AGREEMENT AND PLAN OF MERGER By and Among GASCO ENERGY, INC. (“Parent”), GASCO ACQUISITION, INC. (“Merger Sub”) and BREK ENERGY CORPORATION (“Company”) Dated as of September 20, 2006
Exhibit
2.1
Page
- 1
AGREEMENT
AND PLAN OF MERGER
By
and Among
GASCO
ENERGY, INC. (“Parent”),
GASCO
ACQUISITION, INC. (“Merger
Sub”)
and
BREK
ENERGY CORPORATION (“Company”)
Dated
as
of September 20, 2006
Page
- 2
TABLE
OF CONTENTS
|
1.1
|
The
Merger
|
|
1.2
|
Effective
Time of the Merger
|
|
1.3
|
Tax
Treatment
|
|
2.1
|
Articles
of Incorporation
|
|
2.2
|
Bylaws
|
|
2.3
|
Directors
and Officers
|
|
3.1
|
Conversion
of Capital Stock
|
|
3.2
|
Dissenting
Shares
|
|
3.3
|
Surrender
and Exchange
|
|
3.4
|
Stock
Options
|
|
3.5
|
Warrants
|
|
3.6
|
No
Fractional Shares
|
|
3.7
|
Closing
|
|
4.1
|
Organization
and Qualification
|
|
4.2
|
Capitalization
|
|
4.3
|
Authority
|
|
4.4
|
Consents
and Approvals; No Violation
|
|
4.5
|
Company
SEC Reports
|
|
4.6
|
Company
Financial Statements
|
|
4.7
|
Material
Agreements
|
|
4.8
|
Absence
of Undisclosed Liabilities
|
|
4.9
|
Absence
of Certain Changes
|
|
4.10
|
Taxes
|
|
4.11
|
Litigation
|
|
4.12
|
Employee
Benefit Plans; ERISA
|
|
4.13
|
Environmental
Liability
|
|
4.14
|
Compliance
with Applicable Laws
|
|
4.15
|
Insurance
|
|
4.16
|
Labor
Matters; Employees
|
|
4.17
|
Permits
|
|
4.18
|
Properties
|
|
4.19
|
Reserve
Report
|
|
4.20
|
Operations;
Equipment
|
|
4.21
|
Prepayments;
Hedging; Calls
|
|
4.22
|
Restrictive
Agreements
|
|
4.23
|
Required
Shareholder Vote or Consent
|
|
4.24
|
Proxy
Statement/Prospectus; Registration Statement
|
|
4.25
|
Brokers
|
|
4.26
|
Tax
Matters
|
|
4.27
|
Opinion
of Financial Advisor
|
Page
- 3
|
5.1
|
Organization
and Qualification
|
|
5.2
|
Capitalization
|
|
5.3
|
Authority
|
|
5.4
|
Consents
and Approvals; No Violation
|
|
5.5
|
Parent
SEC Reports
|
|
5.6
|
Parent
Financial Statements
|
|
5.7
|
Absence
of Undisclosed Liabilities
|
|
5.8
|
Absence
of Certain Changes
|
|
5.9
|
Proxy
Statement/Prospectus; Registration Statement
|
|
5.10
|
Brokers
|
|
5.11
|
Tax
Matters
|
|
6.1
|
Conduct
of Business by Company Pending the Merger
|
|
6.2
|
Conduct
of Business by Parent Pending the Merger
|
|
7.1
|
Access
and Information
|
|
7.2
|
No
Solicitation of Transactions
|
|
7.3
|
Subsidiary
Spin Off
|
|
7.4
|
Further
Assurances
|
|
7.5
|
Cooperation
|
|
7.6
|
Publicity
|
|
7.7
|
Additional
Actions
|
|
7.8
|
Filings
|
|
7.9
|
Section
16 Matters
|
|
7.10
|
Shareholders
Meetings
|
|
7.11
|
Preparation
of the Proxy Statement/Prospectus and Registration
Statement
|
|
7.12
|
Stock
Exchange Listing
|
|
7.13
|
Affiliate
Agreements
|
|
7.14
|
Tax
Treatment
|
|
7.15
|
Expenses
|
|
8.1
|
Conditions
to the Obligation of Each Party
|
|
8.2
|
Conditions
to the Obligations of Parent and Merger Sub
|
|
8.3
|
Conditions
to the Obligations of Company
|
|
9.1
|
Survival
of Representations and Warranties
|
|
9.2
|
Survival
of Covenants and Agreements
|
Page
- 4
|
10.1
|
Termination
|
|
10.2
|
Effect
of Termination
|
|
10.3
|
Fees,
Expenses and Other Payments
|
|
11.1
|
Indemnification
|
|
11.2
|
Method
of Asserting Claims, Etc
|
|
11.3
|
Satisfaction
of Claims from Escrow Shares.
|
|
11.4
|
Instructions
to Escrow Agent
|
|
11.5
|
No
Waiver Relating to Claims for Fraud/Willful
Misconduct
|
|
12.1
|
Notices
|
|
12.2
|
Separability
|
|
12.3
|
Assignment
|
|
12.4
|
Interpretation
|
|
12.5
|
Counterparts
|
|
12.6
|
Entire
Agreement
|
|
12.7
|
Governing
Law
|
|
12.8
|
Attorneys’
Fees
|
|
12.9
|
No
Third Party Beneficiaries
|
|
12.10
|
Amendments
and Supplements
|
|
12.11
|
Extensions,
Waivers, Etc
|
Page
- 5
This
Agreement and Plan of Merger (this “Agreement”)
dated
as of September 20, 2006, by and among Gasco Energy, Inc. (“Parent”),
a
Nevada corporation, Gasco Acquisition, Inc. (“Merger
Sub”),
a
Nevada corporation and a wholly-owned subsidiary of Parent and Brek Energy
Corporation (“Company”),
a
Nevada corporation.
WHEREAS,
the respective boards of directors of each of Parent, Merger Sub and Company
deem it advisable and in the best interests of their respective shareholders
that Parent acquire Company through the merger of Merger Sub with and into
Company (the “Merger”)
upon
the terms and subject to the conditions set forth herein, and such boards of
directors have approved the Merger; and
WHEREAS,
concurrently with the execution and delivery of this Agreement, with the
approval of Company’s board of directors, Parent has entered into voting
agreements with Xxxxxxx X. Xxxxx, Xxxxxxx Xxx, Xxx Xxxxxxxx, Xxxxxxx X. Xxxxxxx,
Xxxxxx Xxxxxxx and Xxxxxx Xxxxxx (under which such party has among other things
agreed to support the Merger upon the terms and conditions set forth therein
(the “Voting Agreement”));
and
WHEREAS,
for federal income tax purposes, the parties intend that the Merger will qualify
as a reorganization under the provisions of Section 368(a) of the United States
Internal Revenue Code of 1986, as amended (the“Code”);
NOW,
THEREFORE, in consideration of the premises and the representations, warranties
and agreements contained herein, the parties hereto agree as
follows:
ARTICLE I
THE
MERGER
1.1 The
Merger
.
Upon
the terms and subject to the conditions hereof, at the Effective Time (as
defined in Section
1.2)
Merger
Sub shall merge with and into the Company and the separate corporate existence
of Merger Sub shall cease and Company shall be the surviving corporation in
the
Merger (sometimes referred to herein as the “Surviving
Corporation”).
The
Merger shall have the effects set forth in Section 92A.250 of the Nevada Revised
Statutes (the “NRS”),
including the Surviving Corporation’s succession to and assumption of all rights
and obligations of Merger Sub.
1.2 Effective
Time of the Merger
.
The
Merger shall become effective (the “Effective
Time”)
upon
the later of (i) the filing of the properly executed articles of merger relating
to the Merger with the Secretary of State of Nevada in accordance with the
NRS
(the “Articles of Merger”), and the issuance by the Secretary of State of Nevada
of a certificate of merger with respect thereto, and (ii) at such later time
as
the parties shall agree and set forth in such Articles of Merger. The filing
of
the Articles of Merger referred to above shall be made as soon as practicable
after
the
satisfaction or waiver of the conditions set forth in Article VIII.
1.3 Tax
Treatment
.
It is
intended that the Merger shall constitute a reorganization under Section 368(a)
of the Code.
Page
- 6
THE
SURVIVING CORPORATION
2.1 Articles
of Incorporation
.
At the
Effective Time, the articles of incorporation of Company in effect immediately
prior to the Effective Time shall be amended so that they are identical to
the
articles of incorporation of Merger Sub in effect immediately prior to the
Effective Time until thereafter amended in accordance with the terms thereof
and
the NRS.
2.2 Bylaws
.
The
bylaws of Merger Sub as in effect immediately prior to the Effective Time shall
be the bylaws of the Surviving Corporation at and after the Effective Time
until
thereafter amended in accordance with the terms thereof and as provided by
the
articles of incorporation of the Surviving Corporation and the NRS.
2.3 Directors
and Officers
.
(a) The
directors of Merger Sub immediately prior to the Effective Time shall be the
directors of the Surviving Corporation, each to hold office in accordance with
the articles of incorporation and bylaws of the Surviving Corporation until
their respective successors are duly elected or appointed and qualified.
(b) The
officers of Merger Sub immediately prior to the Effective Time shall be the
officers of the Surviving Corporation, each to hold office in accordance with
the articles of incorporation and bylaws of the Surviving Corporation until
their respective successors are duly elected or appointed and
qualified.
ARTICLE
III
CONVERSION
OF SHARES
3.1 Conversion
of Capital Stock As
of the
Effective Time, by virtue of the Merger and without any action on the part
of
the holders of any capital stock described below:
(a) Treasury
Stock.
