispute by mediation under the then current Center for Public Resources (“CPR”) Model procedure for Mediation of Business Disputes.  The neutral third party will be selected from the CPR Panels of Neutrals, with the assistance of CPR, unless the parties agree otherwise.

 

10.4                        Litigation.  If the dispute has not been resolved by non-binding means as provided herein within ninety (90) days of the initiation of such procedure, either party may initiate litigation (upon thirty (30) days written notice to the other party); provided, however, that if one party has requested the other to participate in a non-binding procedure and the other has failed to participate, the requesting party may initiate litigation before expiration of the above period.

 

10.5                        Choice of Forum and Venue.  All issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Texas or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Texas.  The Seller and the Purchaser further agree that any dispute arising out of this Agreement may be decided by either the state or federal court sitting in Tarrant County, Texas.  The Seller and the Purchaser shall each submit to the jurisdiction of those courts and agree that service of process by certified mail, return receipt requested, shall be sufficient to confer said courts with in personam jurisdiction.

 

10.6                        Waiver of Jury Trial.  IN THE EVENT THAT ANY DISPUTE SHALL ARISE BETWEEN THE PARTIES HERETO, AND LITIGATION ENSUES, WITH RESPECT TO

 

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ANY LITIGATION ARISING OUT OF THIS AGREEMENT OR ANY RELATED TRANSACTION, THE PARTIES EXPRESSLY WAIVE ANY RIGHT THEY MAY HAVE TO A JURY TRIAL AND AGREE THAT ANY SUCH LITIGATION SHALL BE TRIED BY A JUDGE WITHOUT A JURY.

 

10.7                        Provisional Remedies.  The procedures specified in this Article 10 shall be the sole and exclusive procedures for the resolution of disputes between the parties arising out of or relating to this Agreement; provided, however, that either party, without prejudice to the above procedures, may file a complaint (for statute of limitations or venue reasons) or to seek preliminary injunction or other provisional judicial relief, if in its sole judgment such action is necessary to avoid irreparable damage or to preserve the status quo.  Despite such action the parties will continue to participate in good faith in the procedures specified in this Article 10.

 

10.8                        Tolling Statute of Limitations.  All applicable statutes of limitation and defenses based upon the passage of time shall be tolled while the procedures specified in this Article 10 are pending.  The parties will take such action, if any required to effectuate such tolling.

 

10.9                        Performance to Continue.  Each party is required to continue to perform its obligations under this Agreement pending final resolution of any dispute arising out of or relating to this Agreement.

 

10.10                 Exclusive Remedies In Failure to Close.  The remedies set forth in Section 3.3 are the exclusive  remedies of either Purchaser or Seller if the other fails to close this transaction.

 

ARTICLE 11
 TERMINATION, AMENDMENT AND WAIVER

 

11.1                        Termination.  This Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing in the following manner:

 

(a)                                         By mutual written consent of the parties;

 

(b)                                         By either Seller or Purchaser, if:

 

(i)                                                                         The Closing shall not have occurred on or before the Termination Date, unless such failure to close shall be due to a breach of this Agreement by the party seeking to terminate this Agreement pursuant to this clause (i); or

 

(ii)                                                                      There shall be any statute, rule, or regulation that makes the consummation of the transactions contemplated hereby illegal or otherwise prohibited or a Governmental Entity shall have issued an order, decree, or ruling or taken any other action permanently restraining, enjoining, or otherwise prohibiting the consummation of the transactions contemplated hereby, and such order, decree, ruling, or other action shall have become final and nonappealable; or

 

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(c)                                          By Seller or Purchaser, if the aggregate amount of the Title Defect Amounts and Environmental Defects, in each case attributable to the Producing Properties, exceeds twenty percent (20%) of the aggregate Allocated Value of the Producing Properties;

 

(d)                                         By Seller, if (i) there shall be a material breach of any representation and warranty of Purchaser contained in Article 5, or (ii) there shall be a material breach by Purchaser of any of its covenants and agreements contained in this Agreement, which breach, in the case of clause (i) or clause (ii), is not capable of being cured or, if it is capable of being cured, has not been cured within ten (10) days after written notice thereof from Seller to Purchaser; or

 

(e)                                          By Purchaser, if (i) there shall be a material breach of any representation and warranty of Seller contained in Article 4, or (ii) there shall be a material breach by Seller of any of its covenants and agreements contained in this Agreement, which breach, in the case of clause (i) or clause (ii), is not capable of being cured or, if it is capable of being cured, has not been cured within ten (10) days after written notice thereof from Purchaser to Seller.

 

(f)                                           This Section 11.1 shall not affect in any manner the right of any party to seek remedies pursuant to Section 3.3.

 

11.2                        Effect of Termination.  In the event of the termination of this Agreement pursuant to Section 11.1 by the Seller on the one hand, or the Purchaser, on the other, written notice thereof shall forthwith be given to the other party or parties specifying the provision hereof pursuant to which such termination is made, and this Agreement shall become void and have no effect, except that the agreements contained in this Article 11, in Sections 1.2, 3.3, 5.1(h), 6.7 and 7.7 and in Article 12 (other than Section 12.2) shall survive the termination hereof.  Nothing contained in this Section shall relieve any party from liability for damages actually incurred as a result of any breach of this Agreement.

 

11.3                        Amendment.  This Agreement may not be amended except by an instrument in writing signed by or on behalf of all the parties hereto.

 

11.4                        Waiver.  Seller on the one hand, or Purchaser, on the other, may:  (i) waive any inaccuracies in the representations and warranties of the other contained herein or in any document, certificate, or writing delivered pursuant hereto, or (ii) waive compliance by the other with any of the other’s agreements or fulfillment of any conditions to its own obligations contained herein.  Any agreement on the part of a party hereto to any such waiver shall be valid only if set forth in an instrument in writing signed by or on behalf of such party.  No failure or delay by a party hereto in exercising any right, power, or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power, or privilege.

 

ARTICLE 12
 MISCELLANEOUS

 

12.1                        Expenses.  Except as otherwise provided in this Agreement, each party hereto shall pay all expenses and disbursements incurred by it, its officers, employees and

 

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representatives, in connection with this Agreement and the performance of its obligations hereunder.

 

12.2                        Further Assurances.  Seller will from time to time upon the request of Purchaser, execute and deliver to or upon the order of Purchaser such further instruments and take such other action as Purchaser may reasonably request, in order to more effectively convey, assign, transfer and deliver, or place Purchaser in possession and control of, the Assets or to enable Purchaser to exercise and enjoy all rights and benefits with respect thereto.

 

12.3                        Binding Agreement; Assignment; Parties in Interest.  This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns; provided, however, that any assignment of this Agreement by any party hereto without the written consent of the other parties shall be void.  Notwithstanding the foregoing, the rights and obligations of Purchaser hereunder may be assigned to or performed by any other entity owned or controlled by Purchaser or its members, without the written consent of Seller provided that such assignment shall not relieve Purchaser of its obligations hereunder.  Except as provided herein, nothing in this Agreement, express or implied, is intended or shall be construed to give to any Person other than the parties hereto any right, remedy or claim under or by reason of this Agreement.

 

12.4                        Notices.  All notices, requests, demands, and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person, or transmitted by first-class registered or certified mail, postage prepaid, return receipt requested, or sent by prepaid overnight delivery service, or sent by facsimile transmission, to the parties at the following addresses (or at such other address as shall be specified by the parties by like notice):

 

If to Seller:

 

Southridge Energy, LLC

Jerry Steed

President

P.O. Box 3050

Amarillo, TX  79106

Facsimile:  (806) 371-4767

 

With copies to (which shall not constitute notice):

 

Jeffrey G. Shrader and

Michelle L. Sibley

Sprouse Shrader Smith P.C.

701 S. Taylor, Suite 500 (79101)

P. O. Box 15008

Amarillo, Texas  79105

Facsimile:  (806) 373-3454

 

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If to Purchaser:

 

Jones Energy, Ltd.

Jonny Jones and Jody Crook

807 Las Cimas Boulevard, Suite 350

Austin, Texas  78746

Facsimile:  (512) 328-5394

 

With a copy (which shall not constitute notice) to:

 

Baker Botts L.L.P.

Mike Bengtson

98 San Jacinto Boulevard, Suite 1500

Austin, Texas  78701

Facsimile:  (512) 322-8349

 

12.5                        Publicity.  All notices to third parties and other publicity concerning the transaction contemplated by this Agreement shall be jointly planned and coordinated by and between Seller and Purchaser.  No party hereto shall act unilaterally in this regard without the prior written approval of the others; provided, however, that such approval shall not be unreasonably withheld.

 

12.6                        Exhibits and Schedules.  All exhibits and schedules referred to in this Agreement are attached hereto, incorporated herein and made an integral part hereof.

 

12.7                        Entire Agreement; Amendments; Waivers.  This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof and supersedes any and all prior and contemporaneous agreements, representations and understandings of such parties.  No supplement, modification or amendment to this Agreement shall be binding unless executed in writing by each of the parties hereto.  No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver.  No waiver shall be binding unless executed in writing by the party making the waiver.

 

12.8                        Severability.  If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of Applicable Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any adverse manner to any of Seller or Purchaser.  Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties hereto as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.

 

12.9                        Counterparts.  This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument.

 

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12.10                 Mutual Waiver of Certain Remedies.  EXCEPT AS EXPRESSLY SET FORTH HEREIN, NEITHER PARTY HERETO SHALL BE LIABLE OR OTHERWISE RESPONSIBLE TO THE OTHER FOR SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES, FOR LOST PRODUCTION, OR FOR PUNITIVE DAMAGES AS TO ANY ACTION OR OMISSION WHATSOEVER, WHETHER CHARACTERIZED AS A CONTRACT BREACH OR TORT, OR OTHERWISE, WHICH ARISES OUT OF OR RELATES TO THIS CONTRACT OR ITS PERFORMANCE OR NONPERFORMANCE.

 

12.11                 Preparation of Agreement.  Each party hereto has participated in the preparation of this Agreement.  This Agreement was subject to revision and modification by both parties hereto and has been accepted and approved as the final form by each party’s counsel.  Accordingly, any uncertainty or ambiguity existing in this Agreement shall not be interpreted against any party as a result of the manner of the preparation of this Agreement.

 

Signatures to follow.

 

53

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered on their behalf as of the day and year first above written.

 

	
 
    	
“Purchaser”
    
	
 
    	
 
    
	
 
    	
JONES   ENERGY HOLDINGS, LLC,
    
	
 
    	
a   Delaware limited liability company
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   Jon R. Jones, Jr.
    
	
 
    	
Name:
    	
Jon   R. Jones, Jr.
    
	
 
    	
Title:
    	
Chief   Executive Officer
    
				

 

54

 

	
 
    	
“Seller”
    
	
 
    	
 
    
	
 
    	
SOUTHRIDGE ENERGY, LLC,
    
	
 
    	
a   Texas limited liability company
    
	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   Jerry Steed
    
	
 
    	
 
    	
Jerry   Steed, President
    
				

 

55Exhibit 10.7

 

PURCHASE AND SALE AGREEMENT

 

BY AND BETWEEN

 

CHALKER ENERGY PARTNERS III, LLC

 

AND THE LISTED PARTICIPATING OWNERS

 

AS SELLERS

 

AND

 

JONES ENERGY HOLDINGS, LLC

 

AS BUYER

 

 

TEXAS PANHANDLE ASSET SALE

 

DATED NOVEMBER 28, 2012

 

 

	
 
    	
1.
    	
SALE AND PURCHASE OF THE ASSETS
    	
1
    
	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
1.1
    	
Acquired Assets
    	
1
    
	
 
    	
 
    	
1.2
    	
Excluded Assets
    	
3
    
	
 
    	
 
    	
1.3
    	
Assumed Liabilities; Retained Liabilities
    	
4
    
	
 
    	
 
    	
1.4.
    	
Revenues and Expenses
    	
5
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
2.
    	
PURCHASE PRICE
    	
6
    
	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
2.1
    	
Purchase Price
    	
6
    
	
 
    	
 
    	
2.2
    	
Earnest Money
    	
6
    
	
 
    	
 
    	
2.3
    	
Adjustments to the Base Purchase Price
    	
6
    
	
 
    	
 
    	
2.4
    	
Allocation
    	
9
    
	
 
    	
 
    	
2.5
    	
Section 1031 Like Kind Exchange
    	
9
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
3.
    	
CLOSING
    	
10
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
3.1
    	
Closing
    	
10
    
	
 
    	
 
    	
3.2
    	
Delivery by Seller
    	
10
    
	
 
    	
 
    	
3.3
    	
Delivery by Buyer
    	
11
    
	
 
    	
 
    	
3.4
    	
Further Cooperation
    	
11
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
4.
    	
ACCOUNTING ADJUSTMENTS
    	
12
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
4.1
    	
Closing Adjustments
    	
12
    
	
 
    	
 
    	
4.2
    	
Strapping and Gauging
    	
12
    
	
 
    	
 
    	
4.3
    	
Post-Closing Adjustments
    	
12
    
	
 
    	
 
    	
4.4
    	
Suspended Funds
    	
14
    
	
 
    	
 
    	
4.5
    	
Audit Adjustments
    	
14
    
	
 
    	
 
    	
4.6
    	
Asset Tax Refunds
    	
14
    
	
 
    	
 
    	
4.7
    	
Cooperation
    	
14
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
5.
    	
DUE DILIGENCE; TITLE MATTERS
    	
14
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
5.1
    	
General Access
    	
14
    
	
 
    	
 
    	
5.2
    	
Seller’s Title
    	
15
    
	
 
    	
 
    	
5.3
    	
Good and Marketable Title
    	
15
    
	
 
    	
 
    	
5.4
    	
Defect Letters
    	
18
    
	
 
    	
 
    	
5.5
    	
Effect of Title Defect
    	
19
    
	
 
    	
 
    	
5.6
    	
Possible Upward Adjustment
    	
22
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
6.
    	
ENVIRONMENTAL ASSESSMENT
    	
22
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
6.1
    	
Physical Condition of the Assets
    	
22
    
	
 
    	
 
    	
6.2
    	
Inspection and Testing
    	
23
    
	
 
    	
 
    	
6.3
    	
Notice of Adverse Environmental Conditions
    	
24
    
	
 
    	
 
    	
6.4
    	
Rights and Remedies for Adverse Environmental Conditions
    	
25
    
	
 
    	
 
    	
6.5
    	
Remediation
    	
26
    

 

i

 

	
 
    	
7.
    	
REPRESENTATIONS AND WARRANTIES OF SELLER
    	
28
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
7.1
    	
Seller’s Representations and Warranties
    	
28
    
	
 
    	
 
    	
7.2
    	
Scope of Representations of Seller
    	
33
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
8.
    	
REPRESENTATIONS AND WARRANTIES OF BUYER
    	
34
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
9.
    	
CERTAIN AGREEMENTS OF SELLER
    	
35
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
9.1
    	
Maintenance of Assets
    	
35
    
	
 
    	
 
    	
9.2
    	
Consents
    	
36
    
	
 
    	
 
    	
9.3
    	
Records and Contracts
    	
36
    
	
 
    	
 
    	
9.4
    	
Preferential Rights
    	
37
    
	
 
    	
 
    	
9.5
    	
Financial Statements
    	
37
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
10.
    	
CERTAIN AGREEMENTS OF BUYER
    	
38
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
10.1
    	
Plugging Obligation
    	
38
    
	
 
    	
 
    	
10.2
    	
Plugging Bond
    	
38
    
	
 
    	
 
    	
10.3
    	
Seller’s Logos
    	
38
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
11.
    	
CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
    	
38
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
11.1
    	
No Litigation
    	
38
    
	
 
    	
 
    	
11.2
    	
Representations and Warranties
    	
39
    
	
 
    	
 
    	
11.3
    	
Outstanding Preferential Rights and Consents
    	
39
    
	
 
    	
 
    	
11.4
    	
Transfer of Operatorship
    	
39
    
	
 
    	
 
    	
11.5
    	
Raptor Amendment
    	
39
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
12.
    	
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER
    	
39
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
12.1
    	
No Litigation
    	
39
    
	
 
    	
 
    	
12.2
    	
Representations and Warranties
    	
39
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
13.
    	
TERMINATION
    	
39
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
13.1
    	
Causes of Termination
    	
39
    
	
 
    	
 
    	
13.2
    	
Effect of Termination
    	
40
    
	
 
    	
 
    	
13.3
    	
Buyer’s Hedges
    	
40
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
14.
    	
INDEMNIFICATION
    	
41
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
14.1
    	
INDEMNIFICATION BY SELLER
    	
41
    
	
 
    	
 
    	
14.2
    	
INDEMNIFICATION BY BUYER
    	
42
    
	
 
    	
 
    	
14.3
    	
PHYSICAL INSPECTION
    	
43
    
	
 
    	
 
    	
14.4
    	
Notification
    	
43
    
	
 
    	
 
    	
14.5
    	
Escrow Claims
    	
44
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
15.
    	