All
shares of common stock of Company, par value $.001 per share (the “Company
Common Stock”),
that
are held in Company’s treasury shall be canceled and retired and no cash,
capital stock or other consideration shall be delivered in exchange
therefor.
(b) Conversion
of Company Common Stock.
Subject
to Section 3.6,
each
share of Company Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares to be canceled in accordance with Section 3.1(a)
and any
Dissenting Shares (as defined and to the extent provided in Section 3.2)
shall
be converted into (i) a number of shares of Parent’s common stock, par value
$0.0001 per share (the “Parent
Common Stock”)
equal
to 11,000,000 divided by the total number of shares of Company Common Stock
outstanding immediately prior to the Effective Time, calculated on a fully
diluted basis (the “Exchange
Ratio”).
Such
consideration, together with cash in lieu of fractional shares of Parent Common
Stock as contemplated by Section 3.6,
without
interest, is referred to herein as the “Merger
Consideration.”
All
shares of Company Common Stock, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease
to
exist, and the holder of a certificate (“Stock
Certificate”)
that,
immediately prior to the Effective Time, represented outstanding shares of
Company Common Stock shall cease to have any rights with respect thereto, except
the right to receive the Merger Consideration to be issued or paid in
consideration therefor upon the surrender of such certificate in accordance
with
Section 3.3.
Page
- 7
(c) Conversion
of Merger Sub Common Stock. Each
share of common stock of Merger Sub, par value $0.01 per share (“Merger
Sub Common Stock”),
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of the common stock of the Surviving Corporation. Each
stock
certificate of Merger Sub evidencing ownership of any such shares shall from
and
after the Effective Time evidence ownership of the same number of shares of
capital stock of the Surviving Corporation.
(d) Parent
Common Stock.
Each
share of Parent Common Stock issued and outstanding immediately prior to the
Effective Time shall not be affected by the Merger.
(e) Dividends/Distributions.
No
dividends or other distributions declared or made after the Effective Time
with
a record date after the Effective Time shall be paid to the holder of any
unsurrendered Stock Certificate with respect to the applicable Merger
Consideration represented thereby until the holder of record of such Stock
Certificate shall surrender such Stock Certificate in accordance with
Section 3.3.
Subject
to the effect of applicable laws (including escheat and abandoned property
laws), following surrender of any such Stock Certificate there shall be paid
to
the record holder of the certificate or certificates representing the Merger
Consideration issued in exchange therefor, without interest, (i) the amount
of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to Merger Consideration, and (ii) if the payment
date for any dividend or distribution payable with respect to Merger
Consideration has not occurred prior to the surrender of such Stock Certificate,
at the appropriate payment date therefor, the amount of dividends or other
distributions with a record date after the Effective Time but prior to the
surrender of such Stock Certificate and a payment date subsequent to the
surrender of such Stock Certificate.
(f) Full
Satisfaction; No Registration at Transfer.
All
Merger Consideration issued upon the surrender of Stock Certificates in
accordance with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to such Stock Certificates and Company
Common Stock formerly represented thereby, and from and after the Effective
Time
there shall be no further registration of transfers effected on the stock
transfer books of the Surviving Corporation of shares of Company Common Stock
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Stock Certificates are presented to the Surviving Corporation
for any reason, they shall be canceled and exchanged as provided in this
Article
III.
3.2 Dissenting
Shares
(a) Notwithstanding
any provision of this Agreement to the contrary, any shares of Company Common
Stock held by a holder who has demanded and perfected the right to dissent
and
obtain payment of the fair value of his shares in accordance with Section
92A.300 to 92A.500, inclusive, of the NRS and who, as of the Effective Time,
has
not effectively withdrawn such rights (“Dissenting Shares”), shall not be
converted into or represent a right to receive the Merger Consideration pursuant
to Section 3.1, but the holder thereof shall only be entitled to such rights
as
are granted by the NRS.
Page
- 8
(b) Notwithstanding
the provisions of subsection (a), if the holder
of shares of Company Common Stock who demands payment for his shares under
the
NRS shall effectively withdraw the right to dissent and obtain payment, then,
as
of the later of the Effective Time and the occurrence of such event, such
holder’s shares shall automatically be converted into and represent only the
right to receive the Merger Consideration upon surrender of the certificate
representing such shares.
(c) Company
shall give Parent and Merger Sub (i) prompt notice of any written demands for
payment of any shares of Company Common Stock, withdrawals of such demands,
and
any other instruments served pursuant to the NRS and received by Company and
(ii) the opportunity to participate in all negotiations and proceedings which
take place prior to the Effective Time with respect to demands for payment
under
the NRS. Company shall not, except with the prior written consent of Parent,
voluntarily make any payment before the Effective Time with respect to any
demands for payment of shares of Company Common Stock or offer to settle or
settle any such demands.
3.3 Surrender
and Exchange
(a) Prior
to
the Effective Time, Parent shall authorize one or more transfer agent(s)
reasonably acceptable to Company to act as exchange agent hereunder (the
“Exchange
Agent”)
with
respect to the Merger. At or prior to the Effective Time, Parent shall deposit
with the Exchange Agent for the benefit of the holders of Company Common Stock,
for exchange in accordance with this Section
3.3
through
the Exchange Agent, certificates representing the shares of Parent Common Stock
issuable pursuant to Section
3.1
in
exchange for outstanding shares of Company Common Stock (collectively, the
“Exchange
Fund”).
The
Exchange Agent shall, pursuant to irrevocable instructions, deliver the
applicable Merger Consideration in exchange for surrendered Stock Certificates
pursuant to Section
3.1
out of
the Exchange Fund. Except as contemplated by Section
3.3(e),
the
Exchange Fund shall not be used for any other purpose.
(b) Promptly
after the Effective Time, but in any event not later than five Business Days
(as
defined below) thereafter, Parent will send, or will cause the Exchange Agent
to
send, to each holder of a Stock Certificate that immediately prior to the
Effective Time represented outstanding Company Common Stock a letter of
transmittal and instructions for use in effecting the exchange of such Stock
Certificates for the Merger Consideration (which shall specify that delivery
shall be effected and risk of loss and title to the Stock Certificates shall
pass only upon delivery of the Stock Certificates to the Exchange Agent and
shall be in such form and have such other provisions as Parent may reasonably
specify) and instructions for use in effecting the exchange of such Stock
Certificates for the Merger Consideration. Provision also shall be made for
holders of Stock Certificates to procure in person immediately after the
Effective Time a letter of transmittal and instructions and to deliver in person
immediately after the Effective Time such letter of transmittal and Stock
Certificates in exchange for the applicable Merger Consideration. For purposes
of this Agreement, “Business
Day”
means
any date that is not a Saturday or Sunday or other day on which banks are
required or authorized by law to be closed in the city of New York.
Page
- 9
(c) After
the
Effective Time, Stock Certificates shall represent the right, upon surrender
thereof to the Exchange Agent, together with a duly executed and properly
completed letter of transmittal relating thereto, to receive in exchange
therefor the applicable Merger Consideration subject to any required tax
withholding, and the Stock Certificates so surrendered shall be canceled. No
interest will be paid or will accrue on any cash amount payable upon the
surrender of any such Stock Certificates. Until so surrendered, each such Stock
Certificate shall, after the Effective Time, represent for all purposes only
the
right to receive the applicable Merger Consideration.
(d) If
Merger
Consideration is to be paid to a Person other than the registered holder of
the
Stock Certificate or Certificates surrendered in exchange therefor, it shall
be
a condition to such payment that the Stock Certificate or Certificates so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the Person requesting such issuance shall pay to the Exchange
Agent any transfer or other taxes required as a result of such payment to a
Person other than the registered holder or establish to the satisfaction of
the
Exchange Agent that such tax has been paid or is not applicable. For this
Agreement, “Person”
means
an individual, a corporation, a limited liability company, a partnership, an
association, a trust or any other entity or organization, including a
Governmental Authority.
(e) Any
Merger Consideration in the Exchange Fund that remains unclaimed by the holders
of Company Common Stock one year after the Effective Time shall be returned
to
Parent, upon demand, and any such holder who has not exchanged such holder’s
Stock Certificates in accordance with this Section
3.3
prior to
that time shall thereafter look only to Parent, as a general creditor thereof,
to exchange such Stock Certificates for the Merger Consideration to which such
holder is entitled pursuant to Section
3.1.
If
outstanding Stock Certificates are not surrendered prior to six years after
the
Effective Time (or, in any particular case, prior to such earlier date on which
any Merger Consideration deliverable in respect of such Stock Certificates
would
otherwise escheat to or become the property of any governmental unit or agency),
the Merger Consideration deliverable in respect of such Stock Certificates
shall, to the extent permitted by applicable law, become the property of Parent,
free and clear of all claims or interest of any Person previously entitled
thereto. Notwithstanding the foregoing, none of Parent, Company, the Surviving
Corporation, the Exchange Agent or any other Person shall be liable to any
holder of Stock Certificates for any amount paid, or Merger Consideration
delivered, to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(f) If
any
Stock Certificate shall have been lost, stolen or destroyed, upon the making
of
an affidavit of that fact by the Person claiming such Stock Certificate to
be
lost, stolen or destroyed and, if required by the Surviving Corporation, the
posting by such Person of a bond in such reasonable amount as Parent may direct
as indemnity against any claim that may be made against it with respect to
such
Stock Certificate, the Exchange Agent will deliver in exchange for such lost,
stolen or destroyed Stock Certificate the Merger Consideration in respect
thereof pursuant to this Agreement.
Page
- 10
.All
options (the “Company
Stock Options”)
outstanding under Company’s stock option plans or agreements (the “Company
Stock Option Plans”),
shall
be or become fully vested at the Effective Time, and shall, at the option of
the
holder thereof, either remain outstanding following the Effective Time or be
immediately exercised. If a Company Stock Option is exercised, whether before
or
after the Effective Time, the holder thereof may elect to relinquish a portion
of the shares (having equivalent value) subject to such options in lieu of
paying the cash exercise price for shares received upon such exercise. At the
Effective Time, the Company Stock Options shall, by virtue of the Merger and
without any further action on the part of Company or the holder thereof, be
assumed by Parent. From and after the Effective Time, all references to Company
in the Company Stock Option Plans and the applicable stock option agreements
issued thereunder shall be deemed to refer to Parent, which shall have assumed
the Company Stock Option Plans as of the Effective Time by virtue of this
Agreement and without any further action. Each Company Stock Option assumed
by
Parent (each, a “Substitute
Option”)
shall
be exercisable upon the same terms and conditions as under the applicable
Company Stock Option Plan and the applicable option agreement issued thereunder,
except that (A) each such Substitute Option shall be immediately exercisable
for, and represent the right to acquire, that whole number of shares of Parent
Common Stock (rounded down to the nearest whole share) equal to the number
of
shares of Company Common Stock subject to such Substitute Option multiplied
by
the Exchange Ratio and (B) the exercise price per share of Parent Common Stock
shall be an amount equal to the exercise price per share of Company Common
Stock
subject to such Substitute Option in effect immediately prior to the Effective
Time divided by the Exchange Ratio (the exercise price per share, as so
determined, being rounded upward to the nearest full cent).
3.5 Warrants
.
All
warrants (the “Company
Warrants”)
outstanding that are exercisable for shares of Company Common Stock, other
than
Company Warrants that in the aggregate are exercisable for no more than 100,000
shares of Company Common Stock (the “Permitted
Warrants”),
shall
be exercised prior to the Effective Time. If a Company Warrant is exercised,
whether before or after the Effective Time, the holder thereof may elect to
relinquish a portion of the shares (having equivalent value) subject to such
Warrant in lieu of paying the cash exercise price for shares received upon
such
exercise.
At
the
Effective Time, the Permitted Warrants shall, by virtue of the Merger and
without any further action on the part of Company or the holder thereof, be
assumed by Parent. From and after the Effective Time, all references to Company
in the Permitted Warrants and the agreements governing the Permitted Warrants
shall be deemed to refer to Parent. Each Company Permitted Warrant assumed
by
Parent (each, a “Substitute
Warrant”)
shall
be exercisable upon the same terms and conditions as under the agreement
governing such warrant, except that (A) each such Substitute Warrant shall
be
immediately exercisable for, and represent the right to acquire, that whole
number of shares of Parent Common Stock (rounded down to the nearest whole
share) equal to the number of shares of Company Common Stock subject to such
Substitute Warrant multiplied by the Exchange Ratio and (B) the exercise price
per share of Parent Common Stock shall be an amount equal to the exercise price
per share of Company Common Stock subject to such Substitute Warrant in effect
immediately prior to the Effective Time divided by the Exchange Ratio (the
exercise price per share, as so determined, being rounded upward to the nearest
full cent).
Page
- 11
No
fractional shares of Parent Common Stock shall be issued in the Merger and
fractional share interests shall not entitle the owner thereof to vote or to
any
rights of a stockholder of Parent. All holders of fractional shares of Parent
Common Stock shall be entitled to receive, in lieu thereof, an amount in cash
equal to such fraction times the average of the closing prices of Parent Common
Stock on the American Stock Exchange over 20 consecutive trading days ending
on
the third trading day before the Closing Date (the “Parent
Market Price”).
3.7 Closing
The
closing of the transactions contemplated by this Agreement (the “Closing”)
shall
take place at a location mutually acceptable to Company and Parent, at 10:00
a.m., local time, on the day (the “Closing
Date”)
on
which all of the conditions set forth in Article
VIII
are
satisfied or waived (other than conditions that can be satisfied only by
delivery of certificates or other documents at the Closing and where such
delivery is in the control of a party hereto), or at such other date and time
as
Company and Parent shall otherwise agree.
At the
conclusion of the Closing on the Closing Date, the parties hereto shall cause
the Articles of Merger to be filed with the Secretary of State of the State
of
Nevada.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF COMPANY
Company
represents and warrants to Parent and Merger Sub as follows:
4.1 Organization
and Qualification
(a) Each
of
Company and its Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its state of organization, is duly
qualified to do business as a foreign corporation and is in good standing in
the
jurisdictions set forth in Section 4.1(a) of the disclosure letter delivered
to
Parent contemporaneously with the execution hereof (the “Company
Disclosure Schedule”),
which
includes each jurisdiction in which the character of the properties owned by
it
or the nature of its business makes such qualification necessary, except in
jurisdictions, if any, where the failure to be so qualified would not result
in
a Company Material Adverse Effect (as defined below). Each of Company and its
Subsidiaries has all requisite corporate power and authority to own, use or
lease its properties and to carry on its business as it is now being conducted.
Each of Company and its Subsidiaries has made available to Parent a complete
and
correct copy of its articles of incorporation and bylaws (or similar
organizational documents), each as amended to date, and such copies as so
delivered are in full force and effect.
(b) For
purposes of this Agreement, (i) a “Company
Material Adverse Effect”
shall
mean any change, effect, event, occurrence or state of facts that is or could
reasonably be expected to be materially adverse to the condition (financial
or
otherwise), business, properties or results of operations of Company and its
Subsidiaries, taken as a whole, or that could reasonably be expected to
materially impair the ability of Company to perform its obligations under this
Agreement or to consummate the Merger; provided that none of the following,
alone or in combination, shall constitute a Company Material Adverse Effect
or
be considered in determining whether a Company Material Adverse Effect has
occurred or will occur: any change, effect, event, occurrence, state of facts
or
development arising out of, resulting from or relating to (x) the economy in
general, (y) the oil and gas exploration and production industry in general
(including, without limitation, changes in commodity prices, general market
prices and regulatory changes) or (z) the transactions contemplated by this
Agreement or the announcement thereof; and (ii) “Subsidiary”
shall
mean, with respect to any party, any corporation or other organization whether
incorporated or unincorporated, of which (x) at least a majority of the
securities or other interests having by their terms voting power to elect a
majority of the board of directors or others performing similar functions with
respect to such corporation or other organization is directly or indirectly
beneficially owned or controlled by such party or by any one or more of its
subsidiaries, or by such party and one or more of its subsidiaries, or
(y) such party or any Subsidiary of such party is a general partner of a
partnership or a manager of a limited liability company. For purposes of this
Agreement, the term Subsidiary, when used with respect to the Company, shall
not
include those entities listed as Excluded Subsidiaries in Section 4.1(a) of
the
Company Disclosure Schedules (each an “Excluded
Subsidiary”).
Page
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(a) The
authorized capital stock of Company consists of 300,000,000 shares of Company
Common Stock. As of the date of this Agreement, (i) 61,098,090 shares of Company
Common Stock were issued and outstanding, (ii) no shares of Company Common
Stock
were held in treasury, (iii) Company Stock Options to acquire an aggregate
of
1,580,000 shares of Company Common Stock were outstanding under all stock option
plans and agreements of Company or its Subsidiaries, and (iv) Company Warrants
to purchase 18,534,460 shares of Company Common Stock were outstanding and
no
warrants exist to purchase capital stock of any subsidiary of the Company.
All
such outstanding shares have been validly issued and are fully paid,
non-assessable and free of preemptive rights. Except as set forth above and
in
Section 4.2(a) of the Company Disclosure Schedule, there are no outstanding
subscriptions, options, rights, warrants, convertible securities, stock
appreciation rights, phantom equity, or other agreements or commitments
obligating Company to issue, transfer, sell, redeem, repurchase or otherwise
acquire any shares of its capital stock of any class. Section 4.2(a) of the
Company Disclosure Schedule sets forth a detailed list of all Company Stock
Option, Company Warrants and all other rights to acquire shares of the Company’s
capital stock.
(b) Company
is, directly or indirectly, the record and beneficial owner of all of the
outstanding shares of capital stock of each of its Subsidiaries, there are
no
irrevocable proxies with respect to any such shares, and no equity securities
of
any of its Subsidiaries are or may become required to be issued because of
any
options, warrants, rights to subscribe to, calls or commitments, understandings
or other agreements of any character whatsoever relating to, or securities
or
rights convertible into or exchangeable or exercisable for, shares of any
capital stock of any Subsidiary of the Company. All of such shares so owned
by
Company are validly issued, fully paid and nonassessable and are owned by it
free and clear of all Liens (as defined herein).
(c) Except
as
set forth in Section 4.2(c)
of the
Company Disclosure Schedule, there are not as of the date hereof and there
will
not be at the Effective Time any shareholder agreements, voting trusts or other
agreements or understandings to which Company is a party relating to the voting
of any shares of the capital stock of Company that will limit in any way the
solicitation of proxies by or on behalf of Company from, or the casting of
votes
by, the shareholders of Company with respect to the Merger. There are no
restrictions on Company to vote the stock of any of its
Subsidiaries.
Page
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Company
has the requisite corporate power and authority to execute and deliver this
Agreement and the Voting Agreement and, subject to obtaining the Company
Shareholders’ Approval and other approvals as expressly contemplated by this
Agreement, to consummate the transactions contemplated hereby and thereby.