MISCELLANEOUS
    	
45
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
15.1
    	
Casualty Loss
    	
45
    

 

ii

 

	
 
    	
 
    	
15.2
    	
Confidentiality
    	
46
    
	
 
    	
 
    	
15.3
    	
Competition
    	
46
    
	
 
    	
 
    	
15.4
    	
Notice
    	
46
    
	
 
    	
 
    	
15.5
    	
Press Releases and Public Announcements
    	
48
    
	
 
    	
 
    	
15.6
    	
Personnel
    	
48
    
	
 
    	
 
    	
15.7
    	
Compliance with Express Negligence Test
    	
48
    
	
 
    	
 
    	
15.8
    	
Governing Law
    	
48
    
	
 
    	
 
    	
15.9
    	
Exhibits
    	
50
    
	
 
    	
 
    	
15.10
    	
Fees, Expenses, Taxes and Recording
    	
50
    
	
 
    	
 
    	
15.11
    	
Assignment
    	
50
    
	
 
    	
 
    	
15.12
    	
Entire Agreement
    	
51
    
	
 
    	
 
    	
15.13
    	
Severability
    	
51
    
	
 
    	
 
    	
15.14
    	
Captions
    	
51
    
	
 
    	
 
    	
15.15
    	
Counterpart Execution
    	
51
    
	
 
    	
 
    	
15.16
    	
Waiver of Certain Damages
    	
51
    
	
 
    	
 
    	
15.17
    	
Amendments and Waivers
    	
51
    
	
 
    	
 
    	
15.18
    	
Chalker As Agent
    	
51
    
	
 
    	
 
    	
15.19
    	
Right to Set Off
    	
52
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
Exhibits:
    	
 
    	
 
    
	
 
    	
A
    	
List   of Participating Owners
    	
 
    
	
 
    	
A-1(a)-A-1(f)
    	
Interests   of Sellers Sold under this Agreement
    	
 
    
	
 
    	
1.1(A)-1
    	
Leases
    	
 
    
	
 
    	
1.1(A)-2
    	
Wells   and Allocations
    	
 
    
	
 
    	
1.1(E)
    	
Fee   Mineral Tracts
    	
 
    
	
 
    	
1.2(H)
    	
Other   Excluded Assets
    	
 
    
	
 
    	
2.2
    	
Escrow   Agreement
    	
 
    
	
 
    	
3.2(A)
    	
Form   of Assignment
    	
 
    
	
 
    	
3.2(B)
    	
Amendment   to Development Agreement
    	
 
    
	
 
    	
3.2(C)
    	
Certification   of Non-Foreign Status
    	
 
    
	
 
    	
3.2(D)
    	
Transition   Procedures Agreement
    	
 
    
	
 
    	
7.1(D)
    	
AFE’s
    	
 
    
	
 
    	
7.1(F)
    	
Litigation
    	
 
    
	
 
    	
7.1(I)
    	
Imbalances
    	
 
    
	
 
    	
7.1(J)
    	
Preferential   Rights
    	
 
    
	
 
    	
7.1(K)
    	
Consents
    	
 
    
	
 
    	
7.1(O)
    	
Hydrocarbon   Sales Contracts
    	
 
    
	
 
    	
7.1(P)
    	
Material   Contracts
    	
 
    
	
 
    	
7.1(S)
    	
Royalty   Payments
    	
 
    
	
 
    	
7.1(X)
    	
Drilling   Obligations
    	
 
    
	
 
    	
7.1(Y)
    	
Suspense   Funds
    	
 
    
	
 
    	
9.1(D)
    	
Maintenance   of Assets Agreements
    	
 
    
	
 
    	
11.5
    	
Amendment   to Participation Agreement
    	
 
    
	
 
    	
13.3
    	
Buyer’s   Hedges
    	
 
    

 

iii

 

INDEX OF DEFINED TERMS

 

	
DEFINED TERM
    	
 
    	
SECTION
    
	
Adverse   Environmental Condition
    	
 
    	
6.3
    
	
Agreement
    	
 
    	
Preamble
    
	
Allocated   Value/Allocated Values
    	
 
    	
2.4
    
	
Asset   Tax
    	
 
    	
2.3(A)(ii)
    
	
Assets
    	
 
    	
1.1
    
	
Assumed   Liabilities
    	
 
    	
1.3
    
	
Auditor
    	
 
    	
9.5
    
	
Base   Purchase Price
    	
 
    	
2.1
    
	
Buyer
    	
 
    	
Preamble
    
	
Buyer   Group
    	
 
    	
14.1
    
	
Buyer’s   Response
    	
 
    	
5.4(D)(ii)
    
	
Casualty
    	
 
    	
15.1(A)
    
	
Casualty   Loss
    	
 
    	
15.1(B)
    
	
Closing
    	
 
    	
3.1
    
	
Closing   Adjustment Statement
    	
 
    	
4.1
    
	
Closing   Date
    	
 
    	
3.1
    
	
Confidential   Information
    	
 
    	
15.1(A)
    
	
Contracts
    	
 
    	
1.1(C)
    
	
Defect   Fund
    	
 
    	
3.3(B)
    
	
Defect   Threshold
    	
 
    	
5.4(A)
    
	
Earnest   Money
    	
 
    	
2.2
    
	
Effective   Time
    	
 
    	
1.4
    
	
Environmental   Consultant
    	
 
    	
6.4(D)
    
	
Environmental   Defect Notice
    	
 
    	
6.3
    
	
Environmental   Defect Value
    	
 
    	
6.3
    
	
Environmental   Laws
    	
 
    	
6.2(C)
    
	
Escrow   Account
    	
 
    	
2.2
    
	
Escrow   Agent
    	
 
    	
2.2
    

 

iv

 

	
Escrow   Agreement
    	
 
    	
2.2
    
	
Escrow   Fund
    	
 
    	
2.2
    
	
Excluded   Assets
    	
 
    	
1.2
    
	
Fundamental Rep
    	
 
    	
14.1(D)(i)
    
	
Good   and Marketable Title
    	
 
    	
5.3
    
	
Indemnity   Escrow Fund
    	
 
    	
3.3(B)
    
	
Individual   Title Benefit Threshold
    	
 
    	
5.6
    
	
Individual   Title Defect Threshold
    	
 
    	
5.4(A)
    
	
Lands
    	
 
    	
1.1(A)
    
	
Leases
    	
 
    	
1.1(A)
    
	
Litigation
    	
 
    	
7.1(F)
    
	
Loss/Losses
    	
 
    	
14.1(A)
    
	
Material   Contracts
    	
 
    	
7.1(P)
    
	
Net   Revenue Interest
    	
 
    	
5.3(A)(i)
    
	
NORM
    	
 
    	
6.1
    
	
Occurrence
    	
 
    	
6.5(G)
    
	
Oil   and Gas
    	
 
    	
1.1(B)
    
	
Party/Parties
    	
 
    	
Preamble
    
	
Permitted   Encumbrances
    	
 
    	
5.3(B)(ii)
    
	
Post-Closing   Adjustment Statement
    	
 
    	
4.3(A)
    
	
Preferential   Rights
    	
 
    	
7.1(J)
    
	
Purchase   Price
    	
 
    	
2.3
    
	
Qualified   Intermediary
    	
 
    	
2.5
    
	
Raptor
    	
 
    	
11.5
    
	
Real   and Personal Property Taxes
    	
 
    	
2.3(A)(ii)
    
	
Records
    	
 
    	
1.1(I)
    
	
Remediate   and Remediation
    	
 
    	
6.4(C)
    
	
Retained   Liabilities
    	
 
    	
1.3
    
	
SEC
    	
 
    	
9.5
    
	
Sellers
    	
 
    	
Preamble
    

 

v

 

	
Sellers   Group
    	
 
    	
6.2(B)
    
	
Sellers’   Response
    	
 
    	
5.4(D)(i)
    
	
Statement   of Revenues and Expenses
    	
 
    	
9.5
    
	
Survival   Period
    	
 
    	
14.1(D)(i)
    
	
Tax
    	
 
    	
4.6
    
	
Threshold   Amount
    	
 
    	
14.1(D)(iv)
    
	
Title   Benefit
    	
 
    	
5.6
    
	
Title   Consultant
    	
 
    	
5.4(D)(iii)
    
	
Title   Defect
    	
 
    	
5.4(A)
    
	
Title   Defect Value
    	
 
    	
5.5(B)
    
	
Undeveloped   Acreage
    	
 
    	
5.3(A)
    
	
Units
    	
 
    	
1.1(A)
    
	
Wells
    	
 
    	
1.1(A)
    
	
Working   Interest
    	
 
    	
5.3(A)(ii)
    

 

vi

 

PURCHASE AND SALE AGREEMENT

 

This Purchase and Sale Agreement (this “Agreement”) is entered into this 28th day of November, 2012, by and between CHALKER ENERGY PARTNERS III, LLC, a Texas limited liability company (“Chalker”), and the other Participating Owners listed on Exhibit A, attached hereto and made a part hereof (collectively, “Sellers”) and JONES ENERGY HOLDINGS, LLC, a Delaware limited liability company (“Buyer”).  Buyer and Sellers are collectively referred to herein as the “Parties” and sometimes individually referred to as a “Party.”

 

RECITALS:

 

A.                                    Sellers desire to sell to Buyer certain oil, gas and mineral properties and other assets on the terms and conditions set forth in this Agreement.

 

B.                                    Buyer desires to purchase from Sellers such assets on the terms and conditions set forth in this Agreement.

 

WITNESSETH:

 

In consideration of the mutual agreements contained in this Agreement, Buyer and Sellers agree as follows:

 

1.                                      SALE AND PURCHASE OF THE ASSETS.

 

1.1                               Acquired Assets.  Subject to the terms and conditions of this Agreement, each Seller agrees to sell, convey and deliver to Buyer and Buyer agrees to purchase and acquire from each Seller, at the Closing, such Seller’s right, title, interest and estate (of any kind or character, whether legal or beneficial) as set forth on Exhibits A-1(a)-A-1(f) attached hereto in and to the following (collectively, the “Assets”):

 

(A)                               (i) The oil, gas and mineral leases described or referred to in Exhibit 1.1(A)-1 (collectively, “Leases”) including without limitation, but subject to the Excluded Assets, carried interests, royalty interests, overriding royalty interests, production payments, subleases, reversionary interests and net profits interests; (ii) the lands covered by the Leases or the lands pooled, unitized, communitized or consolidated therewith (the “Lands”);  (iii) any and all wells located on the Lands, including those wells described in Exhibit 1.1(A)-2 (the “Wells”);  (iv) all easements, rights of way, and other rights, privileges, benefits and powers with respect to the use and occupation of the surface of, and the subsurface depths under, the Lands, and all tenements, hereditaments and appurtenances belonging thereto or to the Leases; (v) all presently existing unitization, pooling and/or communitization agreements, declarations or designations and statutorily, judicially or administratively created drilling, spacing and/or production units, whether recorded or unrecorded, which relate to the 

 

1

 

Leases, and all of the Sellers’ interests in and to the properties covered or units created thereby which are attributable to the Leases (the “Units”), regardless of whether such unit or pool production comes from wells located within or without the Leases.

 

(B)                               All of the oil and gas and associated hydrocarbons in and under or otherwise attributable to the Leases, the Lands and the Units or produced from the Wells (“Oil and Gas”) from and after the Effective Time;

 

(C)                               To the extent assignable and applicable to the Leases, Lands, Wells or Units, servitudes, gas purchase and sale contracts (including interests and rights, if any, with respect to any prepayments, take-or-pay, buydown and buyout agreements) to the extent that the same pertain or relate to periods after the Effective Time, as herein defined, crude oil or other liquid hydrocarbon purchase and sale agreements, farmin agreements, farmout agreements, bottom hole agreements, acreage contribution agreements, operating agreements, unit agreements, processing agreements, options, leases of equipment or facilities, joint venture agreements, pooling agreements, transportation agreements, rights-of-way and all other contracts, agreements and rights, to which any Seller is a party or in which any Seller has an interest and are appurtenant to the Leases, Lands, Wells or Units (collectively, the “Contracts”); provided, however, that any currently existing operating agreements affecting only lands covered by the Assets and the only parties to which are Sellers, shall be terminated at Closing.

 

(D)                               All of the real, personal and mixed property and facilities located in or on the Leases, Lands or Units directly used in the operation thereof which are owned by any Seller, in whole or in part, including, without limitation, well equipment; casing; tanks; crude oil, natural gas, condensate or products in storage severed after the Effective Time; tubing; compressors; pumps; motors; fixtures; machinery and other equipment; pipelines; gathering lines; gas systems (for gathering, treating and compression); compressors; field processing equipment; inventory and all other improvements used in the operation thereof (specifically including all geophysical and seismic records, data and information owned by any Seller, subject to restrictions contained in agreements with third parties covering such records and data);

 

(E)                                The lands and/or mineral interests described on Exhibit 1.1(E) owned by any Seller in fee (the “Fee Mineral Tracts”);

 

(F)                                 To the extent assignable, all governmental permits, licenses and authorizations, as well as any applications for the same, related to the Leases, Lands, Wells or Units or the use thereof;

 

2

 

(G)                               All rights and benefits arising from or in connection with any gas production, pipeline, storage, processing or other imbalance attributable to Oil and Gas produced from the Wells or Units as of the Effective Time;

 

(H)                              All other rights and interests in, to or under or derived from the Leases, Lands, Wells or Units or directly used or held for use in connection therewith; and

 

(I)                                   All of Sellers’ files, records and data relating to the items described in subsections (A), (B), (C), (D), (E), (F) (G) and (H) above, including, without limitation, division orders, title records (including title curative documents); surveys, maps and drawings; contracts; correspondence; geological records and information; production records, electric logs, core data, pressure data, decline curves, graphical production curves and all related matters and construction documents (except (i) to the extent the transfer, delivery or copying of such records may be restricted by contract with a third party; (ii) documents and instruments of a Seller that may be protected by the attorney-client privilege (excluding title opinions, abstracts of title, Leases and Contracts); and (iii) all accounting and Tax files, books, records, tax returns and tax work papers related to the preceding clauses (i) and (ii)) (collectively, the “Records”).

 

1.2                               Excluded Assets.  Specifically excepted and reserved from this transaction are the following, hereinafter referred to as “Excluded Assets”:

 

(A)                               Sellers’ corporate records, financial and Tax records wholly unrelated to the Assets, reserve estimates and reports, economic analyses, computer programs and applications, pricing forecasts, legal files, legal opinions, attorney-client communications, and attorney work product (except abstracts of title, title opinions, certificates of title, title curative documents, Leases and Contracts, which shall be furnished to Buyer), and all other records and documents subject to confidentiality provisions, or other restrictions on access or transfer; provided, however, that each Seller will, upon Buyer’s request and at no cost or expense to each Seller, request waivers of such restrictions;

 

(B)                               All rights and claims arising, occurring, or existing in favor of Sellers prior to the Effective Time, including, but not limited to, any and all contract rights, claims, penalties, receivables, revenues, recoupment rights, recovery rights, accounting adjustments, mispayments, erroneous payments, personal or corporate injury, property damages, royalty and other rights and claims of any nature in favor of Sellers relating to any time period prior to the Effective Time;

 

(C)                               All of Sellers’ insurance contracts and rights, titles, claims and interests of Sellers related to the Assets for all periods prior to the Effective Time (i)

 

3

 

under any policy or agreement of insurance or indemnity, (ii) under any bond or letter of credit or other security device, or (iii) to any insurance or condemnation proceeds or awards, together with all amounts due or payable to Sellers as adjustments to insurance premiums related to the Assets for all periods prior to the Effective Time;

 

(D)                               Claims of Sellers for any refund of or loss carry forwards with respect to (i) production, windfall profit, severance, ad valorem or any other Taxes attributable to the Assets for any period prior to the Effective Time, and (ii) income, occupational or franchise taxes;

 

(E)                                All monies, proceeds, benefits, receipts, credits, income or revenues (and any security or other deposits made) attributable to the Assets or the ownership or operation thereof prior to the Effective Time, including, without limitation, amounts recoverable from audits under operating agreements and any overpayments of royalties to the extent attributable to the period prior to the Effective Time; and

 

(F)                                 All rights, obligations, benefits, awards, judgments, settlements, if any, applicable to any litigation pending in which any Seller is a named claimant or plaintiff or holds beneficial rights or interests, to the extent related to periods prior to the Effective Time;

 

(G)                               All hedges relating to the Assets; and

 

(H)                              Any other assets or items identified on Exhibit 1.2(H).

 

1.3                               Assumed Liabilities; Retained Liabilities.  On the Closing Date, except as otherwise provided in this Agreement, Buyer shall assume and agree to timely and fully pay, perform and otherwise discharge, without recourse to Sellers or their affiliates, all of the liabilities and obligations of Sellers and their affiliates, successors, assigns or representatives, direct or indirect, known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, which relate, directly or indirectly to the Assets (other than the Excluded Assets), which arise or are related to periods of time or are to be performed on or after the Effective Time (collectively, the “Assumed Liabilities”), provided, however, Buyer does not assume any obligations or liabilities of Seller to the extent they are:

 

(i)                                     attributable to or arise out of ownership, use or operation of the Excluded Assets, or any assets excluded from the Assets pursuant to the terms hereof;

 

(ii)                                  attributable to or arise out of the actions, suits or proceedings set forth in Exhibit 7.1(F);

 

(iii)                               attributable to royalty, overriding royalty and other burdens on production of hydrocarbons from the Assets attributable to periods 

 

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before the Effective Time, and for shut-in payments payable before the Effective Time (provided further that Sellers shall be responsible for the proper disbursement of such payments prior to the Closing to the extent of any damages in excess of royalty obligations owing as a result of improper disbursements);

 

(iv)                              attributable to royalty, overriding royalty and other burdens on the production of hydrocarbons from the Assets held in suspense by Seller as of Closing, or any interest accrued in any escrow account for any such suspended amount, to the extent that such obligations or liabilities exceed the amount actually transferred by Sellers to Buyer pursuant to Section 4.4;

 

(v)                                 any liability of any Seller attributable to (i) any federal, state or local income or franchise Tax of any Seller or (ii) any other Tax that was or is attributable to such Seller’s ownership or operation of the Assets for any taxable period (or portion thereof) before the Effective Time (determined by apportioning Taxes between the period before or after the Effective Time (a) consistently with the method described in Section 2.3(A)(ii) for Real and Personal Property Taxes and (b) on an interim closing of the books method in the case of all other Taxes);

 

(vi)                              Operating and capital expenses for which Seller is responsible under Section 1.4;

 

(vii)                           attributable to any hedge contracts;

 

(viii)                        attributable to the duties of any Seller as operator of any Asset (as distinguished from the duties of Sellers as a joint tenant or joint interest owner in such Asset);

 

(ix)                              any claim arising out of or otherwise relating to any personal injury, illness or death occurring prior to the Closing;

 

(x)                                 any Remediation obligation of Sellers pursuant to Section 6.5; or

 

(xi)                              attributable to obligations with respect to the period prior to Closing and payable to any affiliate of a Seller, other than for goods and services furnished in the ordinary course of business;

 

the liabilities of Seller described in the foregoing clauses (i) - (xi) are referred to herein as the (“Retained Liabilities”).

 

1.4                               Revenues and Expenses.  Subject to the provisions of this Agreement, Sellers shall remain entitled to all of the rights of ownership (including the right to all production, proceeds of production and other proceeds) and shall remain 

 

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responsible for all operating and capital expenses (in each case) attributable to the Assets for the period of time prior to 7:00 a.m. at the location of the Assets, on September 1, 2012 (the “Effective Time”).

 

2.                                      PURCHASE PRICE.

 

2.1                               Purchase Price.  The purchase price for the Assets is Two Hundred Fifty Million Dollars ($250,000,000.00) (the “Base Purchase Price”), subject to the adjustments provided for herein.