The
execution, delivery and performance of this Agreement and the Voting Agreement
and (subject to obtaining the Company Shareholders’ Approval) the consummation
of the transactions contemplated hereby and thereby have been duly and validly
authorized by Company’s board of directors, and no other corporate proceedings
on the part of Company are necessary to authorize this Agreement or the Voting
Agreement or to consummate the transactions contemplated hereby or thereby,
other than obtaining the Company Shareholders’ Approval and other approvals as
expressly contemplated by this Agreement. This Agreement has been, and the
Voting Agreements to which Company is or will be a party are, or upon execution
will be, duly and validly executed and delivered by Company and, assuming the
due authorization, execution and delivery hereof and thereof by the other
parties hereto and thereto and, with respect to this Agreement, obtaining the
Company Shareholders’ Approval, constitute or upon execution will constitute,
valid and binding obligations of Company enforceable against Company in
accordance with their respective terms, except as such enforceability may be
subject to the effects of bankruptcy, insolvency, reorganization, moratorium
and
other laws relating to or affecting the rights of creditors and of general
principles of equity (the “Enforceability
Exception”).
4.4 Consents
and Approvals; No Violation
The
execution and delivery of this Agreement, the consummation of the transactions
contemplated hereby and the performance by Company of its obligations hereunder
will not:
(a) subject
to obtaining the Company Shareholders’ Approval and other approvals as expressly
contemplated by this Agreement, conflict with any provision of Company’s
articles of incorporation or bylaws or the articles of incorporation or bylaws
(or other similar organizational documents) of any of its
Subsidiaries;
(b) require
any consent, waiver, approval, order, authorization or permit of, or
registration, filing with or notification to any governmental or regulatory
authority or agency (a “Governmental
Authority”),
except for (i) the filing of the Articles of Merger with the Secretary of
State of Nevada and the issuance by the Secretary of State of Nevada of a
certificate of merger with respect thereto, (ii) the filing of the
Registration Statement and the Proxy Statement/Prospectus with the Securities
and Exchange Commission (“SEC”)
in
accordance with the Securities Exchange Act of 1934, as amended (the
“Exchange
Act”),
(iii) such consents, approvals, orders, authorizations and regulations,
declarations and filings as may be required under applicable state securities
or
blue sky laws, and (iv) approvals and registrations that, if not obtained or
made, would not be reasonably expected to have a Company Material Adverse
Effect;
(c) result
in
any violation of or the breach of or constitute a default (with notice or lapse
of time or both) under, or give rise to any right of termination, cancellation
or acceleration or guaranteed payments or a loss of a material benefit under,
any of the terms, conditions or provisions of any note, lease, mortgage,
license, agreement or other instrument or obligation to which Company or any
of
its Subsidiaries is a party or by which Company or any of its Subsidiaries
or
any of their respective properties or assets may be bound, except for such
violations, breaches, defaults, or rights of termination, cancellation or
acceleration, or losses as to which requisite waivers or consents have been
obtained or which, individually or in the aggregate, would not reasonably be
expected to result in a Company Material Adverse Effect;
Page
- 14
(d) violate
the provisions of any order, writ, injunction, judgment, decree, statute, rule
or regulation applicable to Company or any Subsidiary of Company;
or
(e) result
in
the creation of any lien, mortgage, pledge, security interest, encumbrance,
claim or charge of any kind (collectively, “Liens”)
upon
any properties or assets or on any shares of capital stock of Company or its
Subsidiaries under any agreement or instrument to which Company or any of its
Subsidiaries is a party or by which Company or any of its Subsidiaries or any
of
their properties or assets is bound.
Except
as
set forth in Section 4.5 of the Company Disclosure Schedule, Company has filed
with the SEC, and has heretofore made available (provided that all documents
filed by Company electronically with the SEC and publicly available prior to
the
date hereof shall be deemed available) to Parent true and complete copies of,
each form, registration statement, report, schedule, proxy or information
statement and other document (including exhibits and amendments thereto, but
excluding preliminary materials), required to be filed with the SEC since
January 1, 2003 under the Securities Act of 1933, as amended (the “Securities
Act”)
or the
Exchange Act (collectively, the “Company
SEC Reports”).
As of
their respective dates, such Company SEC Reports (a) complied in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act, as the case may be, and the applicable rules and regulations promulgated
thereunder, and (b) did not contain any untrue statement of a material fact
or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
4.6 Company
Financial Statements
Each
of
the audited consolidated financial statements and unaudited consolidated interim
financial statements of Company (including any related notes and schedules)
included (or incorporated by reference) in the Company SEC Reports, have been
prepared in accordance with generally accepted accounting principles
(“GAAP”)
applied on a consistent basis (except as may be indicated in the notes thereto
and subject, in the case of quarterly financial statements, to normal and
recurring year-end adjustments) and fairly present, in conformity with GAAP
applied on a consistent basis (except as may be indicated in the notes thereto),
the consolidated financial position of Company and its Subsidiaries as of the
date thereof and the consolidated results of operations and cash flows (and
changes in financial position, if any) of Company and its Subsidiaries for
the
periods presented therein (subject to normal year-end adjustments and the
absence of financial footnotes in the case of any unaudited interim financial
statements). As of the Effective Time, no long-term liabilities of the Company
and its Subsidiaries shall exist, the current assets of the Company and its
Subsidiaries, on a consolidated basis, shall not be less than the current
liabilities of the Company and its Subsidiaries, on a consolidated basis, and
the total liabilities of the Company and its Subsidiaries, on a consolidated
basis, shall not exceed $100,000.
Page
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Except
as
set forth in Section 4.7 of the Company Disclosure Schedule (each a
“Material
Agreement”),
the
Company is not a party to or bound by any:
(a) employment
agreement or employment contract;
(b) agreement,
contract or other arrangement with (1) any Affiliate of the Company, or (2)
any
current or former officer, director or employee of the Company, or any Affiliate
of the Company;
(c) agreement,
contract or other instrument under which the Company has borrowed any money
from, or issued any note, bond, debenture or other evidence of indebtedness
to,
any person or any other note, bond, debenture or other evidence of indebtedness
issued to any person;
(d) agreement,
contract or other instrument under which (1) any person has directly or
indirectly guaranteed indebtedness, liabilities or obligations of the Company
or
(2) the Company has directly or indirectly guaranteed indebtedness, liabilities
or obligations of any Person;
(e) agreement,
contract or other instrument under which the Company has, directly or
indirectly, made any advance, loan, extension of credit or capital contribution
to, or other investment in, any Person;
(f) agreement
or instrument providing for indemnification of any person with respect to
liabilities relating to any current or former business of the Company or any
predecessor person; or
(g) other
agreement, contract, lease, license, commitment or instrument to which the
Company is a party or by or to which it or any of the assets of the Company
is
bound or subject which constitutes an obligation of the Company in excess of
$5,000.
4.8 Absence
of Undisclosed Liabilities
.
Except
as disclosed in the Company SEC Reports (including the financial statements
and
notes thereto included therein) filed prior to the date of this Agreement or
in
Section 4.8 of the Company Disclosure Schedule, neither Company nor any of
its
Subsidiaries has incurred any liabilities or obligations of any nature
(contingent or otherwise).
4.9 Absence
of Certain Changes
Except
as
contemplated by this Agreement, as set forth in Section 4.9 of the Company
Disclosure Schedule or as disclosed in the Company SEC Reports filed prior
to
the date of this Agreement, since December 31, 2005 (a) Company and its
Subsidiaries have conducted their business in all material respects in the
ordinary course consistent with past practices, (b) there has not been any
change or development, or combination of changes or developments that,
individually or in the aggregate, would have a Company Material Adverse Effect
or that would constitute a violation of the covenants contained in Section
6.1,
(c) there has not been any declaration, setting aside or payment of any dividend
or other distribution with respect to any shares of capital stock of Company
or
any repurchase, redemption or other acquisition by Company or any of its
Subsidiaries of any outstanding shares of capital stock or other securities
of,
or other ownership interests in, Company or any of its Subsidiaries, (d) there
has not been any amendment of any term of any outstanding security of Company
or
any of its Subsidiaries, and (e) there has not been any change in any method
of
accounting or accounting practice by Company or any of its Subsidiaries, except
for any such change required because of a concurrent change in GAAP or to
conform a Subsidiary’s accounting policies and practices to those of
Company.
Page
- 16
Except
as
otherwise disclosed in Section 4.10 of the Company Disclosure Schedule and
for
matters that would have no Company Material Adverse Effect:
(a) Company
and each of its Subsidiaries have timely filed all material Tax Returns required
by applicable law to be filed by any of them prior to or as of the Closing
Date.
All such Tax Returns and any amendments thereto are or will be true, complete
and correct in all material respects. Company and each of its Subsidiaries
have
paid all Taxes (except for Taxes that are being contested in good faith by
appropriate proceedings), due with respect to any period ending prior to or
as
of the Closing Date. Company and each of its Subsidiaries have complied in
all
material respects with all applicable laws, rules and regulations relating
to
the payment and withholding of Taxes.
(b) No
Audit
by a Tax Authority is pending with respect to any Tax Returns filed by, or
Taxes
due from, Company or any of its Subsidiaries. No material deficiency or
adjustment for any Taxes has been proposed, asserted or assessed against Company
or any of its Subsidiaries. There are no liens for Taxes upon the assets of
Company or any of its Subsidiaries, except liens for current Taxes not yet
delinquent.
(c) Neither
Company nor any of its Subsidiaries has given any waiver of statutes of
limitations relating to the payment of Taxes, has executed any powers of
attorney with respect to Tax matters, or has agreed to any extension of time
with respect to a Tax assessment or deficiency, which will be outstanding as
of
the Closing Date. Neither Company nor any of its Subsidiaries is currently
the
beneficiary of any extension of time within which to file any Tax
Return.
(d) None
of
the Company or any of its Subsidiaries has a liability for Taxes of any Person
(other than Company and its Subsidiaries) under 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.