 

2.2                               Earnest Money.  In connection with this Agreement, Buyer has tendered concurrently with the execution of this Agreement Twelve Million Five Hundred Thousand Dollars ($12,500,000.00) (“Earnest Money”) to Wells Fargo Bank, N.A. (the “Escrow Agent”) acting pursuant to the terms of an Escrow Agreement dated the date of this Agreement in substantially the same form as Exhibit 2.2 (the “Escrow Agreement”) for deposit in the escrow account (the “Escrow Account”) established pursuant to the Escrow Agreement by wire transfer of immediately available funds.  Said sum is considered and recognized by Buyer and Sellers as a deposit on the above stated Purchase Price and as earnest money for Buyer’s performance hereunder.  In the event at Closing, conditions of Buyer in Section 11 have been satisfied, and Buyer fails or refuses to close other than for Sellers’ default, Sellers shall be entitled to the Earnest Money as liquidated damages.  The parties hereby agree that the Earnest Money is not a penalty; rather, it is a reasonable sum in light of the anticipated or actual harm which Sellers would incur by Buyer’s default hereunder, and that the actual injury caused to Sellers by Buyer’s unexcused failure to purchase the Assets would be most difficult or impossible to ascertain.  In addition, Sellers may, at Sellers’ sole option, be entitled to specific performance of this Agreement.  In the event that Sellers pursue their right to seek the specific performance of Buyer to purchase the Assets, then such Earnest Money shall be credited toward the Purchase Price payable by Buyer for such Assets upon such specific performance.  In the event this Agreement is terminated for reasons other than Buyer’s default, the Earnest Money shall be returned to Buyer.

 

2.3                               Adjustments to the Base Purchase Price.  At Closing, appropriate adjustments to the Base Purchase Price shall be made on an accrual basis as follows, in accordance with Sections 4, 5 and 6, and the following, provided such adjustments shall be made so as to not have duplicative effect (as adjusted, the “Purchase Price”):

 

(A)                               The Base Purchase Price shall be adjusted upward by:

 

(i)                                     an amount equal to the proceeds derived from the sale of Oil and Gas in storage or above the applicable pipeline connection produced prior to the Effective Time, net of severance taxes, royalties and similar burdens paid by Buyer, actually received by 

 

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Buyer and directly attributable to the Wells, attributable to Sellers pursuant to Section 4.2;

 

(ii)                                  Asset Taxes paid by Sellers which relate to periods (or portions thereof) beginning on or after the Effective Time and ending on or before the Closing Date, other than such Taxes which either (i) are taken into account in the computations under Section 2.3(B)(ii), or (ii) are assumed and paid by Buyer.  For purposes of this Agreement, “Asset Tax” shall mean any Tax in the nature of a severance, sales and use or ad valorem Tax which is attributable to any Asset; all ad valorem Taxes, real property Taxes and personal property Taxes for the year in which the Effective Time occurs (“Real and Personal Property Taxes”) shall be apportioned as of the Effective Time between Sellers and Buyer. Sellers shall be liable for the portion of such Real and Personal Property Taxes based upon the number of days in the year occurring prior to the Effective Time, and Buyer shall be liable for the portion of such Taxes based upon the number of days in the year occurring on and after the Effective Time.  For any year in which an apportionment is required, Buyer shall file all reports and returns required to be filed after the Closing Date.  Sellers shall pay to Buyer, at the time of Buyer’s remittance, Sellers’ share of such Taxes to the extent such amounts were not credited to Buyer in calculating adjustments to the Purchase Price pursuant to Section 2.3;

 

(iii)                               an amount equal to the costs, expenses and other expenditures (net to Sellers’ interest) paid by Sellers in accordance with this Agreement that are attributable to the Assets for the period from the Effective Time to the Closing Date;

 

(iv)                              the fixed monthly overhead rate, if any, prorated if necessary, for each active producing Well, as provided in the applicable operating agreement, incurred by Sellers for wells operated by the Sellers while operating the Assets from and after the Effective Time.  If Sellers owns a 100% working interest or if no operating agreement applies, the fixed monthly rate per active producing Well shall be Seven Hundred Fifty Dollars ($750); and

 

(v)                                 any other amount agreed upon in writing by Sellers and Buyer.

 

(B)                               The Base Purchase Price shall be adjusted downward by:

 

(i)                                     an amount equal to the amount of proceeds derived from the sale of Oil and Gas, net of royalties and severance taxes paid by Sellers, actually received by Sellers and directly attributable to the Wells which are attributable to the period of time from and after the 

 

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Effective Time, provided that to the extent the actual amounts cannot be determined prior to the agreement of Buyer and Sellers with respect to the Closing Adjustment Statement, a reasonable estimate of such proceeds shall be used;

 

(ii)                                  Asset Taxes that arise in or are attributable to periods (or portions thereof) prior to the Effective Time, other than any such Asset Taxes which either (a) are taken into account in the compilations under Sections 2.3(A)(ii), or (b) are assumed and paid (or if paid by Buyer, reimbursed to Buyer) by Sellers;

 

(iii)                               an amount equal to all expenditures, liabilities and costs (whether capitalized or expensed) relating to the Assets (other than Taxes related to the Assets) that are unpaid as of the Closing Date and assessed for or attributable to periods of time prior to the Effective Time regardless of how such expenditures, liabilities and costs are calculated, provided that to the extent the actual amounts cannot be determined prior to the agreement of Buyer and Sellers with respect to the Closing Adjustment Statement, a reasonable estimate of such expenditures, liabilities and costs shall be used (and to such extent Buyer shall assume the liability and responsibility for payment therefor);

 

(iv)                              the amount, if any, by which the aggregate gross expenditures for the drilling of the Laubhan 526 #2H-C, the Waters Ranch 289 #1H-C, the McQuiddy 17 #1H-C and the Peery 331 #1H-C wells (determined through the release of the drilling rig therefor, it being understood that Sellers will not complete these Wells) exceeds Ten Million Dollars ($10,000,000);

 

(v)                                 all amounts related to Title Defects as determined pursuant to Section 5.5, Adverse Environmental Conditions as determined pursuant to Section 6.4, Preferential Rights as determined pursuant to Section 9.4 and Casualty Losses as determined pursuant to Section 15.1; and

 

(vi)                              any other amount agreed upon in writing by Sellers and Buyer.

 

(C)                               Sellers shall have the right to collect any receivable, refund or other amounts associated with periods prior to the Effective Time.  To the extent that Buyer collects any such receivable, refund or other amounts, then Buyer shall promptly remit any such amounts to Sellers.  Buyer shall have the right to collect any receivable, refund or other amounts attributable to periods after the Effective Time.  To the extent that Sellers collect any such receivable, refund or other amount associated with periods after the 

 

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Effective Time, then Sellers shall promptly remit any such amounts to Buyer.

 

(D)                               Provided, however, that the Assets do not include Sellers’ hedges, and the Purchase Price shall not be adjusted upward or downward as a result of such hedges.

 

2.4                               Allocation.

 

(A)                               The Base Purchase Price shall be allocated to the Assets as set forth in Exhibit 1.1(A)-2.  Sellers and Buyer covenant and agree that the values allocated to various portions of the Assets, which are set forth on Exhibit 1.1(A)-2 (singularly with respect to each item, the “Allocated Value” and collectively, the “Allocated Values”), shall be binding on Sellers and Buyer and shall be used for the purposes of adjusting the Base Purchase Price pursuant to Sections 5.5 (relating to Title Defects), 5.6 (relating to Title Benefits), 6.4 (relating to Adverse Environmental Conditions), 9.4 (relating to Preferential Rights) and 15.1 (relating to Casualty Losses).

 

(B)                               Buyer and Sellers agree that the Base Purchase Price shall be allocated among the Assets, in accordance with the principles of Section 1060 of the Internal Revenue Code and the Treasury Regulations thereunder and reasonably consistent with the allocations in Section 2.4(A), as set forth on a schedule to be prepared by Buyer and delivered to Sellers on or prior to thirty (30) days after Post-Closing Adjustment Statement has become final and binding on the Parties and to which the Parties shall mutually agree.  Buyer and Sellers shall cooperate to comply with all substantive and procedural requirements of Section 1060 and the Treasury Regulations thereunder, including, without limitation, the filing by Buyer and Sellers of IRS Form 8594 with their federal income tax returns for the taxable year in which Closing occurs.  Buyer and Sellers agree that each will not take for income tax purposes, or permit any affiliate to take, any position inconsistent with the allocation of the Purchase Price under this Section 2.4(B).

 

2.5                               Section 1031 Like Kind Exchange.  Without any liability or increased costs to Sellers, Buyer shall have the right at any time prior to completion of all the transactions that are to occur at Closing to assign all or a portion of its rights under this Agreement to a “Qualified Intermediary” (as that term is defined in Section 1.1031(k)-1(g)(4)(v) of the Treasury Regulations) in order to accomplish the transaction in a manner that will comply, either in whole or in part, with the requirements of a like-kind exchange pursuant to Section 1031 of the Code.  Likewise, without any liability or increased costs to Buyer, Sellers shall have the right at any time prior to completion of all the transactions that are to occur at Closing to assign all or a portion of its rights under this Agreement to a Qualified Intermediary for the same purpose.  If Sellers assign all or any of its rights under 

 

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this Agreement for this purpose, Buyer agrees to (a) consent to Sellers’ assignment of their rights in this Agreement, which assignment shall be in a form reasonably acceptable to Buyer, and (b) pay the Purchase Price (or a designated portion thereof as specified by Sellers) into a qualified escrow or qualified trust account at Closing as directed in writing.  If Buyer assigns all or any of its rights under this Agreement for this purpose, Sellers agree to (i) consent to Buyer’s assignment of its rights in this Agreement, which assignment shall be in a form reasonably acceptable to Sellers, (ii) accept the Purchase Price from the qualified escrow or qualified trust account at Closing, and (iii) at Closing, convey and assign directly to Buyer the interests (or any portion thereof) as directed by Buyer.  Sellers and Buyer acknowledge and agree that any assignment of this Agreement  (or any rights hereunder) to a Qualified Intermediary shall not release any Party from any of its respective liabilities and obligations hereunder, and that neither Party represents to the other that any particular tax treatment will be given to either as a result thereof.

 

3.                                      CLOSING.

 

3.1                               Closing.  Subject to any termination pursuant to Section 13, the sale and purchase of the Assets (“Closing”) shall be held on December 31, 2012 or such earlier date as may be mutually agreed by Buyer and Chalker (the “Closing Date”).  The Closing will take place at the offices of Chalker’s legal counsel or such other place as designated by mutual agreement of the Parties.

 

3.2                               Delivery by Sellers.  At Closing, Sellers shall execute and deliver or cause to be executed and delivered, to Buyer:

 

(A)                               One or more Assignments and Bills of Sale, substantially in the form attached hereto as Exhibit 3.2(A), effecting the sale, transfer, conveyance and assignment of the Assets;

 

(B)                               An Amendment to the Development Agreement dated December 1, 2009, affecting the Assets, in form attached hereto as Exhibit 3.2(B);

 

(C)                               Certifications of Non-Foreign Status substantially in the form attached hereto as Exhibit 3.2(C);

 

(D)                               A Transition Procedures Agreement substantially in the form attached hereto as Exhibit 3.2(D);

 

(E)                                Change of operator forms in form and substance satisfactory to the Buyer for each of the Wells and Units for which the Sellers or their affiliates act as operator evidencing a transfer to the Buyer or the Buyer’s designee of operations on all such Wells and Units;

 

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(F)                                 Transfer orders or letters in lieu in form and substance satisfactory to the Buyer for each purchaser of production with respect to each of the Wells and Units;

 

(G)                               Such releases, termination statements, ratifications, consents, elections and waivers from any party who owns or claims any right, title or interest in and to any of the Assets as might be reasonably requested by the Buyer; and

 

(H)                              Such additional documents customary in similar transactions as might be reasonably requested by the Buyer to consummate this Agreement.

 

3.3                               Delivery by Buyer.  At Closing, Buyer shall deliver to Sellers or Sellers’ designee:

 

(A)                               the Purchase Price set forth in the Closing Adjustment Statement, net of the Escrow Fund, by wire transfer in immediately available funds to an account designated by Chalker or, if written instructions are provided for payment to individual Seller(s) not later than three (3) days prior to Closing, to that individual Seller or those individual Sellers by wire transfer in immediately available funds to accounts designated by such individual Seller(s) at Closing; that portion of the Purchase Price represented by the Earnest Money shall be paid by wire transfer of immediately available funds by the Escrow Agent from the Escrow Account to the account or accounts designated by Chalker, or, if any Sellers instruct Chalker in writing as to their proportionate share, to one or more accounts as instructed by Sellers; and

 

(B)                               to the Escrow Agent, for deposit in the Escrow Account, an amount equal to the sum of (i) Six Million Dollars ($6,000,000) (the “Indemnity Escrow Fund”) and (ii) the aggregate Title Defect Value with respect to all Assets that have incurred title defects that Sellers have elected to attempt to cure under Section 5.5(A)(iii) (the “Defect Fund”, and collectively the “Escrow Fund”). The Indemnity Escrow Fund shall be applied solely to satisfy claims for indemnification pursuant to Section 14.5, and the Defect Fund shall be applied solely to satisfy Purchase Price refunds pursuant to Section 5.5(A)(iii), subject to the terms and limitations therein.  Subject to the foregoing, the Escrow Fund shall be held, invested and disbursed as specified in and pursuant to the terms and conditions of the Escrow Agreement and in accordance with the terms and conditions of Sections 5.5(A)(iii) and 14.5.

 

3.4                               Further Cooperation.  At the Closing and thereafter as may be necessary, Sellers and Buyer shall execute and deliver such other instruments and documents and take such other actions as may be reasonably necessary to evidence and effectuate the transactions contemplated by this Agreement.  Buyer and Sellers shall 

 

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cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax returns related to the Assets and any audit, litigation or other proceeding with respect to Taxes related to the Assets. Such cooperation shall include the retention and (upon the other Party’s request) the provision of records and information that are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder.

 

4.                                      ACCOUNTING ADJUSTMENTS.

 

4.1                               Closing Adjustments.  With respect to matters that can be determined as of the Closing, Sellers shall prepare, in accordance with the provisions of Section 2 and this Section 4, a statement (the “Closing Adjustment Statement”) with relevant supporting information setting forth each adjustment to the Base Purchase Price submitted by Sellers.  Sellers shall submit the Closing Adjustment Statement to Buyer, together with all records or data supporting the calculation of amounts presented on the Closing Adjustment Statement, no later than five (5) days prior to the scheduled Closing Date.  Prior to the Closing, Buyer and Sellers shall review the adjustments proposed by Sellers in the Closing Adjustment Statement.  Agreed upon adjustments shall be taken into account in computing any adjustments to be made to the Base Purchase Price at the Closing.  When available, actual figures will be used for the adjustments at Closing.  To the extent actual figures are not available, estimates shall be used subject to final adjustments as described in Section 4.3 below.

 

4.2                               Strapping and Gauging.  Sellers have caused the Oil and Gas in the storage facilities located on, or utilized in connection with, the Leases to be measured, gauged or strapped as of the Effective Time.  Sellers have caused the production meter charts (or if such do not exist, the sales meter charts) on the pipelines transporting Oil and Gas from the Leases to be read as of such time.  The Oil and Gas in such storage facilities above the pipeline connection or through the meters on the pipelines prior to the Effective Time shall belong to Sellers, and the Oil and Gas placed in such storage facilities from and after the Effective Time and production upstream of the aforesaid meters shall belong to Buyer and become part of the Assets.

 

4.3                               Post-Closing Adjustments.

 

(A)                               A post-closing adjustment statement (the “Post-Closing Adjustment Statement”) based on the actual income and expenses shall be prepared and delivered by Sellers to Buyer within ninety (90) days after the Closing, proposing further adjustments to the calculation of the Purchase Price based on the information then available.  The Post-Closing Adjustment Statement will include adjustments for the matters set forth in this Agreement and in addition will include: (i) an upward or downward 

 

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adjustment, as applicable, for the net mcf amount of the aggregate wellhead gas imbalance attributable to the Wells as of the Effective Time multiplied by Four Dollars and No Cents ($4.00) per mmbtu (upward for an aggregate underage and downward for an aggregate overage); and (ii) an upward or downward adjustment for the total pipeline or throughput obligations as of the Effective Time and, subject to the terms and provisions of the applicable agreements, multiplied by the price actually received per mcf or mmbtu (downward for under deliveries and upward for over deliveries).  Sellers or Buyer, as the case may be, shall be given access to and shall be entitled to review and audit the other Party’s records pertaining to the computation of amounts claimed in such Post-Closing Adjustment Statement.

 

(B)                               Within thirty (30) days after receipt of the Post-Closing Adjustment Statement, Buyer shall deliver to Sellers a written statement describing in reasonable detail its objections (if any) to any amounts or items set forth on  or omitted from the Post-Closing Adjustment Statement.  If Buyer does not raise objections within such period, then the Post-Closing Adjustment Statement shall become final  and  binding upon the Parties at the end of such period.

 

(C)                               If Buyer raises objections, the Parties shall negotiate in good faith to resolve any such objections.  If the Parties are unable to resolve any disputed item within thirty (30) days after Sellers’ receipt of Buyer’s written objections to the Post-Closing Adjustment Statement, any such disputed item shall be submitted to an independent accounting firm mutually agreeable to the Parties who shall be instructed to resolve such disputed item within thirty (30) days.  The resolution of disputes by the accounting firm so selected shall be set forth in writing and shall be conclusive, binding and non-appealable upon the Parties and the Post-Closing Adjustment Statement shall become final and binding upon the Parties on the date of such resolution.  The fees and expenses of such accounting firm shall be paid one-half by Buyer and one-half by Sellers.

 

(D)                               After the Post-Closing Adjustment Statement has become final and binding on the Parties, Sellers or Buyer, as the case may be, shall pay to the other such sums as are due to settle accounts between the Parties due to differences between the estimated Purchase Price paid pursuant to the Closing Adjustment Statement and the actual Purchase Price set forth on the Post-Closing Adjustment Statement, which payments shall be made within ten (10) days after the date the Post-Closing Adjustment Statement has become final and binding on the Parties.

 

(E)                                For the avoidance of doubt, the final and binding nature of the Post Closing Adjustment Statement shall not affect the indemnity obligations of the Parties pursuant to Sections 14.1 and 14.2.