(e) Neither
Company nor any of its Subsidiaries has distributed stock of another Person,
or
has had its stock distributed by another Person in a transaction that was
purported or intended to be governed in whole or in part by Code Sections 355
or
361 within the two-year period preceding the date of this
Agreement.
(f) None
of
Company or its Subsidiaries will be required to include any item of income
in,
or exclude any item of deduction from, taxable income for any taxable period
(or
portion thereof) ending after the Closing Date as a result of any: (i) change
in
method of accounting for a taxable period ending on or prior to the Closing
Date; (ii) “closing agreement” as described in Code Section 7121 (or any
corresponding or similar provision of state, local, or foreign income Tax law)
executed on or prior to the Closing Date; or (iii) open transaction disposition
made on or prior to the Closing Date.
Page
- 17
(g) Neither
Company nor any of its Subsidiaries has participated, within the meaning of
Treasury Regulation Section 1.6011-4(c), in (i) any “listed transaction” within
the meaning of Code Section 6011 and the Treasury Regulation thereunder (or
any
corresponding or similar provision of state, local, or foreign income Tax law)
or (ii) any transaction required to be registered with the Internal Revenue
Service under Code Section 6111 and the Treasury Regulation thereunder (or
any
corresponding or similar provision of state, local, or foreign income Tax law).
(h) As
used
in this Agreement, (i) “Audit”
shall
mean any audit, assessment of Taxes, other examination by any tax attorney,
proceeding or appeal of such proceeding relating to Taxes; (ii) “Taxes”
shall
mean all Federal, state, local and foreign taxes, and other assessments of
a
similar nature (whether imposed directly or through withholding), including
any
interest, additions to tax, or penalties applicable thereto; (iii) “Tax
Authority”
shall
mean the Internal Revenue Service and any other domestic or foreign Governmental
Authority responsible for the administration of any Taxes; and (iv)
“Tax
Returns”
shall
mean all Federal, state, local and foreign tax returns, declarations,
statements, reports, schedules, forms and information returns and any amended
Tax Return.
Except
as
disclosed in the Company SEC Reports or Section 4.11 of the Company Disclosure
Schedule, there is no suit, claim, action, proceeding or investigation pending
or, to Company’s knowledge, threatened against or directly affecting Company or
any of its Subsidiaries. Except as disclosed in the Company SEC Reports or
Section 4.11 of the Company Disclosure Schedule, there is not in existence
any
order, judgment or decree of any court or other tribunal or other agency
enjoining or requiring Company or any of its Subsidiaries to take any action
of
any kind with respect to its business, assets or properties. Notwithstanding
the
foregoing, no representation or warranty in this Section
4.11
is made
with respect to Environmental Laws, which are covered exclusively by the
provisions set forth in Section
4.13.
4.12 Employee
Benefit Plans; ERISA
(a) Neither
the Company nor any of its Subsidiaries has or at any time had any employee
benefit plans and arrangements (written or oral) of any type (including plans
described in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended (“ERISA”)),
including severance pay, sick leave, vacation pay, salary continuation for
disability, compensation agreements, retirement, deferred compensation, bonus,
long-term incentive, stock option, stock purchase, hospitalization, medical
insurance, life insurance and scholarship programs sponsored, maintained,
contributed to, or obligated to contribute to by Company or any of its
Subsidiaries. Neither Company nor any of its Subsidiaries maintains or has
any
fixed or contingent liability with respect to, any employee benefit, pension
or
other plan that is subject to ERISA.
Page
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Except
as
set forth in Section 4.13 of the Company Disclosure Schedule, to the knowledge
of Company:
(a) The
businesses of Company and its Subsidiaries, other than with respect to the
oil
and gas interests for which Parent serves as operator (the “Parent
Properties”),
have
been and are operated in material compliance with all federal or state statutes,
regulations or rules relating to the regulation or protection or human health,
safety or the environment, including the Clean Water Act, the Oil Pollution
Act,
the Safe Drinking Water Act, the Resource Conservation & Recovery Act, the
Clean Air Act, the Comprehensive Environmental Response, Compensation and
Liability Act, the Hazardous Materials Transportation Act, the Solid Waste
Disposal Act, the Toxic Substances Control Act and the Emergency Planning and
Community Right-to-Know Act, each as amended and currently in effect (together,
the “Environmental
Laws”).
(b) Neither
Company nor any of its Subsidiaries has caused or allowed the generation,
treatment, storage, discharge, release, disposal or transport of any pollutant,
contaminant or waste that is regulated by any Governmental Authority or any
material that is defined as a “hazardous waste,” “hazardous substance,”
“hazardous material,” “restricted hazardous waste,” “toxic waste,” or “toxic
pollutant” under any Environmental Laws (“Hazardous
Substances”)
at any
of its properties or facilities other than the Parent Properties, except in
material compliance with all Environmental Laws.
(c) Neither
Company nor any of its Subsidiaries has received any written notice from any
Governmental Authority or third party alleging or concerning any material
violation by Company or any of its Subsidiaries of, or responsibility or
liability of Company or any of its Subsidiaries under, any Environmental Law.
There are no pending, or to the knowledge of Company, threatened, claims, suits,
actions, proceedings or investigations with respect to the businesses or
operations of Company or any of its Subsidiaries alleging or concerning any
material violation of or responsibility or liability under any Environmental
Law
that, if adversely determined, could reasonably be expected to have a Company
Material Adverse Effect.
(d) Company
and its Subsidiaries are in possession of and in material compliance with all
material approvals, permits, licenses, registrations and similar type
authorizations from, all Governmental Authorities under all Environmental Laws
with respect to the operation of the businesses of Company and its Subsidiaries
other than the Parent Properties.
(e) No
pending claims have been asserted or threatened to be asserted against Company
or its Subsidiaries for any personal injury or property damage alleged to arise
out of exposure to Hazardous Substances used, handled, generated, transported
or
disposed by Company or its Subsidiaries at property owned or operated by Company
or its Subsidiaries that is not a Parent Property.
4.14 Compliance
with Applicable Laws
Company
and each of its Subsidiaries hold all material approvals, licenses, permits,
registrations and similar type authorizations necessary for the lawful conduct
of their respective businesses, as now conducted, and such businesses are not
being, and neither Company nor any of its Subsidiaries has received any notice
from any Person that any such business has been or is being conducted in
violation of any law, ordinance or regulation, including any law, ordinance
or
regulation relating to occupational health and safety; provided, however,
notwithstanding the foregoing, no representation or warranty in this
Section
4.14
is made
with respect to Environmental Laws, which are covered exclusively by the
provisions set forth in Section
4.13.
Page
- 19
Company
has made available to Parent a true, complete and correct copy of each insurance
policy or the binder therefor relating to Company or its Subsidiaries that
are
currently in effect. With respect to each insurance policy or binder none of
Company, any of its Subsidiaries or any other party to the policy is in breach
or default thereunder (including with respect to the payment of premiums or
the
giving of notices), and Company does not know of any occurrence or any event
which (with notice or the lapse of time or both) would constitute such a breach
or default or permit termination, modification or acceleration under any such
policy, except for such breaches or defaults which, individually or in the
aggregate, would not result in a Company Material Adverse Effect. Section 4.15
of the Company Disclosure Schedule describes any self-insurance arrangements
affecting Company or its Subsidiaries.
4.16 Labor
Matters; Employees
(a) Except
as
otherwise set forth in Section 4.16(a) of the Company Disclosure Schedule,
there
are no employees of Company or any of its Subsidiaries.
(b) Each
of
Company and its Subsidiaries is in material compliance with all laws, rules,
regulations and orders relating to the employment of labor, including all such
laws, rules, regulations and orders relating to wages, hours, collective
bargaining, discrimination, civil rights, safety and health, workers’
compensation and the collection and payment of withholding or social security
taxes and similar taxes.
4.17 Permits
Immediately
prior to the Effective Time, Company and its Subsidiaries will hold all of
the
permits, licenses, certificates, consents, approvals, entitlements, plans,
surveys, relocation plans, environmental impact reports and other authorizations
of Governmental Authorities (collectively, “Permits”)
required or necessary to construct, own, operate, use and/or maintain their
respective properties and conduct their operations as currently conducted,
except for such Permits, the lack of which, individually or in the aggregate,
would not have a Company Material Adverse Effect; provided, however, that
notwithstanding the foregoing, no representation or warranty in this
Section
4.17
is made
with respect to Permits issued pursuant to Environmental Laws, which are covered
exclusively by the provisions set forth in Section
4.13.
4.18 Properties
(a) Except
for goods and other property sold, used or otherwise disposed of since
December 31, 2005 in the ordinary course of business and except as set
forth in Section 4.18
of
the
Company Disclosure Schedule, Company and its Subsidiaries have Good and
Marketable Title (as defined below), in and to all real properties, interests
in
real properties and other assets (including Company’s Oil and Gas Interests (as
defined in Section 4.19(b)
but
excluding personal property) included as an asset on the Company Balance Sheet
and good and defensible title to all personal properties, interests in
properties and other assets included as an asset on the Company Balance Sheet,
free and clear of any Liens, except (i) Liens associated with obligations
reflected in the Company Balance Sheet, (ii) Liens for current taxes not yet
due
and payable, (iii) materialman’s, mechanic’s, repairman’s, employee’s,
contractor’s, operator’s, and other similar liens, charges or encumbrances
arising in the ordinary course of business to the extent (A) the same have
not
yet become due and payable, (B) payment is being withheld as provided by law
or
(C) their validity is being contested in good faith by appropriate action and
(iv) all rights to consent by, required notices to, filings with, or other
actions by any Governmental Authority in connection with the sale or conveyance
of oil and gas leases or interests if they are customarily obtained subsequent
to the sale or conveyance. Except as set forth in Section
4.18
of the
Company Disclosure Schedule, all leases and other agreements pursuant to which
Company or any of its Subsidiaries leases or otherwise acquires or obtains
operating rights affecting any real or personal property are in good standing
and are valid and enforceable in accordance with their terms, and all royalties,
rentals and other payments due by Company or any of its Subsidiaries to any
lessor of any such oil and gas leases have been paid, except in each case as
would not, individually or in the aggregate, reasonably be expected to have
a
Company Material Adverse Effect. All such agreements and leases are listed
on
Section 4.18 of the Company Disclosure Schedule. There have been no material
changes proposed in the production allowables for any xxxxx included in the
Oil
and Gas Interests of Company and its Subsidiaries.