 

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4.4                               Suspended Funds.  Sellers shall transfer to Buyer all of those suspended proceeds at Closing.  BUYER SHALL BE RESPONSIBLE FOR PROPER DISTRIBUTION OF ALL THE SUSPENDED PROCEEDS, TO THE EXTENT TURNED OVER TO IT BY SELLERS, TO THE PARTIES LAWFULLY ENTITLED TO THEM AND ANY CLAIMS RELATED THERETO.  BUYER HEREBY AGREES TO INDEMNIFY, DEFEND AND HOLD HARMLESS SELLERS FROM AND AGAINST ANY AND ALL LOSSES AS DEFINED BELOW ARISING OUT OF OR RELATING TO THOSE SUSPENDED PROCEEDS ACTUALLY PAID OVER TO BUYER.

 

4.5                               Audit Adjustments.  Sellers shall retain all rights to adjustments resulting from any operating agreement and other claims asserted against third party operators on transactions occurring prior to the Effective Time (which includes Buyer, if applicable).  Any credit received by Buyer pertaining to such a claim shall be paid to Sellers within thirty (30) days after receipt.

 

4.6                               Asset Tax Refunds.  Refunds of Asset Taxes paid or payable with respect to or attributable to the Assets shall be promptly paid as follows (or to the extent payable but not paid due to offset against other Taxes shall be promptly paid by the Party receiving the benefit of the offset as follows) (determined by apportioning Taxes between the period before or after the Effective Time (a) consistently with the method described in Section 2.3(A)(ii) for Real and Personal Property Taxes and (b) on an interim closing of the books method in the case of all other Taxes): (i) to Sellers if attributable to Asset Taxes with respect to any Asset Tax year or portion thereof ending on or before the Effective Time; and (ii) to Buyer if attributable to Taxes with respect to any Asset Tax year or portion thereof beginning from and after the Effective Time.  “Tax” means any tax (including any income tax, capital gains tax, value-added tax, sales and use tax, franchise tax, payroll tax, withholding tax, property tax, payroll tax, occupation tax, license tax, gross receipts tax, fuel tax, or severance or production tax), levy, assessment, tariff, duty (including any customs duty), deficiency, franchise fee or payment, or other fee or payment imposed, assessed or collected by or under the authority of any governmental body, including any taxes of any other taxpayer for which a person or entity is liable as transferee, successor, by contract or otherwise, and any related charge or amount (including any fine, penalty, interest or addition to tax).

 

4.7                               Cooperation.  Each Party covenants and agrees to promptly inform the other with respect to amounts owing under Sections 4.3, 4.5 and 4.6 hereof.

 

5.                                      DUE DILIGENCE; TITLE MATTERS.

 

5.1                               General Access.  Prior to Closing, Sellers shall:

 

(A)                               Give Buyer and its representatives, employees, consultants, independent contractors, attorneys and other advisors reasonable access to the Leases 

 

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(to the extent same are Seller operated or controlled, and for those Leases not operated or controlled by Sellers, Sellers agree to use reasonable efforts to afford access to Buyer to such Leases) and other Assets, and all pertinent records, information, and data in Sellers’ possession related to the Assets, during regular office hours for any and all inspections and investigations, subject to such restrictions on disclosure as may exist under confidentiality agreements or other agreements binding on Sellers.

 

(B)                               Furnish to Buyer all other information with respect to the Assets as Buyer may from time to time reasonably request, unless Sellers are prohibited therefrom by any agreement, contract, obligation or duty by which it is bound or by the necessity of any third party approval; provided that, if requested by Buyer, Sellers shall use reasonable efforts to obtain the waiver of any such prohibition or the granting of any such approval.

 

5.2                               Sellers’ Title.  Sellers shall warrant and defend the Assets unto Buyer against every person lawfully claiming the Assets or any part thereof, by, through or under Sellers, but not otherwise.  However, except for such limited warranty of title and the representations and warranties set forth in this Agreement and Assignment and Bill of Sale all of Sellers’ interests in the Assets are to be sold AS IS AND WHERE IS AND WITHOUT WARRANTY OF MERCHANTABILITY, CONDITION OR FITNESS FOR A PARTICULAR PURPOSE, EITHER EXPRESS OR IMPLIED.

 

5.3                               Good and Marketable Title.  As used herein the term “good and marketable title” shall mean:

 

(A)                               As to each of the Wells, Units or the Undeveloped Acreage which record title, or contractual rights to earn, of Sellers:

 

(i)                                     entitles Sellers to receive from each Well, Unit or the Undeveloped Acreage not less than the interests shown in Exhibit 1.1(A)-2 as the “Net Revenue Interest” of all Oil and Gas produced, saved and marketed from each Well, Unit or the Undeveloped Acreage; and

 

(ii)                                  obligates Sellers to bear a percentage of the costs and expenses relating to the maintenance and development of, and operations relating to, each Well, Unit or the Undeveloped Acreage not greater than the “Working Interest” shown in Exhibits 1.1(A)-2 (without a proportionate increase in the Net Revenue Interest).

 

As used herein, “Undeveloped Acreage” means the leasehold or mineral fee interest to the extent it covers the lands (as to the depths specified on Exhibit 1.2(A)-2) included within the geographic area identified as Undeveloped Acreage on Exhibit 1.1(A)-2.

 

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(B)                               That title of Sellers to the Assets:

 

(i)                                     at Closing, is free and clear of mortgages, liens, burdens and other encumbrances  (except for Permitted Encumbrances as defined in subsection (ii) below) and with respect to real property interests to be transferred to Buyer, real property interests are of record in the relevant counties or parishes;

 

(ii)                                  as used herein the term “Permitted Encumbrances” shall mean any one (1) or more of the following described below or created or described in documents described below:

 

(1)                                 The terms and conditions of the Leases, including without limitation lessors’ royalties, overriding royalties, net profits interests, carried interests, production payments, reversionary interests and similar burdens, if the net cumulative effect of the burdens does not operate to reduce the interest of Sellers with respect to all Oil and Gas produced from any Well, Unit or the Undeveloped Acreage below the Net Revenue Interest for such Well, Unit or Undeveloped Acreage set forth in Exhibit 1.1(A)-2 or increase the Working Interest with respect to such Well, Unit or Undeveloped Acreage;

 

(2)                                 The division orders and sales contracts terminable without penalty upon no more than ninety (90) days notice to the purchaser;

 

(3)                                 Preferential Rights and required third party consents to assignment and similar agreements with respect to which waivers or consents are obtained from the appropriate parties, or the appropriate time period for asserting any such right has expired without an exercise of the right;

 

(4)                                 Materialman’s, mechanic’s, repairman’s, employee’s, contractor’s, operator’s and other similar liens or charges arising in the ordinary course of business for obligations that are not delinquent or that will be paid and discharged in the ordinary course of business;

 

(5)                                 All rights to consent by, required notices to, filings with, or other actions by governmental entities in connection with the sale or conveyance of oil and gas leases or interests therein if they are routinely obtained subsequent to the sale or conveyance;

 

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(6)                                 Easements, rights-of-way, servitudes, permits, surface leases and other rights in respect of surface operations that do not interfere with the oil and gas operations to be conducted on any Well, Unit or the Undeveloped Acreage or the economical operation of any Asset;

 

(7)                                 All rights reserved to or vested in any governmental, statutory or public authority to control or regulate any of the Assets in any manner, and all applicable laws, rules and orders of governmental authority;

 

(8)                                 All operating agreements, unit agreements, unit operating agreements, pooling agreements and pooling designations and other agreements affecting the Assets that are of record in Sellers’ chain of title or are reflected or referenced in Sellers’ files to the extent such agreements do not reduce the interest of Sellers with respect to all Oil and Gas produced from any Well, Unit or the Undeveloped Acreage below the Net Revenue Interest set forth in Exhibit 1.1(A)-2 for such Well, Unit or Undeveloped Acreage, and/or do not increase the portion of the costs and expenses relating to any Well, Unit or the Undeveloped Acreage that Sellers are obligated to pay above the Working Interest set forth in Exhibit 1.1(A)-2 for such Well, Unit or Undeveloped Acreage (without a proportionate increase in Net Revenue Interest);

 

(9)                                 All other liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects and irregularities affecting the Assets that individually or in the aggregate are not such as to interfere with the operation, value or use of any of the Assets, do not prevent Buyer from receiving the proceeds of production from any of the Wells, Units or the Undeveloped Acreage, do not reduce the interest of Sellers with respect to all Oil and Gas produced from any Well, Unit or the Undeveloped Acreage below the Net Revenue Interest set forth in Exhibit 1.1(A)-2 for such Well, Unit or Undeveloped Acreage, and/or do not increase the portion of the costs and expenses relating to any Well, Unit or the Undeveloped Acreage that Sellers are obligated to pay above the Working Interest set forth in Exhibit 1.1(A)-2 for such Well, Unit or Undeveloped Acreage (without a proportionate increase in Net Revenue Interest); Title Defects Buyer may have expressly waived in writing, any Title Defects for which an adjustment to the Base Purchase Price is made pursuant to Section 5.5, or any 

 

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Title Defects for which the applicable Asset is not transferred pursuant to this Agreement due to the election of Sellers not to cure a Title Defect and not transfer such Asset pursuant to Section 5.5 or which are otherwise deemed to have become Permitted Encumbrances under this Agreement;

 

(10)                          Any Adverse Environmental Conditions waived by Buyer pursuant to Section 6.3;

 

(11)                          Sellers’ ownership of rights in and to the Cleveland formation (or its stratigraphic equivalent as found between the depths of 8,435’ and 8,874 on the Schlumberger Compensated Neutron — Formation Density Log in the Enron Oil and Gas operated, Cleveland #1-107 Well (API# 42-295-31806) located in  Section 107, Block 43, H&TC Survey Lipscomb County Texas) within Section 103, Block 43, H&TC RR Co Survey, Lipscomb County, Texas,  that are based on or relate to Buyer’s potential ownership of any rights to the Cleveland formation derived from Buyer’s operated Jones Energy Cleveland 103-3H well;

 

(12)                          Regulatory issues with the Texas Railroad Commission or other administrative agency regarding the spacing or density of Wells located in Section 83, Block 13, H&TC RR Co Survey, Ochiltree County, Texas.

 

5.4                               Defect Letters.

 

(A)                               Buyer may from time to time and no later than seven (7) days prior to Closing notify Chalker in writing of any liens, contracts, obligations, encumbrances, defects of title which would cause title to all or part of the Assets not to be good and marketable as defined in Section 5.3 hereof or which would cause a breach of a representation or warranty of Sellers (“Title Defect”), provided that no Title Defect shall be deemed to exist unless (i) the Title Defect Value thereof exceeds Seventy-Five Thousand Dollars ($75,000.00) (the “Individual Title Defect Threshold”) (provided, that with regard to a particular Asset, a series of common defects in or failures to Sellers’ Title may be aggregated in respect of determining whether the Individual Title Defect Threshold has been exceeded); and, (ii) the aggregate Title Defect Values plus the aggregate Environmental Defect Values less Title Benefits exceed Five Million Dollars ($5,000,000) (the “Defect Threshold”), but in the event that the sum of all Title Defect Values and all Environmental Defect Values less all Title Benefits exceeds the Defect Threshold, then any adjustments to the Purchase Price or other remedies for Title Defects provided by Seller shall 

 

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include all Title Defect Values that exceed the Individual Title Defect Threshold.  In order to provide Sellers a reasonable opportunity to cure any Title Defects prior to Closing, Buyer shall use reasonable efforts to provide the notice as soon as reasonably possible after becoming aware of or making its determination of the Title Defect.

 

(B)                               In the notice, Buyer must describe with reasonable detail each alleged Title Defect it has discovered, include Buyer’s reasonable estimate of the Title Defect Value attributable to each, and include all data and information in Buyer’s possession or control bearing thereon.

 

(C)                               Buyer shall be deemed to have conclusively waived all Title Defects not disclosed to Sellers in a notice as provided in Section 5.4(A) herein.

 

(D)                               Upon timely delivery of a notice by Buyer:

 

(i)                                     on or before three (3) days prior to Closing, Chalker shall notify Buyer whether Sellers agree with Buyer’s claimed Title Defects and/or the proposed Title Defect Values therefor (“Sellers’ Response”) or provide Buyer with curative information or documents satisfactory to Buyer that the asserted Title Defect is cured.  If Sellers do not agree with any claimed Title Defect and/or the proposed Title Defect Value therefor, then the Parties shall enter into good faith negotiations and shall attempt to agree on such matters;

 

(ii)                                  for any Title Defect which Sellers allege to have cured, one (1) day prior to Closing after Sellers’ notice of its cure of a Title Defect, Buyer shall notify Chalker if Buyer disagrees with Sellers’ proposed cure of a Title Defect (“Buyer’s Response”).  If Buyer does not agree with any such cure, then the Parties shall enter into good faith negotiations and shall attempt to agree on such matters.

 

5.5                               Effect of Title Defect.

 

(A)                               Subject to Section 5.4 and Section 5.5(C) herein, for those Title Defects not cured by Closing, Sellers may, at their sole discretion:

 

(i)                                     adjust the Base Purchase Price in the amount of the Title Defect Value of the Asset to which such Title Defect relates and proceed to Closing on all of the Assets; or

 

(ii)                                  proceed with Closing on those Assets not affected by the valid Title Defects and such Assets to which a Title Defect relates but for which Sellers have elected to proceed to Closing with an adjustment of the Base Purchase Price in the amount of the Title Defect Value of such Assets and retain the affected Assets and 

 

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reduce the Base Purchase Price by the Allocated Value of the affected Assets; or

 

(iii)                               with respect to any Asset affected by a valid Title Defect which Sellers elect to attempt a cure after Closing, proceed with Closing on those Assets without adjustment to the Base Purchase Price and for a period of up to one hundred twenty (120) days after Closing Sellers shall have the right to attempt to cure such Title Defect;  if the Title Defect is not fully cured or the Title Defect is not waived by Buyer within such time period, Sellers shall refund to Buyer out of the Defect Fund the uncured Title Defect Value pertaining to such Asset, not to exceed the Allocated Value of such Asset.  Any amounts remaining in the Defect Fund shall be returned to Sellers following the cure or waiver by Buyer of all Title Defects which Sellers have elected to cure.

 

The Parties recognize that the existence of a Title Defect or a Title Defect Value may not be agreed to by the Parties or determined by the Title Consultant by the Closing, and that for purposes of this Section 5.5(A), the existence of any disputed Title Defect or the amount of any disputed Title Defect Value shall be as determined by Buyer, subject to adjustment if the Parties otherwise agree or the Title Consultant otherwise determines in respect thereto.

 

(B)                               The diminution in value of an Asset attributable to a Title Defect (the “Title Defect Value”) notified in a notice shall be determined by the following:

 

(i)                                     if the Title Defect asserted is that the actual Net Revenue Interest attributable to any Well, Unit or Undeveloped Acreage is less than that stated in the applicable Exhibit, then the Title Defect Value is the product of the Allocated Value attributed to such Asset, multiplied by a fraction, the numerator of which is the difference between the Net Revenue Interest set forth in the applicable Exhibit and the actual Net Revenue Interest, and the denominator of which is the Net Revenue Interest stated in the applicable Exhibit; or

 

(ii)                                  if the Title Defect represents an encumbrance upon the affected Asset (including any increase in Working Interest for which there is not a proportionate increase in Net Revenue Interest), the amount of the Title Defect Value is to be determined by taking into account the Allocated Value of the Asset, the portion of the Asset affected by the Title Defect, the legal effect of the Title Defect, the potential economic effect of the Title Defect over the life of the 

 

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affected Asset, and the Title Defect Values placed upon the Title Defect by Buyer and Sellers.

 

Notwithstanding the above, in no event shall the total of the Title Defect Values related to a particular Asset exceed the Allocated Value of such Asset.

 

(C)                               Title Consultant.

 

(i)                                     If the Parties cannot reach agreement concerning the existence of a Title Defect, Sellers’ proposed cure of a Title Defect, or a Title Defect Value by Closing, and to the extent that Sellers do not elect to proceed under Section 5.5(A) above, upon either Party’s request, the Parties shall mutually agree on and employ an attorney experienced in title examination in the state where the Assets are located (“Title Consultant”) to resolve all points of disagreement relating to Title Defects and Title Defect Values.

 

(ii)                                  The cost of any such Title Consultant shall be borne fifty percent (50%) by Sellers and fifty percent (50%) by Buyer.  Each Party shall present a written statement of its position on the Title Defect and/or Title Defect Value in question to the Title Consultant within three (3) days after the Title Consultant is selected, and the Title Consultant shall make a determination of all points of disagreement in accordance with the terms and conditions of this Agreement within seven (7) days of receipt of such position statements.  The determination by the Title Consultant shall be conclusive and binding on the Parties, and shall be enforceable against any Party in any court of competent jurisdiction.  If necessary, the Closing Date shall be deferred and the Base Purchase Price adjusted downward by the corresponding Allocated Values only as to those Assets affected by any unresolved disputes regarding the existence of a Title Defect and/or the Title Defect Value until the Title Consultant has made a determination of the disputed issues with respect thereto and all subsequent dates and required activities with respect to any such Assets having reference to the Closing Date shall be correspondingly deferred; provided, however, that, unless Sellers and Buyer mutually agree to the contrary, the Closing Date shall not be deferred in any event beyond December 31, 2012.

 

(iii)                               If at any time any Title Consultant so chosen fails or refuses to perform hereunder, a new Title Consultant shall be chosen by the Parties.

 

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Title Benefits.  Should Sellers determine that the ownership of any Well entitles Sellers to a larger Net Revenue Interest or a smaller Working Interest than that set forth on Exhibit 1.1(A)-2, so that Sellers’ ownership in the Well is greater than that contemplated by this transaction, then Sellers shall notify Buyer of such increase no later than seven (7) days prior to the Closing Date describing in such notice with reasonable detail each alleged increase it has discovered, Sellers’ reasonable estimate of the value attributable to each, and including all data and information in Sellers’ possession or control bearing thereon (a “Title Benefit”), provided that in no event shall an increase be treated as a Title Benefit under this Agreement unless the increase in Allocated Value directly attributable thereto exceeds Seventy-Five Thousand Dollars ($75,000.00) (the “Individual Title Benefit Threshold”). To the extent that there are both Title Benefits and Title Defects they shall be netted prior to determining whether the Defect Threshold as been reached.  The amount of such adjustment shall be determined in the same manner as provided in Section 5.5 (B)(i).  Title Benefits finally determined in accordance with this Agreement may be used exclusively to offset Title Defect Values.  For the avoidance of doubt, the Parties agree that under no circumstances will the Purchase Price be increased in respect of any Title Benefits that exceed the aggregate amount of all Title Defect Values.  Sellers shall be deemed to have conclusively waived any Title Benefit of which the Sellers fails to notify Buyer in writing in the manner described above.

 

6.                                      ENVIRONMENTAL ASSESSMENT.

 

6.1                               Physical Condition of the Assets.  The Assets have been used for oil and gas drilling and production operations and possibly for the storage and disposal of waste materials or hazardous substances related to standard oil field operations.  Physical changes in or under the Assets or adjacent lands may have occurred as a result of such uses.  The Assets also may contain buried pipelines and other equipment, whether or not of a similar nature, the locations of which may not now be known by Sellers or be readily apparent by a physical inspection of the Assets.  In addition, Buyer acknowledges that some oil field production equipment located on the Assets may contain asbestos and/or naturally occurring radioactive material (“NORM”).  In this regard, Buyer expressly understands that NORM may affix or attach itself to inside of wells, materials and equipment as scale or in other forms, and that wells, materials and equipment located on the Assets described herein may contain NORM and that NORM-containing materials may be buried or have been otherwise disposed of on the Assets.  Buyer also expressly understands that special procedures may be required for the removal and disposal of asbestos and NORM from the Assets where they may be found, and that Buyer assumes all liability when such activities are performed.  Buyer understands that Sellers do not have the requisite information with which to determine the exact nature or condition of the Assets nor the effect any prior use has had on the physical condition of the Assets.  Pursuant to the Safe Water Drinking and Toxic Enforcement Act of 1986, Buyer is hereby notified and assumes the risk that detectable amounts of chemicals known to cause cancer, birth defects and other

 

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reproductive harm may be found in, on or around the Assets.  Buyer shall assume the risk that the Assets may contain waste or contaminants and those adverse physical conditions, including the presence of waste or contaminants, may not have been revealed by Buyer’s investigation.  Except as expressly set forth in this Agreement, all responsibility and liability of Sellers attributable to the period prior to Closing related to disposal, spills, waste or contamination on or below the Assets shall be transferred from Sellers to Buyer.

 

6.2                               Inspection and Testing.

 

(A)                               Prior to Closing, Buyer shall have the right, at its sole cost and risk, to conduct a physical inspection of the Assets, including a Phase I environmental assessment of the Assets; provided that Sellers shall have the right to review and approve any plan to conduct such an environmental assessment, with such approval not to be unreasonably withheld, delayed or conditioned by Sellers.  Any data obtained shall be provided to Sellers as part of the Environmental Defect Notice, including copies of any final reports prepared by Buyer’s environmental consultant.  Sellers and Buyer shall keep all information strictly confidential whether or not Closing occurs, except as may be required pursuant to any Environmental Laws.

 

(B)                               Buyer waives and releases all claims against Sellers, their parents and subsidiary companies, and each of their respective directors, officers, employees, agents and other representatives and their successors and assigns (collectively, the “Sellers Group”), for injury to or death of persons, or damage to property, arising in any way from the exercise of rights granted to Buyer hereby or the activities of Buyer or its employees, agents or contractors on the Assets.  BUYER SHALL INDEMNIFY THE SELLERS GROUP AGAINST AND HOLD EACH AND ALL OF SAID INDEMNITEES HARMLESS FROM ANY AND ALL LOSSES WHATSOEVER ARISING OUT OF (I) ANY AND ALL STATUTORY OR COMMON LAW LIENS OR OTHER ENCUMBRANCES FOR LABOR OR MATERIALS FURNISHED IN CONNECTION WITH SUCH TESTS, SAMPLINGS, STUDIES OR SURVEYS AS BUYER MAY CONDUCT WITH RESPECT TO THE ASSETS; AND (II) ANY INJURY TO OR DEATH OF PERSONS OR DAMAGE TO PROPERTY OCCURRING IN, ON OR ABOUT THE ASSETS AS A RESULT OF SUCH EXERCISE OR ACTIVITIES.

 

(C)                               “Environmental Laws” means all applicable local, state, and federal laws, rules, regulations, and orders regulating or otherwise pertaining to:  (i) the use, generation, migration, storage, removal, treatment, remedy, discharge, release, transportation, disposal, or cleanup of pollutants, contamination, hazardous wastes, hazardous substances, hazardous materials, toxic substances or toxic pollutants; (ii) surface waters, ground waters, ambient air and any other environmental medium on or off any Lease; or (iii) the

 

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environment or health and safety-related matters; including the following as from time to time amended: the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous and Solid Waste Amendments of 1984, the Hazardous Materials Transportation Act, as amended, the Toxic Substance Control Act, as amended, the Clean Air Act, as amended, the Clean Water Act, as amended, the Safe Drinking Water Act, the Occupational and Health Act, and all regulations promulgated pursuant thereto.

 

6.3                               Notice of Adverse Environmental Conditions.  No later than seven (7) days prior to Closing, Buyer shall notify Sellers in writing of any Adverse Environmental Condition with respect to the Assets discovered by Buyer.  Such notice shall describe in reasonable detail the Adverse Environmental Condition and include the estimated Environmental Defect Value attributable thereto (the “Environmental Defect Notice”).  Buyer shall not send such a notice to Sellers unless (i) the Environmental Defect Value exceeds Seventy-Five Thousand Dollars ($75,000.00) in each individual case; and (ii) the aggregate Environmental Defect Values of all Adverse Environmental Conditions and the aggregate Title Defect Values less Title Benefits exceed the Defect Threshold.  The “Environmental Defect Value” attributable to any Adverse Environmental Condition shall be the estimated amount (net to Sellers’ interest) of all reasonable costs and claims associated with the Remediation of the Adverse Environmental Conditions, as reasonably determined and estimated by Buyer.  The term “Adverse Environmental Condition” means (i) the failure of the Assets to be in compliance with any applicable Environmental Laws; (ii) the Assets being subject to any agreements, consent orders, decrees or judgments currently in existence based on any environmental conditions or Environmental Laws that negatively and materially impact the future use of any portion of the Assets or that require any material change in the present conditions of any of the Assets; or (iii) the Assets being subject to any material uncured remediation or liability obligation under, uncured notices of violations of, or material non-compliance with, any applicable Environmental Laws.  Buyer also shall be deemed to have conclusively waived all Adverse Environmental Conditions not disclosed to Sellers before seven (7) days prior to Closing.  Buyer waives any remedy against Sellers for Adverse Environmental Conditions if the sum of the aggregate Environmental Defect Values and the aggregate Title Defect Values less the aggregate Title Benefits do not exceed the Defect Threshold; provided, however, if such sum exceeds the Defect Threshold, Buyer shall be entitled to recover all amounts to which it is entitled in respect of any Adverse Environmental Conditions as provided for in Section 6.4.

 

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6.4                               Rights and Remedies for Adverse Environmental Conditions.

 

(A)                               With respect to any Adverse Environmental Conditions affecting one or more of the Assets which exceed the Defect Threshold, Sellers and Buyer may on an Asset by Asset basis mutually agree to either (i) Remediate the Adverse Environmental Conditions, but Sellers shall have no obligation to do so, and proceed to Closing with no adjustment of the Base Purchase Price; (ii) proceed to Closing and adjust the Base Purchase Price in an amount equal to the applicable Environmental Defect Value; or (iii) retain the affected Asset and reduce the Base Purchase Price by the Allocated Value of the affected Asset.  In the event Buyer and Sellers fail to mutually agree with respect to an affected Asset, they shall be deemed to have elected clause (iii).

 

(B)                               Buyer waives any Adverse Environmental Condition for which Buyer has received an adjustment to the Base Purchase Price in accordance with Section 6.4(A).

 

(C)                               The term “Remediate” and “Remediation” means, with respect to any valid Adverse Environmental Condition, the undertaking and completion of those actions and activities necessary to remediate such Adverse Environmental Condition to the degree sufficient that such Adverse Environmental Condition no longer constitutes an Adverse Environmental Condition as defined above or to a degree sufficient to obtain agency approval that no further action is necessary based on the application of applicable remediation standards, implementation of institutional controls, or other legally acceptable mechanisms that allow for cleanup to a lesser standard.

 

(D)                               If Sellers and Buyer are unable to agree on the amount of the Environmental Defect Value within three (3) days after Sellers’ receipt of the Environmental Defect Notice, any proposed Remediation of an Adverse Environmental Condition by Sellers or that an Adverse Environmental Condition exists, has been Remediated or is required to be Remediated, or on the cost that would have been incurred by Sellers to complete Remediation of an Adverse Environmental Condition but for an Occurrence then the dispute will be submitted to a mutually acceptable environmental consulting company (the “Environmental Consultant”) whose determination shall be final and binding upon the Parties.  Sellers and Buyer shall each bear their respective costs and expenses incurred in connection with any such dispute, and one-half (1/2) of the fees, costs and expenses charged by the Environmental Consultant.  Each Party shall present a written statement of its position on the Adverse Environmental Condition and/or the Environmental Defect Value in question to the Environmental Consultant within five (5) days after the Environmental Consultant is selected, and the Environmental Consultant shall make a

 

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determination of all points of disagreement in accordance with the terms and conditions of this Agreement within ten (10) days of receipt of such position statements.  If necessary, the Closing Date shall be deferred only as to those Assets affected by any unresolved disputes regarding the existence of an Adverse Environmental Condition and/or the Environmental Defect Value until the Environmental Consultant has made a determination of the disputed issues with respect thereto and all subsequent dates and required activities with respect to any such Assets having reference to the Closing Date shall be correspondingly deferred; provided, however, that, unless Sellers and Buyer mutually agree to the contrary, the Closing Date shall not be deferred in any event for more than forty five (45) days beyond the scheduled Closing Date in Section 3.1.  All Assets as to which no such dispute(s) exist shall be conveyed to Buyer along with the remaining Assets subject to the terms of this Agreement at Closing.  Once the Environmental Consultant’s determination has been expressed to both Parties, if applicable, Sellers shall have five (5) days in which to advise Buyer in writing which of the options available to Sellers under Section 6.4 Sellers elect regarding each of the Assets as to which the Environmental Consultant has made a determination.

 

6.5                               Remediation.  If Sellers and Buyer agree to have Sellers Remediate an Adverse Environmental Condition or Sellers are required by a governmental or regulatory agency to Remediate an Adverse Environmental Condition, the following will govern the Remediation:

 

(A)                               Sellers shall be responsible for all negotiations and contacts with federal, state, and local agencies and authorities with regard to the Adverse Environmental Condition or Remediation but shall keep Buyer informed of the status of the Adverse Environmental Condition and the Remediation, shall provide Buyer with copies of all final reports and material written communications relating to the Adverse Environmental Condition or the Remediation, and shall afford Buyer the right to attend material in person and telephone meetings with agencies and authorities concerning the Adverse Environmental Condition or the Remediation.  Buyer may not make any independent contacts with any agency, authority, or other third party with respect to the Adverse Environmental Condition or Remediation and shall keep all information regarding the Adverse Environmental Condition and Remediation confidential, except in each instance to the extent required by applicable law.

 

(B)                               Sellers shall Remediate the Adverse Environmental Condition to the level agreed upon by Sellers and Buyer (or failing such agreement to the level determined by the Environmental Consultant), but in no event shall Sellers be required to Remediate the Adverse Environmental Condition beyond the level required by the Environmental Laws in effect at the Effective Time.

 

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(C)                               Buyer shall grant and warrant access and entry to the Assets after Closing to Sellers and third parties conducting assessments or Remediation, to the extent and as long as necessary to conduct and complete the assessment or Remediation work, to remove equipment and facilities, and to perform any other activities reasonably necessary in connection with assessment or Remediation.

 

(D)                               Buyer shall use reasonable efforts not to interfere with Sellers’ ingress and egress or assessment or Remediation activities.  Sellers shall make reasonable efforts to perform the work so as to minimize disruption to Buyer’s business activities and shall coordinate access to the Assets with Buyer and shall comply and cause its consultants and contractor to comply with Buyer’s written safety and security standards that are provided to Sellers.

 

(E)                                Sellers shall continue Remediation of the Adverse Environmental Condition until the first of the following occurs:

 

(i)            the appropriate governmental authorities provide notice to Sellers or Buyer that no further Remediation of the Adverse Environmental Condition is required; or

 

(ii)           the Adverse Environmental Condition has been Remediated to the level required by the Environmental Laws or as agreed in writing by all Parties.

 

Upon the occurrence of either (i) or (ii) above, Sellers shall notify Buyer that Remediation of the Adverse Environmental Condition is complete and provide a copy of the notification described in (i) above, if applicable.  Upon delivery of said valid notice, Sellers shall be released from all liability and have no further obligations under any provisions of this Agreement in connection with such Adverse Environmental Condition.

 

(F)                                 Until Sellers complete Remediation of an Adverse Environmental Condition, Sellers and Buyer shall each notify the other of any pending or threatened claim, action, or proceeding by any authority or private party that relates to or would affect the environmental condition, the assessment, or the Remediation of the Assets affected by such Adverse Environmental Condition.

 

(G)                               After delivery of possession of the Assets (or Closing, whichever occurs first) and before Sellers have completed Remediation of an Adverse Environmental Condition, if a leak, spill, or discharge of any material or substance occurs on the affected Assets (“Occurrence”), Buyer shall promptly notify Sellers and act promptly to minimize the effects of the Occurrence.  If there is an Occurrence that is not caused by Sellers, and Sellers and Buyer jointly determine that it will affect the area where

 

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Sellers are conducting Remediation or assessment, Sellers and Buyer will agree to the cost that would have been incurred by Sellers to complete the Remediation but for the Occurrence.  As consideration for such payment, Buyer shall accept the environmental condition of the affected Assets as they exist on the date of the payment, assume full responsibility for conducting Remediation of the affected Assets in accordance with this Agreement, and agree to release, not to sue, indemnify, hold harmless, and defend Sellers as to claims and liabilities arising from the Occurrence.  If Sellers cause the Occurrence, Sellers agree to continue the Remediation and broaden its scope as necessary to encompass the Occurrence and will assume responsibility for Remediation of the affected Assets in accordance with the terms of this Agreement.

 

(H)                              If Sellers undertake Remediation as to any Assets in which Sellers’ ownership was less than one hundred percent (100%), Buyer shall bill the other working interest owners for their share of the Remediation expenses if and to the extent permitted under applicable agreements.  Buyer shall refund to Sellers any amounts received by Buyer from any of the other working interest owners.

 

7.                                      REPRESENTATIONS AND WARRANTIES OF SELLERS.

 

7.1                               Sellers’ Representations and Warranties.  Subject to the disclosures set forth in the Exhibits referred to in this Section 7, Sellers, severally but not jointly, represent and warrant as to the Assets as follows:

 

(A)                               Status.  With respect to each Seller that is an entity, such Seller is duly organized, validly existing, and in good standing under the laws of the state of its formation and is qualified to conduct business in each state in which the Assets are located.  With respect to each Seller that is an individual, such Seller is an individual with a legal domicile in the United States.

 

(B)                               Authority.  Sellers own the Assets and have the requisite power and authority to enter into this Agreement, to carry out the transactions contemplated hereby, to transfer the Assets in the manner contemplated by this Agreement, and to undertake all of the obligations of Sellers set forth in this Agreement.

 

(C)                               Validity of Obligations; No Conflicts.  This Agreement and any documents or instruments delivered by Sellers at the Closing shall constitute legal, valid and binding obligations of Sellers, enforceable in accordance with their terms.  The execution, delivery and performance of this Agreement (and all documents required to be executed and delivered by Sellers at Closing), and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized

 

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by all necessary corporate and company action (as applicable) on the part of Sellers.  The execution, delivery and performance of this Agreement by Sellers, and the consummation of the transactions contemplated by this Agreement shall not (i) violate any provision of the governing documents or instruments of Sellers, (ii) result in a default (with due notice or lapse of time or both) or the creation of any lien or encumbrance or give rise to any right of termination, cancellation, or acceleration under any material note, bond, mortgage, indenture, or other financing instrument to which any Seller is a party or by which it is bound, (iii) violate any judgment, order, ruling, or decree applicable to a Seller as a party in interest, or (iv) violate any laws applicable to any Seller.

 

(D)                               AFE’s.  Except as set forth in Exhibit 7.1(D), there are no material outstanding calls or payments under authorities for expenditures for payments relating to the Assets which exceed (i) individually, One Hundred Fifty Thousand Dollars ($150,000.00) (net to Sellers’ interest) or (ii) in the aggregate, One Million Dollars ($1,000,000) (net to Sellers’ interest), in each case which are due or which Sellers have committed to make which have not been made.

 

(E)                                Contractual Restrictions.  Sellers have not entered into any contracts for or received prepayments under or pursuant to take-or-pay arrangements, buydowns, buyouts or similar agreements for Oil and Gas, or storage of the same relating to the Assets which Buyer shall be obligated to honor and make deliveries of Oil and Gas or pay refunds of amounts previously paid under such contracts or arrangements.

 

(F)                                 Litigation.  Except as disclosed on Exhibit 7.1(F) (the “Litigation”), to the knowledge of Sellers there is no suit or action pending, arising out of, or with respect to the ownership, operation or environmental condition of the Assets.

 

(G)                               Permits.  With respect to Assets for which Sellers are the operator, and to Sellers’ knowledge with respect to Assets operated by third parties, Sellers or such third parties, as applicable,  have acquired all material permits, licenses, approvals and consents from appropriate governmental bodies, authorities and agencies to conduct operations on the Assets, which are in full force and effect, and the ownership and operation of the Assets is in compliance with all such permits, licenses, approvals and consents in all material respects.  To Sellers’ knowledge, the Assets are in compliance with applicable laws, rules, regulations, ordinances and orders.

 

(H)                              Brokers’ Fees.  Except for possible fees owed to Raymond James and Associates for which Sellers will have sole responsibility, Sellers have incurred no obligation or liability, contingent or otherwise, for brokers’ or finders’ fees in respect of the matters provided for in this Agreement, and,

 

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if any such obligation or liability exists, it shall remain an obligation of Sellers, and Buyer shall have no responsibility therefor.