Page
- 20
(b) “Good
and Marketable Title”
means
such title that: (i) is deducible of record (from the records of the applicable
parish or county or (A) in the case of federal leases, from the records of
the
applicable office of the Minerals Management Service or Bureau of Land
Management, (B) in the case of Indian leases, from the applicable office of
the
Bureau of Indian Affairs, (C) in the case of state leases, from the records
of
the applicable state land office) or is assignable to Company or its
Subsidiaries out of an interest of record because of the performance by Company
or its Subsidiaries of all operations required to earn an enforceable right
to
such assignment; (ii) is free from reasonable doubt to the end that a prudent
purchaser engaged in the business of owning, developing and operating producing
oil and gas properties with knowledge of all of the facts and their legal
bearing would be willing to accept and pay full value for the same and a prudent
lender would be willing to lend against it as collateral without discount for
title matters; (iii) except as set forth in Section
4.18(b)(iii)
of the
Company Disclosure Schedule, entitles Company or its Subsidiaries to receive
a
percentage of Hydrocarbons produced, saved and marketed from such well or
property not less than the interest set forth in the Company Reserve Report
with
respect to each proved property evaluated therein under the caption “Net Revenue
Interest” or “NRI” without reduction during the life of such property except as
stated in the Company Reserve Report; (iv) obligates Company and its
Subsidiaries to pay costs and expenses relating to each such proved property
in
an amount not greater than the interest set forth under the caption “Working
Interest” or “WI” in the Company Reserve Report with respect to such property
without increase over the life of such property except as shown on the Company
Reserve Report; and (v) does not restrict the ability of Company or its
Subsidiaries to use the properties as currently intended.
(a) Company
has furnished Parent estimates of Company’s oil and gas reserves attributable to
Company’s Oil and Gas Interests (as defined below) as of January 1, 2006 in
reports as described in Section 4.19
of the
Company Disclosure Schedule (collectively, the “Company
Reserve Report”).
The
factual, non-interpretive data on which the Company Reserve Report was based
for
purposes of estimating the oil and gas reserves set forth therein and in any
supplement thereto or update thereof, each of which has been furnished to
Parent, was accurate in all material respects, and Company has no knowledge
of
any material errors in such information that existed at the time such
information was provided. There has been no change in respect of the matters
addressed in the Company Reserve Report that would reasonably be expected to
have a Company Material Adverse Effect. Set forth in Section 4.19
of the
Company Disclosure Schedule is a list of all material Oil and Gas Interests
of
Company that were included in the Company Reserve Report that have been disposed
of prior to the date of this Agreement. To the knowledge of Company, and based
on the information given to Company by third-party operators for all xxxxx
not
operated by Company, the Company Payout Balances (as defined below) for each
of
the xxxxx as used in the Company Reserve Report were accurate in all material
respects as of the dates to which Company had calculated them.
Page
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(b) For
purposes of this Agreement, “Oil
and Gas Interests”
means
(i) direct and indirect interests in and rights with respect to oil, gas,
mineral, and related properties and assets of any kind and nature, direct or
indirect, including working, leasehold and mineral interests and operating
rights and royalties, overriding royalties, production payments, net profit
interests and other nonworking interests and nonoperating interests; (ii) all
interests in rights with respect to oil, condensate, gas, casinghead gas and
other liquid or gaseous hydrocarbons (collectively, “Hydrocarbons”)
and
other minerals or revenues therefrom, all contracts in connection therewith
and
claims and rights thereto (including all oil and gas leases, operating
agreements, unitization and pooling agreements and orders, division orders,
transfer orders, mineral deeds, royalty deeds, oil and gas sales, exchange
and
processing contracts and agreements, and in each case, interests thereunder),
surface interests, fee interests, reversionary interests, reservations, and
concessions; (iii) all easements, rights of way, licenses, permits, leases,
and
other interests associated with, appurtenant to, or necessary for the operation
of any of the foregoing; and (iv) all interests in equipment and machinery
(including xxxxx, well equipment and machinery), oil and gas production,
gathering, transmission, treating, processing, and storage facilities (including
tanks, tank batteries, pipelines, and gathering systems), pumps, water plants,
electric plants, gasoline and gas processing plants, refineries, and other
tangible personal property and fixtures associated with, appurtenant to, or
necessary for the operation of any of the foregoing.
(c) For
purposes of this Agreement, “Company
Payout Balances”
means
the status, as of the dates of Company’s calculations, of the recovery by
Company or a third party of a cost amount specified in the contract relating
to
a well out of the revenue from such well where the net revenue interest of
Company therein will be reduced or increased when such amount has been
recovered.
4.20 Operations;
Equipment
Except
as
otherwise set forth in Section 4.20
of the
Company Disclosure Schedule, to the knowledge of the Company:
(a) all
xxxxx
included in the Oil and Gas Interests of Company and its Subsidiaries (other
than xxxxx that the Parent operates) have been drilled and (if completed)
completed, operated and produced in accordance with good oil and gas field
practices and in compliance in all respects with applicable oil and gas leases
and applicable Laws, except where any failure or violation has not had, and
would not reasonably be expected to have, a Company Material Adverse Effect;
and
(b) all
equipment and machinery currently in use and material to the operation of the
Oil and Gas Interests of Company and of its Subsidiaries (other than such
equipment and machinery used in the operation of Parent Properties) as conducted
prior to the date hereof are in reasonable working condition, ordinary wear
and
tear excepted.
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As
of the
date hereof, except as set forth in Section 4.21
of the
Company Disclosure Schedule:
(a) neither
Company nor any of the Company Subsidiaries has any outstanding obligations
for
the delivery of Hydrocarbons attributable to any of the Oil and Gas Interests
of
Company or any of its Subsidiaries in the future on account of prepayment,
advance payment, take-or-pay or similar obligations without then or thereafter
being entitled to receive full value therefor;
(b) neither
Company nor any of the Company Subsidiaries is bound by any future, 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, currencies or
securities (each, a “Hedging
Transaction”);
and
(c) no
Person
has any call upon, option to purchase, or similar rights with respect to the
production of Hydrocarbons attributable to the Oil and Gas Interests of Company
and its Subsidiaries, except for any such call, option or similar right at
market prices, and upon consummation of the transactions contemplated by this
Agreement, Company or its Subsidiaries will have the right to market production
from the Oil and Gas Interests of Company and its Subsidiaries on terms no
less
favorable than the terms upon which such production is currently being
marketed.
4.22 Restrictive
Agreements
.
Except
as set forth in Section 4.22
of the
Company Disclosure Schedule, neither Company nor any of its Subsidiaries is
a
party to, or bound by, any contract, agreement or similar arrangement which
upon
the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby would purport to restrict, by virtue of a
confidentiality, non-competition, territorial exclusivity or other provision,
the scope of the business or operation of Parent or any of its affiliates (other
than Company and its Subsidiaries) geographically or otherwise.
4.23 Required
Shareholder Vote or Consent
The
only
vote of the holders of any class or series of Company’s capital stock that will
be necessary to consummate the Merger and the other transactions contemplated
by
this Agreement is the approval by the holders of a majority of the outstanding
shares of Company Common Stock, on the applicable record date (the “Company
Shareholders’ Approval”).
4.24 Proxy
Statement/Prospectus; Registration Statement
None
of
the information to be supplied by Company for inclusion in (a) the proxy
statement (the “Proxy
Statement/Prospectus”)
to be
filed by Parent and Company with the SEC, and any amendments or supplements
thereto, or (b) the Registration Statement on Form S-4 (the “Registration
Statement”)
to be
filed by Parent with the SEC in connection with the Merger, and any amendments
or supplements thereto, will, at the respective times such documents are filed,
and, in the case of the Proxy Statement/Prospectus, at the time the Proxy
Statement/Prospectus or any amendment or supplement thereto is first mailed
to
shareholders of Company and Parent, at the time such shareholders vote on
approval and adoption of this Agreement and at the Effective Time, and, in
the
case of the Registration Statement, when it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state
any material fact required to be made therein or necessary in order to make
the
statements made therein, in light of the circumstances under which they were
made, not misleading.
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No
broker, finder or investment banker is entitled to any brokerage, finder’s fee
or other fee or commission payable by Company or any of its Subsidiaries in
connection with the transactions contemplated by this Agreement based upon
arrangements made by and on behalf of Company or any of its
Subsidiaries.
4.26 Tax
Matters
Neither
Company nor, to the knowledge of Company, any of its affiliates has taken or
agreed to take any action that would prevent the Merger from constituting a
reorganization within the meaning of Section 368(a) of the Code.
4.27 Opinion
of Financial Advisor
The
board
of directors of Company has received the opinion of Gemini Partners, Inc. to
the
effect that, as of the date of such opinion, the aggregate consideration to
be
received by the holders of the Company Common Stock is fair, from a financial
point of view, to such holders.