 

(I)                                   Imbalances.  Except as set forth on Exhibit 7.1(I) or for normal pipeline imbalances that are adjusted by the pipeline each month, there are no wellhead imbalances or other imbalances attributable to the Assets as of the Effective Time which would be a liability to or require payment from Buyer to a third party.

 

(J)                                   Preferential Rights.  Exhibit 7.1(J) lists all preferential rights to purchase (“Preferential Rights”) attributable or with respect to any of the Assets and applicable to the transaction contemplated hereby.

 

(K)                              Consents. Except as declared on Exhibit 7.1(K) there are no material required consents, approvals or authorizations (“Consent” or “Consents”) from  any person or entity (excluding any of the foregoing customarily obtained following Closing), in each case, that are applicable to the transactions contemplated hereby.  Provided, however, the failure to declare a Consent from any person or entity shall be deemed to be a Title Defect and not a breach of a representation or warranty made in this Agreement if the existence thereof is known to Buyer prior to Closing.

 

(L)                                Taxes.  All ad valorem, property, production, severance and similar Taxes and assessments based on or measured by the ownership of property comprising the Assets or the production or removal of hydrocarbons or the receipt of proceeds therefrom (including applicable escheatment requirements) have been timely paid when due and are not in arrears.  There are no Tax liens with respect to any of the Assets.

 

(M)                            Non-Foreign Representation.  None of the Sellers is a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in Internal Revenue Code and Income Tax Regulations).

 

(N)                               Leases.  To the best of Sellers’ knowledge, the Leases have been maintained according to their terms, are in compliance in all material respects with the agreements to which the Leases are subject, are presently in full force and effect, and there has not occurred any event, fact or circumstance which, with the lapse of time or the giving of notice, or both, would constitute such a breach or default of the leases on behalf of the Sellers or with respect to any other parties.

 

(O)                               Hydrocarbon Sales Contracts.  Except as set forth on Exhibit 7.1(O), no hydrocarbons produced from the Assets are subject to a sales contract other than division orders or sales agreements terminable on no more than ninety (90) days notice.  Proceeds from the sale of hydrocarbons produced from the Assets are being received in all respects by Sellers in a timely

 

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manner and are not being held in suspense by the purchaser for any reason.  To Sellers’ knowledge, Sellers are presently receiving a price for all production from, or attributable to, each Asset covered by a hydrocarbon sales contract in accordance with the terms of such contract.

 

(P)                                 Material Contracts.  Exhibit 7.1(P) lists all of the contracts and agreements that (i) are required to operate and maintain the Assets, including without limitation operating agreements, pooling agreements, unitization agreements, gathering, treatment and processing agreements, and farm-out and farm-in agreements, (ii) involve expenditures by or revenues to Sellers in the aggregate in excess of $150,000 or (iii) are confidentiality agreements or agreements relating to areas of mutual interest (“Material Contracts”).  All Material Contracts are in full force and effect and Sellers are not in default with respect to any of the obligations thereunder.

 

(Q)                               Tax Partnerships and Other Entities.  None of the Assets are held in any arrangement that is reported as a partnership for federal, state, or local income or franchise tax purposes or are otherwise treated as an interest in any entity for such purposes, provided, however, that this shall not be deemed to be a representation of the Tax status of any Seller.

 

(R)                               Bankruptcy.  There are no bankruptcy, reorganization or receivership proceedings pending, being contemplated by or, to Sellers’ knowledge, threatened against Sellers or any affiliate of Sellers.

 

(S)                                 Royalty Payments.  Except as noted in Exhibit 7.1(S), all royalties, including shut-in royalties, overriding royalties and other royalties or similar burdens on production with respect to the Assets that have become due and payable by Sellers as of the Effective Time have been duly paid (other than royalties or other burdens held in escrow or suspense accounts).  .

 

(T)                                Environmental Matters.  To Sellers’ knowledge, as of the date of this Agreement, (i) there is no condition relating to the Assets that constitutes a material violation of or would reasonably be expected to give rise to a material remediation obligation of the operator of the Assets under Environmental Laws; and (ii) Sellers have not received any written notice of material violation of or a material remediation obligation under any Environmental Laws by any governmental authority or other person relating to the Assets where such violation or remediation obligation has not been previously cured or otherwise remedied.

 

(U)                               Compliance with Laws.  Sellers’ operation of the Assets has been in accordance in all material respects with all laws, orders, rules and regulations of all governmental authorities having or asserting jurisdiction

 

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relating to the ownership and operation of the Assets, including the production of all hydrocarbons attributable to the Assets.  All necessary material governmental certificates, consents, permits, licenses or other authorizations with regard to Sellers’ ownership or operation of the Assets have been obtained and no violations exist or have been recorded in respect of such licenses, permits or authorizations, since the Effective Time, and Sellers have not received any written notice of any such violation.

 

(V)                               Wells.  There are no Wells that constitute a part of the Assets (i) in respect of which Sellers have received an order from any governmental authority or other person requiring that such Well be plugged and abandoned, or (ii) that are neither in use for purposes of production or injection, nor suspended or temporarily abandoned in accordance with applicable law, that have not been plugged and abandoned in accordance with applicable law.  To Sellers’ knowledge, all Wells have been drilled and completed within the boundaries of all applicable Leases, the applicable Contracts and pooling or unit orders.  To Sellers’ knowledge, no Well is subject to penalties on allowables after the Effective Time because of overproduction.

 

(W)                            Non-Consent.  Sellers have not failed to elect to participate in any operation or activity proposed with respect to the Assets that could result in any of Sellers’ interest in any Asset becoming subject to a penalty or forfeiture as a result of such election not to participate in such operation or activity.

 

(X)                               Drilling Obligations.  Except as set forth on Exhibit 7.1(X), or to the extent of those obligations previously fulfilled by Sellers or any of its predecessors, none of the Leases or any applicable Contract contain express provisions obligating Sellers to drill any Wells on the Assets (other than provisions requiring optional drilling a condition of maintaining or earning all or a portion of a presently non-producing Lease).

 

(Y)                               Suspense Funds.  Exhibit 7.1(Y) lists (i) all funds held in suspense by Sellers as of the date hereof that are attributable to the Assets, (ii) a description of the source of such funds and the reason they are being held in suspense and (iii) if known, the name or names of the Persons claiming such funds or to whom such funds are owed.

 

(Z)                                Payout Balance.  As of the Effective Time, the total project payout balance for the Assets, as defined in the Participation Agreement referenced in Section 11.5, is not more than Sixty Seven Million Sixty Three Thousand Four Hundred Sixty Seven Dollars and Thirty Eight Cents ($67,063,467.38).

 

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7.2                               Scope of Representations of Sellers.

 

Information About the Assets.  Except as expressly set forth in this Agreement and in the Assignment and Bill of Sale, Sellers disclaim all liability and responsibility for any representation, warranty, statements or communications (orally or in writing) to Buyer, including any information contained in any opinion, information or advice that may have been provided to Buyer by any employee, officer, director, agent, consultant, engineer or engineering firm, trustee, representative, investment banker, financial advisor, partner, member, beneficiary, stockholder or contractor of Sellers wherever and however made, including those made in any data room or internet site and any supplements or amendments thereto or during any negotiations with respect to this Agreement or any confidentiality agreement previously executed by the Parties with respect to the Assets.  EXCEPT AS SET FORTH IN THIS AGREEMENT AND THE ASSIGNMENT AND BILL OF SALE, SELLERS MAKE NO WARRANTY OR REPRESENTATION, EXPRESS, STATUTORY OR IMPLIED, AS TO (i) THE ACCURACY, COMPLETENESS OR MATERIALITY OF ANY DATA, INFORMATION OR RECORDS FURNISHED TO BUYER IN CONNECTION WITH THE ASSETS OR OTHERWISE CONSTITUTING A PORTION OF THE ASSETS; (ii) THE PRESENCE, QUALITY AND QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE ASSETS, INCLUDING WITHOUT LIMITATION SEISMIC DATA AND SELLERS’ INTERPRETATION AND OTHER ANALYSIS THEREOF; (iii) THE ABILITY OF THE ASSETS TO PRODUCE HYDROCARBONS, INCLUDING WITHOUT LIMITATION PRODUCTION RATES, DECLINE RATES AND RECOMPLETION OPPORTUNITIES; (iv) IMBALANCE OR PAYOUT ACCOUNT INFORMATION, ALLOWABLES, OR OTHER REGULATORY MATTERS; (v) THE PRESENT OR FUTURE VALUE OF THE ANTICIPATED INCOME, COSTS OR PROFITS, IF ANY, TO BE DERIVED FROM THE ASSETS; (vi) THE ENVIRONMENTAL CONDITION OF THE ASSETS; (vii) ANY PROJECTIONS AS TO EVENTS THAT COULD OR COULD NOT OCCUR; (viii) THE TAX ATTRIBUTES OF ANY ASSET; (ix) THE TRANSFER OF THE OPERATOR DUTIES TO BUYER; OR (x) ANY OTHER MATTERS CONTAINED IN OR OMITTED FROM ANY INFORMATION OR MATERIAL FURNISHED TO BUYER BY SELLERS OR OTHERWISE CONSTITUTING A PORTION OF THE ASSETS.  ANY DATA, INFORMATION OR OTHER RECORDS FURNISHED BY SELLERS ARE PROVIDED TO BUYER AS A CONVENIENCE AND BUYER’S RELIANCE ON OR USE OF THE SAME IS AT BUYER’S SOLE RISK.

 

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8.                                      REPRESENTATIONS AND WARRANTIES OF BUYER.

 

Buyer’s Representations and Warranties.  Buyer represents and warrants as follows:

 

(A)                               Status of Formation.  Buyer is a limited liability company, duly formed, validly existing and in good standing under the laws of the state of Delaware.

 

(B)                               Authority.  Buyer has the power and authority to enter into this Agreement, to carry out the transactions contemplated hereby and to undertake all of the obligations of Buyer set out in this Agreement.

 

(C)                               Validity of Obligations.  The execution, delivery and performance of this Agreement and the performance of the transactions contemplated by this Agreement will not in any respect violate, nor be in conflict with, any provision of Buyer’s partnership agreement or other governing documents, or any agreement or instrument to which Buyer is a party or is bound, or any judgment, decree, order, statute, rule or regulation applicable to Buyer (subject to governmental consents and approvals customarily obtained after the Closing).  This Agreement constitutes legal, valid and binding obligations of Buyer, enforceable in accordance with its terms.

 

(D)                               Qualification and Bonding.  At Closing, Buyer shall be in compliance with the bonding and liability insurance requirements of all applicable state or federal laws or regulations applicable to the Assets and that at Closing it will be qualified to own any federal, Indian or state oil and gas leases that constitute part of the Assets.

 

(E)                                Non-Security Acquisition.  Buyer intends to acquire the Assets for its own benefit and account and is not acquiring said Assets with the intent of distributing fractional undivided interests thereof such as would be subject to regulation by federal or state securities laws.

 

(F)                                 Financing.  At Closing, Buyer will have sufficient cash, available lines of credit or other sources of immediately available funds to enable it to pay the Purchase Price to Sellers at the Closing.

 

(G)                               Brokers’ Fees.  Buyer has incurred no obligation or liability, contingent or otherwise, for brokers’ or finders’ fees in respect of the matters provided for in this Agreement, and, if any such obligation or liability exists, it shall remain an obligation of Buyer, and Sellers shall have no responsibility therefor.

 

(H)                              Independent Investigation.  Buyer has, or by Closing will have, made its own independent investigation, analysis and evaluation of the transactions contemplated by this Agreement (including Buyer’s own estimate and

 

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appraisal of the extent and value of Sellers’ Oil and Gas reserves attributable to the Assets and an independent assessment and appraisal of the environmental risks and liabilities associated with the acquisition of the Assets).  Buyer has had, or will have prior to Closing, access to all information necessary to perform its investigation and has not relied upon any representation by Sellers other than those expressly set forth in this Agreement.

 

(I)                                   Waiver of Deceptive Trade Practices Acts.  BUYER WAIVES ITS RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES ACT SECTION 17.41 et seq., TEXAS BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS, AND UNDER SIMILAR STATUTES ADOPTED IN OTHER STATES, TO THE EXTENT THEY HAVE APPLICABILITY TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.  AFTER CONSULTATION WITH AN ATTORNEY OF ITS SELECTION, BUYER CONSENTS TO THIS WAIVER.

 

9.                                      CERTAIN AGREEMENTS OF SELLERS.  Sellers agree and covenant that, unless Buyer shall have otherwise agreed in writing, the following provisions shall apply:

 

9.1                               Maintenance of Assets.  From the date of this Agreement until Closing, Sellers agree that, for any Wells which are operated by a Seller, Sellers shall:

 

(A)                               Administer and operate the Wells in accordance with the applicable operating agreements.

 

(B)                               Not introduce any new methods of management, operation or accounting with respect to any or all of the Assets, or, except in the ordinary course of business and as is consistent with past practice, file, amend, or revoke any material form or return with respect to Taxes relating to any or all of the Assets.

 

(C)                               Use commercially reasonable efforts to maintain and keep the Assets in full force and effect; and fulfill all contractual or other covenants, obligations and conditions imposed upon Sellers with respect to the Assets, including, but not limited to, payment of royalties, delay rentals, shut-in gas royalties and any and all other required payments.

 

(D)                               Except as set forth on Exhibit 9.1(D) and to the extent necessary or advisable to avoid forfeiture or penalties, not enter into agreements to drill new wells or to rework, plug back, deepen, plug or abandon any Well, nor commence any drilling, reworking or completing or other operations on the Leases which requires expenditures exceeding One Hundred Fifty Thousand Dollars ($150,000.00) (net to Sellers’ interest) for each operation (except for emergency operations and operations required under

 

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presently existing contractual obligations) without obtaining the prior written consent of Buyer (which consent shall not be unreasonably withheld, delayed or conditioned); provided that the terms of this paragraph (D) shall not apply to any expenditures of Sellers which will not be charged to Buyer.

 

(E)                                Not voluntarily relinquish its position as operator to anyone other than Buyer with respect to any of the Wells or Leases or voluntarily abandon any of the Wells or Leases other than as required pursuant to the terms of a Lease or by regulation.

 

(F)                                 Not without the prior written consent of Buyer (which consent shall not be unreasonably withheld, delayed or conditioned) (i) enter into any agreement or arrangement transferring, selling or encumbering any of the Assets (other than ordinary course sales of production); (ii) grant any preferential or other right to purchase or agree to require the consent of any party not otherwise required to consent to the transfer and assignment of the Assets to Buyer; (iii) enter into any new sales contracts or supply contracts which cannot be cancelled upon sixty (60) days prior notice; or (iv) incur or agree to incur any contractual obligation or liability (absolute or contingent) with respect to the Assets except as otherwise provided herein.

 

(G)                               To the extent known to Sellers, provide Buyer with written notice of (i) any claims, demands, suits or actions made against Sellers which materially affect the Assets; or (ii) any proposal from a third party to engage in any material transaction (e.g., a farmout) with respect to the Assets.

 

(H)                              Maintain current insurance covering the Assets until Closing.

 

(I)                                   Provide prompt notice to Buyer of any notice received by Sellers of a default, claim, obligation or suit which affects any of the Assets.

 

9.2                               Consents.  Sellers shall exercise commercially reasonable efforts to obtain all such permissions, approvals and consents by governmental authorities and others which are reasonably obtainable by Closing and are required to vest good and marketable title to the Assets in Buyer or as may be otherwise reasonably requested by Buyer.  Sellers will execute all necessary or appropriate transfer orders (or letters in lieu thereof) designating Buyer as the appropriate party for payment effective as of the Effective Time.  The failure to obtain such permission, approval or consent shall be deemed a Title Defect with respect to the Asset affected and shall not otherwise be grounds for the failure of Buyer to Close or terminate this Agreement.

 

9.3                               Records and Contracts.  Sellers shall have the right to make and retain copies of the Records and Contracts as Sellers may desire prior to the delivery of the

 

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Records and Contracts to Buyer.  Sellers will deliver to Buyer all Records and Contracts as soon as practicable, but in no event more than thirty (30) days after Closing.  Buyer, for a period of three (3) years after the Closing Date, shall make available to Sellers (at the location of such Records and Contracts in Buyer’s organization) access to such Records and Contracts as Buyer may have in its possession (or to which it may have access) upon written request of Sellers, during normal business hours; provided, however, that Buyer shall not be liable to Sellers for the loss of any Records or Contracts by reason of clerical error or inadvertent loss or destruction of Records or Contracts.

 

9.4                               Preferential Rights.

 

(A)                               Chalker, on behalf of Sellers, agrees that it will request from the holders of Preferential Rights as identified in Exhibit 7.1(J) (and in accordance with the documents creating such rights), execution of waivers of each Preferential Right.

 

(B)                               If the holder of a Preferential Right exercises such right, Sellers shall tender to such party the required interest in the affected Asset at a price equal to the Allocated Value (reduced appropriately, as determined by mutual agreement of Buyer and Sellers, if less than the entire Asset must be tendered), and to the extent that such Preferential Right is exercised and such interest in such Asset is actually sold to the party so exercising such right, such interest shall be excluded from the transaction contemplated hereby and the Base Purchase Price will be adjusted downward by the Allocated Value for such interest.

 

(C)                               If, on the Closing Date, the holder of a Preferential Right has not indicated whether or not it will exercise such Preferential Right and the time period within which the holder of the Preferential Right must exercise its right has not lapsed, then the Parties shall proceed with Closing on those Assets not affected by the Preferential Right and adjust the Base Purchase Price downward by the Allocated Value of such Asset.  Upon receipt of waiver of such Preferential Right or lapse of time within which to exercise same, Sellers shall convey the Asset to the Buyer and Buyer shall tender to Sellers the Allocated Value attributable to such Asset.