ARTICLE
V
REPRESENTATIONS
AND WARRANTIES
OF
PARENT AND MERGER SUB
Parent
and Merger Sub hereby jointly and severally represent and warrant to Company
as
follows:
5.1 Organization
and Qualification
(a) Each
of
Parent and its Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its state of organization, is duly
qualified to do business as a foreign corporation and is in good standing in
the
jurisdictions in which it currently conducts business, other than such
jurisdictions in which the failure to be so qualified would not have a Parent
Material Adverse Effect (defined below). Each of Parent and its Subsidiaries
has
all requisite corporate power and authority to own, use or lease its properties
and to carry on its business as it is now being conducted. Each of Parent and
its Subsidiaries has made available to Company a complete and correct copy
of
its certificate of incorporation and bylaws (or similar organizational
documents), each as amended to date, and such copies as so delivered are in
full
force and effect.
(b) For
purposes of this Agreement, a “Parent
Material Adverse Effect”
shall
mean any change, effect, event, occurrence or state of facts that is or could
reasonably be expected to be materially adverse to the condition (financial
or
otherwise), business, properties or results of operations of Parent and its
Subsidiaries, taken as a whole, or that could reasonably be expected to
materially impair the ability of Parent to perform its obligations under this
Agreement or to consummate the Merger; provided that none of the following,
alone or in combination, shall constitute a Parent Material Adverse Effect
or be
considered in determining whether a Parent Material Adverse Effect has occurred
or will occur: any change, effect, event, occurrence, state of facts or
development arising out of, resulting from or relating to (x) the economy in
general, (y) the oil and gas exploration and production industry in general
(including, without limitation, changes in commodity prices, general market
prices and regulatory changes) or (z) the transactions contemplated by this
Agreement or the announcement thereof.
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(a) The
authorized capital stock of Parent consists of 300,000,000 shares of Parent
Common Stock, of which 85,894,802 shares were issued and outstanding as of
June
30, 2006 and 20,000 shares of preferred stock of Parent, par value $.0001 per
share, none of which were issued and outstanding as of June 30, 2006. As of
June
30, 2006, stock options to acquire an aggregate of 9,728,088 shares of Parent
Common Stock were outstanding under all stock option plans and agreements of
Parent. The authorized capital stock of Merger Sub consists of 100 shares of
Merger Sub Common Stock, all of which are issued and outstanding and all of
which are held by Parent. All such outstanding shares have been validly issued
and are fully paid, nonassessable and free of preemptive rights. Except as
set
forth above, there are no outstanding subscriptions, options, rights, warrants,
convertible securities, stock appreciation rights, phantom equity, or other
agreements or commitments (including “rights plans” or “poison pills”)
obligating Parent or its Subsidiaries to issue, transfer, sell, redeem,
repurchase or otherwise acquire any shares of its capital stock of any
class.
(b) Parent
is, directly or indirectly, the record and beneficial owner of all of the
outstanding shares of capital stock of each Parent Subsidiary, there are no
irrevocable proxies with respect to any such shares, and no equity securities
of
any Parent Subsidiary are or may become required to be issued because of any
options, warrants, rights to subscribe to, calls or commitments, understandings
or other agreements of any character whatsoever relating to, or securities
or
rights convertible into or exchangeable or exercisable for, shares of any
capital stock of any Parent Subsidiary. All of such shares so owned by Parent
are validly issued, fully paid and nonassessable and are owned by it free and
clear of all Liens.
(c) The
shares of Parent Common Stock to be issued pursuant to the Merger have been
duly
authorized and, upon their issuance in the Merger in accordance with the terms
of this Agreement, will be validly issued, fully paid and nonassessable, free
and clear of all Liens and will be issued in compliance with all applicable
federal and state securities laws.
5.3 Authority
Each
of
Parent and Merger Sub has the requisite corporate power and authority to execute
and deliver this Agreement and the Voting Agreement and to consummate the
transactions contemplated hereby and thereby. The execution, delivery and
performance of this Agreement and the Voting Agreement and the consummation
of
the transactions contemplated hereby and thereby have been duly and validly
authorized by the board of directors of Parent and the board of directors and
shareholders of Merger Sub, and no other corporate proceedings on the part
of
Parent or Merger Sub are necessary to authorize this Agreement or the Voting
Agreements to which any of them are or will be a party or to consummate the
transactions contemplated hereby or thereby. This Agreement and the Voting
Agreement has been duly and validly executed and delivered by Parent and Merger
Sub and, assuming the due authorization, execution and delivery hereof and
thereof by the other parties hereto and thereto and, with respect to this
Agreement, constitute valid and binding obligations of Parent and Merger Sub
enforceable against Parent and Merger Sub in accordance with their respective
terms, except for the Enforceability Exceptions.
Page
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The
execution and delivery of this Agreement, the consummation of the transactions
contemplated hereby and the performance by Parent and Merger Sub of its
obligations hereunder will not:
(a) conflict
with any provision of the certificate of incorporation or bylaws of Parent
or
Merger Sub or the certificates of incorporation or bylaws (or other similar
organizational documents) of any of Parent’s Subsidiaries;
(b) require
any consent, waiver, approval, order, authorization or permit of, or
registration, filing with or notification to any Governmental Authority, except
for (i) the filing of the Articles of Merger with the Secretary of State of
Nevada and the issuance by the Secretary of State of Nevada of a certificate
of
merger with respect thereto, (ii) the filing of the Registration Statement
and the Proxy Statement/Prospectus with the SEC in accordance with the Exchange
Act, (iii) such consents, approvals, orders, authorizations and
regulations, declarations and filings as may be required under applicable state
securities or blue sky laws, and (vi) approvals and registrations that, if
not
obtained or made, would not be reasonably expected to have a Parent Material
Adverse Effect;
(c) result
in
any violation of or the breach of or constitute a default (with notice or lapse
of time or both) under, or give rise to any right of termination, cancellation
or acceleration or guaranteed payments or a loss of a material benefit under,
any of the terms, conditions or provisions of any note, lease, mortgage,
license, agreement or other instrument or obligation to which Parent or any
of
its Subsidiaries is a party or by which Parent or any of its Subsidiaries or
any
of their respective properties or assets may be bound, except for such
violations, breaches, defaults, or rights of termination, cancellation or
acceleration, or losses as to which requisite waivers or consents have been
obtained or which, individually or in the aggregate, would not reasonably be
expected to result in a Parent Material Adverse Effect;
Page
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(d) violate
the provisions of any order, writ, injunction, judgment, decree, statute, rule
or regulation applicable to Parent or any of its Subsidiaries; or
(e) result
in
the creation of any Lien upon any material properties or assets or on any shares
of capital stock of Parent or any of its Subsidiaries under any agreement or
instrument to which Parent or any of its Subsidiaries is a party or by which
Parent or any of its Subsidiaries or any of their properties or assets is
bound.
Parent
has filed with the SEC, and has heretofore made available (provided that all
documents filed by Parent electronically with the SEC and publicly available
prior to the date hereof shall be deemed available) to Company true and complete
copies of, each form, registration statement, report, schedule, proxy or
information statement and other document (including exhibits and amendments
thereto), including its Annual Reports to Stockholders incorporated by reference
in certain of such reports (other than preliminary materials), required to
be
filed with the SEC since January 1, 2003 under the Securities Act or the
Exchange Act (collectively, the “Parent
SEC Reports”).
As of
their respective dates, such Parent SEC Reports (a) complied in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act, as the case may be, and the applicable rules and regulations promulgated
thereunder, and (b) did not contain any untrue statement of a material fact
or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
5.6 Parent
Financial Statements
Each
of
the audited consolidated financial statements and unaudited consolidated interim
financial statements of Parent (including any related notes and schedules)
included (or incorporated by reference) in the Parent SEC Reports, have been
prepared in accordance with GAAP applied on a consistent basis (except as may
be
indicated in the notes thereto and subject, in the case of quarterly financial
statements, to normal and recurring year-end adjustments) and fairly present,
in
conformity with GAAP applied on a consistent basis (except as may be indicated
in the notes thereto), the consolidated financial position of Parent and its
Subsidiaries as of the date thereof and the consolidated results of operations
and cash flows (and changes in financial position, if any) of Parent and its
Subsidiaries for the periods presented therein (subject to normal year-end
adjustments and the absence of financial footnotes in the case of any unaudited
interim financial statements).
5.7 Absence
of Undisclosed Liabilities
Except
as
disclosed in the Parent SEC Reports (including the financial statements and
notes thereto included therein) filed prior to the date of this Agreement,
neither Parent nor any of its Subsidiaries has incurred any liabilities or
obligations of any nature (contingent or otherwise) that would have a Parent
Material Adverse Effect other than liabilities incurred in the ordinary course
of business after March 31, 2006 and liabilities under this
Agreement.
5.8 Absence
of Certain Changes
Except
as
contemplated by this Agreement or as disclosed in the Parent SEC Reports filed
prior to the date of this Agreement, since December 31, 2005 (a) Parent and
its
Subsidiaries have conducted their business in all material respects in the
ordinary course consistent with past practices, (b) there has not been any
change or development, or combination of changes or developments that,
individually or in the aggregate, would have a Parent Material Adverse Effect,
(c) there has not been any declaration, setting aside or payment of any dividend
or other distribution with respect to any shares of capital stock of Parent
or
any repurchase, redemption or other acquisition by Parent or any of its
Subsidiaries of any outstanding shares of capital stock or other securities
of,
or other ownership interests in, Parent or any of its Subsidiaries, (d) there
has not been any amendment of any term of any outstanding security of Parent
or
any of its Subsidiaries, and (e) there has not been any change in any method
of
accounting or accounting practice by Parent or any of its Subsidiaries, except
for any such change required because of a concurrent change in GAAP or to
conform a Subsidiary’s accounting policies and practices to those of
Parent.