 

9.5                               Financial Statements.  For a period of twenty four (24) months following the Closing Date, at the request of Buyer, each of Chalker and Raptor, or their successors, shall assist Buyer in the preparation of audited statements of revenues and direct operating expenses for the Assets for up to the most recent three (3) fiscal years ending prior to the Closing Date and all notes and schedules related thereto (including a footnote satisfying the requirements of FAS 69) in accordance with the rules and regulations adopted by the Securities and Exchange Commission (the “SEC”), together with any quarterly or interim period statement of revenues and direct operating expenses (in accordance with the rules and

 

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regulations adopted by the SEC) (collectively, the “Statements of Revenues and Expenses”).  If requested by Buyer’s external auditor (“Auditor”), each of Chalker and Raptor shall execute and deliver to Auditor such representation letters, in form and substance customary for representation letters provided to external audit firms by management of the company whose financial statements are the subject of an audit or are the subject of a review pursuant to Statement of Auditing Standards 100 (Interim Financial Information), as may be reasonably requested by Auditor, with respect to the Statements of Revenue and Expenses; provided, however, that Buyer shall provide customary indemnity for any officer of Chalker or Raptor executing and delivering such representation letters to Auditor.  Chalker will provide suitable electronic detail in the form of lease operating statements by adequately supporting all statements provided.  Buyer shall bear all fees charged by Auditor, including those reasonable and necessary fees and expenses incurred by Chalker or Raptor to comply with the requirements provided for in this paragraph, if any.  Sellers and Buyer shall sign an engagement letter for Auditor and provide such information as may be reasonably requested from time to time by Auditor.  Sellers shall reasonably cooperate in the completion of such audit and delivery of the Statements of Revenue and Expenses to Buyer as soon as reasonably practicable following the request therefor by Buyer.

 

10.                               CERTAIN AGREEMENTS OF BUYER.  Buyer agrees and covenants that unless Sellers shall have consented otherwise in writing, the following provisions shall apply:

 

10.1                        Plugging Obligation.  Buyer shall perform and assume all liability for the necessary and proper plugging and abandonment of all Wells.

 

10.2                        Plugging Bond.  Buyer has and will maintain the necessary bonds or letters of credit as required by the state in which the Leases are located for the plugging of all Wells.

 

10.3                        Sellers’ Logos.  Commencing no later than sixty (60) days after Closing, Buyer shall promptly cover or cause to be covered by decals or new signage any names and marks used by Sellers, and all variations and derivatives thereof and logos relating thereto, from the Assets and shall not thereafter make any use whatsoever of such names, marks and logos.

 

11.                               CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER.  All obligations of Buyer under this Agreement are, at Buyer’s election, subject to the fulfillment, prior to or at the Closing, of each of the following conditions:

 

11.1                        No Litigation.  At the Closing, no suit, action or other proceeding shall be pending before any court or governmental agency which attempts to prevent the occurrence of the transactions contemplated by this Agreement.

 

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11.2                        Representations and Warranties.  All representations and warranties of Sellers contained in this Agreement shall be true in all material respects as of the Closing as if such representations and warranties were made as of the Closing Date (except for those representations or warranties that are expressly made only as of another specific date, which representations and warranties shall be true in all material respects as of such other date) and Sellers shall have performed and satisfied in all material respects all covenants and fulfilled all conditions required by this Agreement to be performed and satisfied by Sellers at or prior to the Closing.

 

11.3                        Outstanding Preferential Rights and Consents.  There shall be no unwaived or outstanding Preferential Rights or Consents, except for such Preferential Rights and Consents that pertain to Assets with a cumulative Allocated Value that total less than 20% of the Base Purchase Price.

 

11.4                        Transfer of Operatorship.  Effective as of the Closing, Buyer shall be named the successor operator of all the Assets currently operated by any Seller, as such matter is controlled by the applicable joint operating agreements and governmental regulations.

 

11.5                        Raptor Amendment.  Raptor Petroleum, LLC (“Raptor”), shall have executed and delivered to Buyer an amendment to that certain Participation Agreement dated as of February 15, 2010, between Raptor and Buyer in the form attached hereto as Exhibit 11.5.

 

12.                               CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS.  All obligations of Sellers under this Agreement are, at Sellers’ election, subject to the fulfillment, prior to or at the Closing, of each of the following conditions:

 

12.1                        No Litigation.  At the Closing, no suit, action or other proceeding shall be pending before any court or governmental agency which attempts to prevent the occurrence of the transactions contemplated by this Agreement.

 

12.2                        Representations and Warranties.  All representations and warranties of Buyer contained in this Agreement shall be true in all material respects as of the Closing, as if such representations and warranties were made as of the Closing Date (except for those representations and warranties that are expressly made only as of another specific date, which representations and warranties shall be true in all material respects as of such other date) and Buyer shall have performed and satisfied in all material respects all covenants and fulfilled all conditions required by this Agreement to be performed and satisfied by Buyer at or prior to the Closing.

 

13.                               TERMINATION.

 

13.1                        Causes of Termination.  This Agreement and the transactions contemplated herein may be terminated:

 

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(A)                               At any time by mutual consent of the Parties;

 

(B)                               By either Party if the Closing shall not have occurred by December 31, 2012, despite the good faith reasonable efforts of the Parties, and if the Party desiring to terminate is not in breach of this Agreement, provided, however, such December 31, 2012, date shall not apply to any Asset for which Closing has been deferred pursuant to the terms of this Agreement;

 

(C)                               By either Party if the cumulative total reduction in the Base Purchase Price due to Title Defects (net of any Title Benefits), Adverse Environmental Conditions and Casualty Loss exceeds fifteen percent (15%) of the Base Purchase Price;

 

(D)                               By Buyer if, on the Closing Date, any of the conditions set forth in Section 11 hereof shall not have been satisfied or waived by Buyer;

 

(E)                                By Sellers if, on the Closing Date, any of the conditions set forth in Section 12 hereof shall not have been satisfied or waived by Sellers;

 

provided in the case of (D) or (E), a Party shall not be entitled to terminate under such subsections if Closing has failed to occur because such Party failed to perform or observe in any material respect its covenants or agreements or is in breach of its representations or warranties under this Agreement.

 

13.2                        Effect of Termination.  In the event of the termination of this Agreement pursuant to the provisions of this Section 13 or elsewhere in this Agreement, except as provided in Section 13.3, this Agreement shall become void and have no further force and effect and, except for the indemnities provided for in Sections 6.2(B) and 14.3, any breach of this Agreement prior to such termination and any continuing confidentiality requirement, neither Party shall have any further right, duty or liability to the other hereunder.  Upon termination, Buyer agrees to use its best efforts to return to Sellers or destroy, all materials, documents and copies thereof provided, obtained or discovered in the course of any due diligence investigations.  If this Agreement is terminated by Buyer pursuant to Section 13.1(A), 13.1(B), 13.1(C), or 13.1(D), the Earnest Money shall be returned to Buyer and such return shall be Buyer’s sole remedy for Sellers’ breach of this Agreement.  In the event Sellers terminate this Agreement pursuant to Section 13.1(E), and Sellers elect to retain the Earnest Money, the Earnest Money will be retained by Sellers as liquidated damages in lieu of all other damages, except to the extent Sellers obtain specific performance as set forth in Section 2.2, in which case the Earnest Money will be applied to the Purchase Price.

 

13.3                        Buyer’s Hedges. Sellers acknowledge that in connection with the execution and delivery of this Agreement Buyer will be entering into hedging transactions at current NYMEX strip prices for the quantities of hydrocarbons set forth in Exhibit 13.3 (the “Buyer Hedges”).  In the event on the Closing Date all conditions to the obligations of Sellers to close have been satisfied or waived and Sellers fail or

 

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refuse to close, Sellers shall promptly pay to Buyer (in addition to any other damages that Buyer may be entitled to receive) the aggregate cost to Buyer for the termination or unwinding of the Buyer Hedges.

 

14.                               INDEMNIFICATION.

 

14.1                        INDEMNIFICATION BY SELLERS.  UPON CLOSING, SELLERS SHALL, TO THE FULLEST EXTENT PERMITTED BY LAW, RELEASE, DEFEND, INDEMNIFY, AND HOLD HARMLESS BUYER, ITS PARENT AND SUBSIDIARY COMPANIES, AND EACH OF THEIR RESPECTIVE PARTNERS, MEMBERS, MANAGERS, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND OTHER REPRESENTATIVES (THE “BUYER GROUP”) FROM AND AGAINST THE FOLLOWING:

 

(A)                               MISREPRESENTATIONS.  ALL CLAIMS, DEMANDS, LIABILITIES, JUDGMENTS, TAXES, LOSSES AND REASONABLE COSTS, EXPENSES AND REASONABLE ATTORNEYS’ FEES (INDIVIDUALLY A “LOSS” AND COLLECTIVELY, THE “LOSSES”) ARISING FROM THE BREACH BY SELLERS OF ANY REPRESENTATION OR WARRANTY SET FORTH IN THIS AGREEMENT THAT SURVIVES CLOSING;

 

(B)                               BREACH OF COVENANTS.  ALL LOSSES ARISING FROM THE BREACH BY SELLERS OF ANY COVENANT SET FORTH IN THIS AGREEMENT;

 

(C)                               RETAINED LIABILITIES.  ALL LOSSES ARISING FROM THE RETAINED LIABILITIES; AND

 

(D)                               TITLE MATTERS.  ALL LOSSES ARISING OUT OF ANY BREACH BY SELLERS OF SELLERS’ LIMITED WARRANTY OF TITLE CONTAINED IN SECTION 5.2(A).

 

(E)                                Notwithstanding the above, the following limitations shall apply to Sellers’ indemnification obligations:

 

(i)            Sellers shall not be obligated to indemnify Buyer for any Loss under Section 14.1(A) unless Buyer has delivered a written notice of such Loss within one (1) year after Closing; provided that this limitation shall not apply in respect of breach of the representations contained in Section 7.1(A), (B), (C), (H), (L), (M), or (Q) (each as “Fundamental Rep”).

 

(ii)           The indemnification obligations of Sellers pursuant to this Agreement shall be limited to actual Losses and shall not include incidental, consequential, indirect, punitive, or exemplary Losses or damages;

 

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(iii)          Sellers’ aggregate liabilities and obligations under Section 14(A) shall not exceed twenty percent (20%) of the Base Purchase Price, provided that this limitation shall not apply to breaches of any Fundamental Rep;

 

(iv)          Sellers shall have no liability or obligation for any Losses under Section 14(A), unless and until the aggregate Losses for which Buyer is entitled to recover under this Agreement exceeds two and one half percent (2.5%) of the Base Purchase Price (the “Threshold Amount”); provided, however, once such amount exceeds the Threshold Amount, the Buyer Group will be entitled to recover all amounts to which they are entitled in excess of the Threshold Amount; provided, further, that this limitation shall not apply in respect of breach of the representations contained in Section 7.1 (H), (L), (M), or (Q);

 

(v)           Sellers shall have no liability in excess of the Allocated Value for an Asset, less any prior adjustments to the Base Purchase Price, for any Losses associated with the claim that Sellers do not have good and marketable title associated with a particular Asset;

 

(vi)          The amount of Losses required to be paid by Sellers to indemnify Buyer pursuant to this Agreement shall be reduced to the extent of any amounts actually received by Buyer pursuant to the terms of the insurance policies (if any) covering such claim; and

 

(vii)         Buyer acknowledges and agrees that the indemnification provisions in this Section 14 and the termination rights and obligations in Section 13 shall be the exclusive remedies of Buyer with respect to the transactions contemplated by this Agreement.

 

14.2                        INDEMNIFICATION BY BUYER.  UPON CLOSING, BUYER SHALL TO THE FULLEST EXTENT PERMITTED BY LAW, RELEASE, DEFEND, INDEMNIFY, AND HOLD HARMLESS SELLERS GROUP FROM AND AGAINST THE FOLLOWING:

 

(A)                               MISREPRESENTATIONS.  ALL LOSSES ARISING FROM THE BREACH BY BUYER OF ANY REPRESENTATION OR WARRANTY SET FORTH IN THIS AGREEMENT;

 

(B)                               BREACH OF COVENANTS.  ALL LOSSES ARISING FROM THE BREACH BY BUYER OF ANY COVENANT SET FORTH IN THIS AGREEMENT;

 

(C)                               OWNERSHIP AND OPERATION.  ALL LOSSES ARISING FROM THE ASSUMED LIABILITIES, AND THE OWNERSHIP AND

 

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OPERATION OF THE ASSETS FROM AND AFTER THE EFFECTIVE TIME;

 

(D)                               ENVIRONMENTAL LIABILITIES.  EXCEPT FOR THE RETAINED LIABILITIES, ALL ENVIRONMENTAL LIABILITIES, REGARDLESS OF WHEN SUCH ENVIRONMENTAL LIABILITIES AROSE OR ACCRUED, INCLUDING ANY PLUGGING AND ABANDONMENT OBLIGATIONS, WHETHER SUCH RIGHTS AND REMEDIES ARE PURSUANT TO COMMON LAW, STATUTE OR OTHERWISE.

 

14.3                        PHYSICAL INSPECTION.  BUYER INDEMNIFIES AND AGREES TO RELEASE, DEFEND, INDEMNIFY AND HOLD HARMLESS THE SELLERS GROUP FROM AND AGAINST ANY AND ALL LOSSES ARISING FROM BUYER’S INSPECTING AND OBSERVING THE ASSETS, INCLUDING (A) LOSSES FOR PERSONAL INJURIES TO OR DEATH OF EMPLOYEES OF THE BUYER, ITS CONTRACTORS, AGENTS, CONSULTANTS AND REPRESENTATIVES, AND DAMAGE TO THE PROPERTY OF BUYER OR OTHERS ACTING ON BEHALF OF BUYER; AND (B) LOSSES FOR PERSONAL INJURIES TO OR DEATH OF EMPLOYEES OF THE SELLERS GROUP OR THIRD PARTIES, AND DAMAGE TO THE PROPERTY OF THE SELLERS GROUP OR THIRD PARTIES, PROVIDED, HOWEVER, THE BUYER WILL HAVE NO RESPONSIBILITY TO INDEMNIFY THE SELLERS GROUP HEREUNDER WITH RESPECT TO ANY LOSS THAT ARISES OUT OF OR IS ATTRIBUTABLE TO THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY OF THE SELLERS GROUP.  THE FOREGOING INDEMNITY INCLUDES, AND THE PARTIES INTEND IT TO INCLUDE, AN INDEMNIFICATION OF THE SELLERS GROUP FROM AND AGAINST LOSSES ARISING OUT OF OR RESULTING, IN WHOLE OR PART, FROM THE CONDITION OF THE ASSETS OR THE SELLERS GROUP’S SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR FAULT.

 

14.4                        Notification.  As soon as reasonably practical after obtaining knowledge thereof, the indemnified Party shall notify the indemnifying Party of any claim or demand which the indemnified Party has determined has given or could give rise to a claim for indemnification under this Section 14.  Such notice shall specify the agreement, representation or warranty with respect to which the claim is made, the facts giving rise to the claim and the alleged basis for the claim, and the amount (to the extent then determinable) of liability for which indemnity is asserted.  In the event any action, suit or proceeding is brought with respect to which a Party may be liable under this Section 14, the defense of the action, suit or proceeding (including all settlement negotiations and arbitration, trial, appeal, or other proceeding) shall be at the discretion of and conducted by the indemnifying Party.  If an indemnified Party shall settle any such action, suit or proceeding without the written consent of the indemnifying Party (which consent shall not be unreasonably withheld), the right of the indemnified Party to make

 

43

 

any claim against the indemnifying Party on account of such settlement shall be deemed conclusively denied.  An indemnified Party shall have the right to be represented by its own counsel at its own expense in any such action, suit or proceeding, and if an indemnified Party is named as the defendant in any action, suit or proceeding, it shall be entitled to have its own counsel and defend such action, suit or proceeding with respect to itself at its own expense.  Subject to the foregoing provisions of this Section 14, neither Party shall, without the other Party’s written consent, settle, compromise, confess judgment or permit judgment by default in any action, suit or proceeding if such action would create or attach any liability or obligation to the other Party.  The Parties agree to make available to each other, and to their respective counsel and accountants, all information and documents reasonably available to them which relate to any action, suit or proceeding, and the Parties agree to render to each other such assistance as they may reasonably require of each other in order to ensure the proper and adequate defense of any such action, suit or proceeding.

 

14.5                        Escrow Claims.

 

(A)                               Subject to the applicable limitations set forth in this Section 14, any amounts due to Buyer Group under Section 14.1 for the recovery of indemnifiable Losses may, at Buyer’s option, be satisfied from the Indemnity Escrow Fund or directly from Sellers.

 

(B)                               In the event Sellers do not dispute a claim for indemnification made by a member of Buyer Group that pursuant to Section 14.5(A) Buyer has elected to be satisfied from the Indemnity Escrow Fund (in whole or in part), Chalker and Buyer shall provide written instructions to the Escrow Agent in accordance with the Escrow Agreement to disburse to Buyer the amount of the undisputed claim.  Upon final determination of liability (or a settlement between the Parties) with respect to any claim for indemnification made by any member of Buyer Group that pursuant to Section 14.5(A) Buyer has elected to be satisfied from the Indemnity Escrow Fund (in whole or in part), Chalker and Buyer shall provide written instructions to the Escrow Agent to disburse to Buyer the amount determined by such final determination or settlement to be due and which amount is then remaining in the Indemnity Escrow Fund.

 

(C)                               On the 180th day following the Closing Date (not counting the Closing Date but counting such 180th day), Buyer and Chalker shall instruct the Escrow Agent to release to an account designated by Chalker, or, if any Sellers instruct Chalker in writing as to their proportionate share, to one or more accounts as instructed by Sellers, from the Indemnity Escrow Fund an amount equal to two-thirds (2/3) of the original amount of the Indemnity Escrow Fund minus the aggregate amount of prior disbursements and the aggregate amount of all unsatisfied claims for

 

44

 

indemnification that Buyer Group has made against the Indemnity Escrow Fund on or before such 180th day pursuant to Section 14.

 

(D)                               On the first anniversary of the Closing Date, Buyer and Chalker shall instruct the Escrow Agent to release to an account designated by Chalker, or, if any Sellers instruct Chalker in writing as to their proportionate share, to one or more accounts as instructed by Sellers, of the positive difference (if any) between the then-remaining amount of the Indemnity Escrow Fund minus the aggregate amount of all unsatisfied claims for indemnification that Buyer Group has made on or before the date of such first anniversary against the Indemnity Escrow Fund.  Any amount remaining in the Indemnity Escrow Fund for such unsatisfied claims shall remain in escrow until a final determination of liability (or a settlement between the parties) with respect to such claims is made pursuant to this Agreement.

 

(E)                                In all other cases where a Party is entitled to a payment from the Escrow Account, Chalker and Buyer shall jointly instruct the Escrow Agent to make such payment to the Party or Parties entitled thereto.

 

15.                               MISCELLANEOUS.

 

15.1                        Casualty Loss.

 

(A)                               An event of casualty means volcanic eruptions, acts of God, terrorist action, fire, explosion, earthquake, wind storm, flood, drought, condemnation, the exercise of any right of eminent domain, confiscation and seizure (a “Casualty”).  A Casualty does not include depletion due to normal production and depreciation or failure of equipment or casing.

 

(B)                               If, prior to Closing, a Casualty occurs (or Casualties occur) which results in a reduction in the value of the Assets (“Casualty Loss”), and the Agreement is not terminated pursuant to Section 13.1(c), then this Agreement shall remain in full force and effect notwithstanding any such Casualty Loss, and, upon agreement of the Parties, (i) Sellers may retain such Asset and such Asset shall be the subject of an adjustment to the Base Purchase Price in the same manner set forth in Section 5.5 hereof, or (ii) if Buyer agrees, at the Closing, Sellers shall pay to Buyer all sums paid to Sellers by reason of such Casualty Loss; provided, however, that the Base Purchase Price shall not be adjusted by reason of such payment, and Sellers shall assign, transfer and set over unto Buyer all of the right, title and interest of Sellers in and to such Asset and any unpaid awards or other payments arising out of such Casualty Loss.

 

(C)                               For purposes of determining the diminution in value of an Asset as a result of a Casualty Loss, the Parties shall use the same methodology as applied

 

45

 

in determining the diminution in value of an Asset as a result of a Title Defect as set forth in Section 5.

 

15.2                        Confidentiality.

 

(A)                               Prior to Closing, to the extent not already public, Buyer shall exercise all due diligence in safeguarding and maintaining secure all engineering, geological and geophysical data, seismic data, reports and maps, the results and findings of Buyer with regard to its due diligence associated with the Assets (including without limitation with regard to due diligence associated with environmental and title matters) and other data relating to the Assets (collectively, the “Confidential Information”).  Buyer acknowledges that, prior to Closing, all Confidential Information shall be treated as confidential and shall not be disclosed to third parties without the prior written consent of Sellers.

 

(B)                               In the event of termination of this Agreement for any reason, Buyer shall not use or knowingly permit others to use such Confidential Information in a manner detrimental to Sellers, and will not disclose any such Confidential Information to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, except to Sellers or to a governmental agency pursuant to a valid subpoena or other order or pursuant to applicable governmental regulations, rules or statutes.

 

(C)                               The undertaking of confidentiality shall not diminish or take precedence over any separate confidentiality agreement between the Parties, including the Confidentiality Agreement.  Should this Agreement terminate, such separate confidentiality agreement shall remain in full force and effect.

 

15.3                        Competition.  Buyer acknowledges that Sellers may presently own interests or have leads, prospects, information or ideas on properties or leaseholds adjacent to, adjoining or in the vicinity of the Assets.  Unless otherwise expressly agreed to in writing, Sellers shall not be prohibited in any way from competing with Buyer or pursuing any activity or business opportunity on property not being transferred to Buyer pursuant to this Agreement.

 

15.4                        Notice.  Unless otherwise specifically provided herein, any notice, request, demand, or consent required or permitted to be given hereunder shall be in writing and delivered in person or by certified letter, with return receipt requested or by prepaid overnight delivery service, or by facsimile addressed to the Party for whom intended at the following addresses:

 

46

 

SELLERS:

 

Chalker Energy Partners III, LLC

Attn:       Douglas G. Krenek, President

777 Walker Street, Suite 2520

Houston, Texas 77002

Tel:         713-586-6858

Fax:        713-586-6859

Email:    doug@chalkerenergy.com

 

With a copy to:

 

Greenberg Traurig, LLP

Attn:       Douglas C. Atnipp

1000 Louisiana Street, Suite 1700

Houston, Texas 77002

Tel:         713-374-3515

Fax:        713-754-7515

Email:    atnippd@gtlaw.com

 

BUYER:

 

Jones Energy Holdings, LLC

Attn:       Jody Crook

807 Las Cimas Parkway

Suite 350

Austin, TX  78746

Tel:         512-328-2953 x 245

Fax:        512-328-5394

Email:    jcrook@jonesenergy.com

 

With a copy to:

 

Baker Botts LLP

Attn:       Mike Bengtson

98 San Jacinto Blvd

Suite 1500

Austin, TX  78701

Tel:         512-322-2661

Fax:        512-322-8349

Email:    mike.bengtson@bakerbotts.com

 

or at such other address as any of the above shall specify by like notice to the other.  All notices shall be deemed to have been duly given at the time of receipt by the Party to whom such notice is addressed.

 

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15.5                        Press Releases and Public Announcements.  No Party shall issue any press release or make any public announcement relating to the subject matter of this Agreement  without the prior review and prior written approval of the other Party (which approval will not be unreasonably withheld); provided, however, that any Party may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning its or its affiliates’ publicly-traded securities (in which case the disclosing Party shall use all reasonable efforts to advise the other Party, and give the other Party an opportunity to comment on the proposed disclosure, prior to making the disclosure).

 

15.6                        Personnel.  Without the other Party’s prior written consent, for a period of twelve (12) months from the Effective Time, neither Party will directly or indirectly solicit for employment any person who is now employed by the other Party or its affiliates in an executive, management, technical or professional position; provided, however, the foregoing restriction shall not apply to circumstances where a Party’s employees are responding to public solicitation for employment by the other Party.

 

15.7                        Compliance with Express Negligence Test.  THE PARTIES AGREE THAT THE INDEMNIFICATION OBLIGATIONS OF THE INDEMNIFYING PARTY SHALL BE WITHOUT REGARD TO THE NEGLIGENCE OR STRICT LIABILITY OF THE INDEMNIFIED PERSON(S), WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE.

 

15.8                        Governing Law and Dispute Resolution.  THIS AGREEMENT IS GOVERNED BY AND MUST BE CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS-OF-LAW RULE OR PRINCIPLE THAT MIGHT APPLY THE LAW OF ANOTHER JURISDICTION.  Any dispute under this Agreement and all claims, counterclaims, demands, causes of action, disputes, controversies, and other matters in question arising out of or relating to this Agreement, any provision hereof, the alleged breach of any such provision or in any way relating to the subject matter of this Agreement or the relationship between the Parties created by this Agreement, involving the Parties and/or their respective representatives (all of which are referred to herein as “Disputes”), even though some or all of such Disputes allegedly are extra-contractual in nature, whether such Disputes sound in contract, tort, or otherwise, at law or in equity, under State or federal law, whether provided by statute or the common law, for damages or any other relief, shall be resolved by binding arbitration in accordance with this Section 15.8.

 

(A)                               The validity, construction, and interpretation of this Section 15.8, and all procedural aspects of the arbitration conducted pursuant to this Section 15.8, including but not limited to, the determination of the issues that are subject to arbitration (i.e., arbitrability), the scope of the arbitrable

 

48

 

issues, allegations of “fraud in the inducement” to enter into this Agreement, or this arbitration provision, allegations of waiver, laches, delay or other defenses to arbitrability, and the rules governing the conduct of the arbitration shall be decided by the arbitrators.  The arbitration shall be administered by the American Arbitration Association (the “AAA”), and shall be conducted pursuant to the Commercial Arbitration Rules of the AAA, as modified by the Agreement.  In deciding the substance of the Parties’ Disputes, the arbitrators shall refer to the substantive laws of the State of Texas for guidance (excluding Texas choice-of-law principles that might call for the application of some other state’s law).  Notwithstanding any other provision in this Section 15.8 to the contrary, the Parties expressly agree that the arbitrators shall have absolutely no authority to award consequential, incidental, special, treble, exemplary or punitive damages of any type under any circumstances regardless of whether such damages may be available under Texas law, the law of any other state, or federal law, or under the Commercial Arbitration Rules of the AAA, the Parties hereby waiving their right, if any, to recover consequential, incidental, special, treble, exemplary or punitive damages in connection with any such Disputes.

 

(B)                               The arbitration proceeding shall be conducted in Houston, Texas, before a panel of three arbitrators appointed in accordance with the Commercial Arbitration Rules of the AAA consisting of persons from any of the following categories:  (i) attorneys having practiced in the area of oil and gas law for at least ten years, (ii) engineers with at least ten years of experience in the oil and gas industry, or (iii) certified public accountants with at least ten years of experience in the oil and gas industry dealing with joint interest billings; provided, however, that if the dispute relates solely to the final accounting statement or any other predominantly accounting issue, all three arbitrators chosen shall be accountants as set forth in the preceding clause (iii).  The arbitrators shall conduct a hearing as soon as reasonably practicable after appointment of the third arbitrator, and a final decision completely disposing of all Disputes that are the subject of the arbitration proceedings shall be rendered by the arbitrators within thirty (30) days after the hearing, to the extent reasonably practicable.  The arbitrators’ ultimate decision after final hearing shall be in writing.  In case the arbitrators award monetary damages to either Party, the arbitrators shall certify in their award that they have not included any consequential, incidental, special, treble, exemplary or punitive damages.

 

(C)                               The arbitrators shall designate a prevailing Party in their final award.  Pursuant to this determination, the arbitrators shall award to the prevailing Party its reasonable attorneys’ fees, costs and expenses of the arbitration (including the arbitrators’ fees and expenses) in full.

 

49

 

(D)          To the fullest extent permitted by law, the arbitration proceeding and the arbitrators’ award shall be maintained in confidence by the Parties.

 

(E)           The award of the arbitrators shall be binding upon the parties and final and nonappealable to the maximum extent permitted by law, and judgment thereon may be entered in a court of competent jurisdiction and enforced by any Party as a final judgment of such court.

 

15.9                        Exhibits.  The Exhibits attached to this Agreement are incorporated into and made a part of this Agreement.

 

15.10                 Fees, Expenses, Taxes and Recording.

 

(A)          Each Party shall be solely responsible for all costs and expenses incurred by it in connection with this transaction (including, but not limited to fees and expenses of its counsel and accountants) and shall not be entitled to any reimbursements from the other Party, except as otherwise provided in this Agreement.

 

(B)          Buyer shall file all necessary Tax returns and other documentation with respect to all transfer, documentary, sales, use, stamp, registration and other similar Taxes and fees, and, if required by applicable law, Sellers shall join in the execution of any such Tax returns and other documentation.  Notwithstanding anything set forth in this Agreement to the contrary, Buyer shall pay any transfer, documentary, sales, use, stamp, registration and other similar Taxes and fees incurred in connection with this Agreement and the transactions contemplated hereby.  Buyer and Sellers shall cooperate, to the extent possible, in qualifying the transactions contemplated by this Agreement for exemption from such Taxes.

 

(C)          Buyer shall, at its own cost, promptly record all instruments of conveyance and sale in the appropriate office of the state and county in which the lands covered by such instrument are located.  Buyer shall promptly file for and obtain the necessary approval of all federal, Indian, tribal or state government agencies to the assignment of the Assets.  The assignment of any state, federal or Indian tribal oil and gas leases shall be filed in the appropriate governmental offices on a form required and in compliance with the applicable rules of the applicable government agencies.  Buyer shall supply Sellers with a true and accurate photocopy reflecting the recording information of all the recorded and filed assignments within a reasonable period of time after their recording and filing.

 

15.11                 Assignment.  This Agreement or any part hereof may not be assigned by a Party without the prior written consent of the other Parties; provided, however, upon notice to the other Parties, a Party shall have the right to assign all or part of its

 

50

 

rights (but none of its obligations) under this Agreement in order to qualify transfer of the Assets as a “like-kind” exchange for federal tax purposes.  Subject to the foregoing, this Agreement is binding upon the Parties hereto and their respective successors and assigns.

 

15.12                 Entire Agreement.  This Agreement constitutes the entire agreement reached by the Parties with respect to the subject matter hereof, superseding all prior negotiations, discussions, agreements and understandings, whether oral or written, relating to such subject matter, except that the Confidentiality Agreement dated October 2, 2012, between the Parties (the “Confidentiality Agreement”), and incorporated by reference herein, shall remain in full force and effect in accordance with its terms through and until the Closing.  The Parties agree that this Agreement is made subject to the terms of the Confidentiality Agreement.

 

15.13                 Severability.  In the event that any one or more covenants, clauses or provisions of this Agreement shall be held invalid or illegal, such invalidity or unenforceability shall not affect any other provisions of this Agreement.

 

15.14                 Captions.  The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement.

 

15.15                 Counterpart Execution.  This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original, and all of which together shall constitute one and the same instrument.

 

15.16                 Waiver of Certain Damages.  Each of the Parties hereby waives and agrees not to seek consequential or punitive damages with respect to any claim, controversy, or dispute arising out of or relating to this Agreement or the breach thereof.

 

15.17                 Amendments and Waivers.  This Agreement may not be modified or amended except by an instrument in writing signed by the Parties.  Any Party hereto may, only by an instrument in writing, waive compliance by another Party with any term or provision of this Agreement on the part of such other Party hereto to be performed or complied with.  The waiver by any Party hereto of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach.

 

15.18                 Chalker as Agent.  Buyer acknowledges that Chalker shall serve as agent for the Sellers for the following limited purposes in the administration of this Agreement.  Chalker, at its sole discretion, will exclusively negotiate the terms and conditions of this Agreement including any exhibits and any ancillary documents thereto.  Chalker shall have the authority to receive all notices as required hereunder on behalf of Sellers prior to Closing.  Sellers agree that Chalker may so act on their behalf, and further agree that Chalker shall have no liability to them with respect to their actions in such capacity in the absence of bad faith or willful misconduct.  Sellers further agree that, unless otherwise specifically provided herein, Buyer

 

51

 

shall have no obligation to notify Sellers other than Chalker with respect to such matters, and Sellers hereby agree to be bound by the actions of Chalker in all respects in connection with such matters.  Sellers will execute such further instruments and take such further actions as may be necessary or advisable from time to time to carry out the intentions of the parties set forth herein. To the extent notice or other written communication is required to or from Sellers as provided for in this Agreement, all Parties hereto agree that Chalker shall act as agent for the Sellers prior to Closing.  Chalker shall act as agent for Sellers for purposes of Buyer’s payment of and entitlement to the Earnest Money, the Purchase Price, except as otherwise instructed by any individual Seller pursuant to Section 3.3(A), and any funds held in escrow pursuant to the Escrow Agreement.  Chalker shall retain and not distribute the Earnest Money until Closing or termination of this Agreement, as applicable.

 

15.19                 Right to Set Off.  Buyer shall have the right to set off any amounts owed by any Seller to Buyer against any amounts owed by Buyer to such Seller or that Buyer may hold on behalf of such Seller, including any amounts held by Buyer on behalf of such Seller under a joint interest account.

 

[Signatures begin on the following page]

 

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Executed as of the day and year first above written.

 

	
 
    	
SELLERS:
    
	
 
    	
 
    
	
 
    	
CHALKER   ENERGY PARTNERS III, LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/ Doug G.   Krenek
    
	
 
    	
 
    	
Doug   G. Krenek, President
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
BMW   INVESTMENTS, L.P.
    
	
 
    	
 
    
	
 
    	
By:
    	
BMW   Ventures, LLC,
    
	
 
    	
 
    	
its   General Partner
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   Wesley J. Mahone
    
	
 
    	
 
    	
Wesley   J. Mahone, President
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
ARK-LA-TEX   PROPERTY INVESTMENTS, LP
    
	
 
    	
 
    
	
 
    	
By:
    	
Ark-La-Tex   Property Management, LLC, it General Partner
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   Wesley J. Mahone
    
	
 
    	
 
    	
Wesley   J. Mahone, President
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
R.   BYRON ROACH, TRUSTEE, LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   R. Byron Roach
    
	
 
    	
 
    	
R.   Byron Roach, Managing Member
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
REMORA   OIL & GAS, LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Edward Kremer
    
	
 
    	
 
    	
Edward   Kremer, President
    

 

53

 

	
 
    	
SELLERS:
    
	
 
    	
 
    
	
 
    	
RAPTOR   PETROLEUM, LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Dustin Faulkner
    
	
 
    	
 
    	
Dustin   Faulkner, Director of Operations
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
EASTERN   REDBUD, LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Jason Perkins
    
	
 
    	
 
    	
Jason   Perkins, Manager
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
MICHAEL   FAULKNER
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Michael Faulkner
    
	
 
    	
 
    	
Michael   Faulkner
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
JIMMY   SUTTON
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Jimmy Sutton
    
	
 
    	
 
    	
Jimmy   Sutton
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
VICENERGY,   LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Daniel Victor
    
	
 
    	
 
    	
Daniel   Victor, Manager
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
TERRA   GEOLOGICAL, LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Chris Faulkner
    
	
 
    	
 
    	
Chris   Faulkner, President
    

 

54

 

	
 
    	
SELLERS:
    
	
 
    	
 
    
	
 
    	
JERRY   CAYLOR
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Jerry Caylor
    
	
 
    	
 
    	
Jerry   Caylor
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
LARRY   CAYLOR
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Larry Caylor
    
	
 
    	
 
    	
Larry   Caylor
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
JOHN   TALLEY
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   John Talley
    
	
 
    	
 
    	
John   Talley
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
ERICKSON   RESOURCES, LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Eric Erickson
    
	
 
    	
 
    	
Eric   Erickson, President
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
1ST   AMENDMENT TO THE RICHARD E. AND BETTY V. KREMER LIVING TRUST DATED 1/3/2002
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   John G. Kremer
    
	
 
    	
 
    	
John   G. Kremer, Trustee
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
RUSSELL   L. ROACH
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Russell L. Roach
    
	
 
    	
 
    	
Russell   L. Roach
    

 

55

 

	
 
    	
SELLERS:
    
	
 
    	
 
    
	
 
    	
M&D   EXPLORATION, LLC
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Mark Warren
    
	
 
    	
 
    	
Mark   Warren, President
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
JOE   D. NOBLES
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Joe D. Nobles
    
	
 
    	
 
    	
Joe   D. Nobles
    

 

56

 

	
 
    	
BUYER:
    
	
 
    	
 
    
	
 
    	
JONES   ENERGY HOLDINGS, LLC,
    
	
 
    	
a   Delaware limited liability company
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Jon R. Jones, Jr.
    
	
 
    	
 
    	
Jon   R. Jones, Jr.
    
	
 
    	
 
    	
Chief   Executive Officer
    

 

57

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