Page
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None
of
the information to be supplied by Parent for inclusion in (a) the Proxy
Statement/Prospectus to be filed by Company and Parent with the SEC, and any
amendments or supplements thereto, or (b) the Registration Statement to be
filed
by Parent with the SEC in connection with the Merger, and any amendments or
supplements thereto, will, at the respective times such documents are filed,
and, in the case of the Proxy Statement/Prospectus, at the time the Proxy
Statement/Prospectus or any amendment or supplement thereto is first mailed
to
shareholders of Company and Parent, at the time such shareholders vote on
approval and adoption of this Agreement and at the Effective Time, and, in
the
case of the Registration Statement, when it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state
any material fact required to be made therein or necessary in order to make
the
statements made therein, in light of the circumstances under which they were
made, not misleading.
5.10 Brokers
No
broker, finder or investment banker is entitled to any brokerage, finder’s fee
or other fee or commission payable by Parent or any of its Subsidiaries in
connection with the transactions contemplated by this Agreement based upon
arrangements made by and on behalf of Parent or any of its
Subsidiaries.
5.11 Tax
Matters
Neither
Parent nor, to the knowledge of Parent, any of its affiliates has taken or
agreed to take any action that would prevent the Merger from constituting a
reorganization within the meaning of Section 368(a) of the Code.
ARTICLE
VI
CONDUCT
OF BUSINESS PENDING THE MERGER
6.1 Conduct
of Business by Company Pending the Merger
From
the
date hereof until the Effective Time, unless Parent shall otherwise agree in
writing, or except as set forth in the Company Disclosure Schedule or as
otherwise contemplated by this Agreement, Company shall conduct, and shall
cause
each of its Subsidiaries to conduct its business in the ordinary course
consistent with past practice and shall use and shall cause each of its
Subsidiaries to use, all reasonable efforts to preserve intact their business
organizations and relationships with third parties, subject to the terms of
this
Agreement. Except as set forth in the Company Disclosure Schedule or as
otherwise provided in this Agreement, and without limiting the generality of
the
foregoing, from the date hereof until the Effective Time, without the written
consent of Parent, which consent shall not be unreasonably
withheld:
(a) Neither
Company nor its Subsidiaries will adopt changes to its articles of incorporation
or bylaws (or similar organizational documents);
(b) Company
will not, and will not permit any of its Subsidiaries to (i) declare, set aside
or pay any dividend or other distribution with respect to any shares of capital
stock of Company or its Subsidiaries (except for the distribution of
intercompany dividends from direct or indirect wholly owned subsidiaries);
(ii)
split, combine or reclassify any of its capital stock or issue or authorize
the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or (iii) purchase or otherwise acquire,
directly or indirectly, any shares of its capital stock;
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(c) Company
will not, and will not permit any of its Subsidiaries to, merge or consolidate
with any other Person or acquire assets of, or an equity interest in, any other
Person, or enter a new line of business or commence business outside of its
existing areas of operation;
(d) Except
as
set forth in Section 6.1(d) of the Company Disclosure Schedule, Company will
not, and will not permit any of its Subsidiaries to, sell, lease, license or
otherwise surrender, relinquish or dispose of any assets or properties (other
than among Company and its direct and indirect wholly owned Subsidiaries, except
the Excluded Subsidiaries) (other than sales of Hydrocarbons) in the ordinary
course of business and other than the distribution, sale, transfer or
liquidation of the Excluded Subsidiaries;
(e) Company
will not settle any material Audit, make or change any material Tax election
or
file any material amended Tax Return;
(f) Except
as
otherwise permitted by this Agreement, Company will not issue any securities
(whether through the issuance or granting of options, warrants, rights or
otherwise and except pursuant to existing obligations disclosed in the Company
SEC Reports or the Company Disclosure Schedule, including dividends on the
Company Preferred Stock), enter into any amendment of any term of any
outstanding security of Company or of any of its Subsidiaries;
(g) Company
will not change any method of accounting or accounting practice by Company
or
any of its Subsidiaries, except for any such change required by
GAAP;
(h) Neither
Company nor any of its Subsidiaries will incur any indebtedness for borrowed
money or guarantee any indebtedness or liabilities of any other
Person.
(i) Neither
Company nor any of its Subsidiaries will become bound by any agreement that
would constitute a Material Agreement.
(j) Neither
Company nor any of its Subsidiaries will become bound or obligated to
participate in any operation, or consent to participate in any operation, with
respect to any direct and indirect interests in and rights with respect to
oil,
gas, mineral, and related properties and assets of any kind and nature, direct
or indirect, including working, leasehold and mineral interests and operating
rights and royalties, overriding royalties, production payments, net profit
interests and other non-working interests and non-operating interests
(collectively, “Oil
and Gas Interests”)
that
constitutes a capital cost unless the operation is a currently existing
obligation of Company or any of its Subsidiaries or necessary to extend,
preserve or maintain an Oil and Gas Interest;
(k) Neither
Company nor any of its Subsidiaries will (i) enter into any futures, hedge,
swap, collar, put, call, floor, cap, option or other contracts that are intended
to benefit from or reduce or eliminate the risk of fluctuations in the price
of
commodities, including Hydrocarbons or securities, or (ii) enter into any fixed
price commodity sales agreements with a duration of more than three
months;
(l) Neither
Company nor any of its Subsidiaries shall (i) adopt, amend (other than
amendments that reduce the amounts payable by Company or any Subsidiary, or
amendments required by law) or assume an obligation to contribute to any
employee benefit plan or arrangement of any type or collective bargaining
agreement or enter into any employment, severance or similar contract with
any
Person (including contracts with management of Company or any Subsidiaries
that
might require that payments be made upon consummation of the transactions
contemplated hereby) or amend any such existing contracts to increase any
amounts payable thereunder or benefits provided thereunder, (ii) engage in
any
transaction (either acting alone or in conjunction with any Company Benefit
Plan
or trust created thereunder) in connection with which Company or any Subsidiary
could be subjected (directly or indirectly) to either a civil penalty assessed
pursuant to subsections (c), (i) or (l) of Section 502 of ERISA or a tax imposed
pursuant to Chapter 43 of Subtitle D of the Code, (iii) terminate any Company
Benefit Plan in a manner, or take any other action with respect to any Company
Benefit Plan, that could result in the liability of Company or any Subsidiary
to
any Person, (iv) take any action that could adversely affect the qualification
of any Company Benefit Plan or its compliance with the applicable requirements
of ERISA, (v) fail to make full payment when due of all amounts which, under
the
provisions of any Company Benefit Plan, any agreement relating thereto or
applicable law, Company or any Subsidiary are required to pay as contributions
thereto or (vi) fail to file, on a timely basis, all reports and forms required
by federal regulations with respect to any Company Benefit Plan;
Page
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(n) Company
shall take such action as is necessary to ensure that as of the Effective Time,
no long-term liabilities of the Company and its Subsidiaries will exist, the
current assets of the Company and its Subsidiaries, on a consolidated basis,
will not be less than the current liabilities of the Company and its
Subsidiaries, on a consolidated basis, and the total liabilities of the Company
and its Subsidiaries, on a consolidated basis, will not exceed
$100,000.
6.2 Conduct
of Business by Parent Pending the Merger
.
Except
as
otherwise provided in this Agreement, from the date hereof until the Effective
Time, without the written consent of Company, which consent shall not be
unreasonably withheld:
(a) Parent
shall not adopt changes to its articles of incorporation or bylaws that would
alter the terms of the Parent Common Stock;
(b) Parent
shall not split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in
substitution for shares of its capital stock; and
(c) Parent
will not agree or commit to do any of the foregoing.
ARTICLE
VII
ADDITIONAL
AGREEMENTS
7.1 Access
and Information
The
parties shall each afford to the other and to the other’s financial advisors,
legal counsel, accountants, consultants, financing sources, and other authorized
representatives access during normal business hours throughout the period prior
to the Effective Time to all of its books, records, properties, contracts,
leases, plants and personnel and, during such period, each shall furnish
promptly to the other (a) a copy of each report, schedule and other document
filed or received by it pursuant to the requirements of federal or state
securities laws, and (b) all other information as such other party reasonably
may request, provided that no investigation pursuant to this Section
7.1
shall
affect any representations or warranties made herein or the conditions to the
obligations of the respective parties to consummate the Merger. The
Confidentiality Agreement dated April 12, 2006 between Parent and Company
(the “Confidentiality
Agreement“)
shall
survive the execution and delivery of this Agreement.
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(a) From
the
execution of this Agreement until the termination hereof, Company agrees that
(i) it and its officers, directors and employees shall not and (ii) it
shall use reasonable best efforts to ensure that its agents and representatives
shall not, (A) directly or indirectly, initiate, solicit or knowingly
encourage any Acquisition Proposal or (B) engage in negotiations with, or
disclose any information relating to Company or provide access to their
properties, books or records to, any Person relating to an Acquisition Proposal.
Company agrees that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any Persons conducted
heretofore with respect to any Acquisition Proposal. For purposes of this
Agreement, “Acquisition
Proposal”
means
any proposal or offer to acquire all or a material portion of Company’s capital
stock or assets whether by merger, purchase of assets, tender offer, exchange
offer or otherwise, other than the transactions contemplated by this Agreement.
Nothing in this Section
7.2
shall
permit Company to terminate this Agreement except as specifically provided
in
Section
10.1.
(b) Nothing
contained in this Agreement shall prevent Company or its board of directors
from
(i) taking and disclosing to its shareholders a position contemplated by
Rule 14d-9 and Rule 14e-2(a) promulgated under the Exchange Act,
(ii) furnishing information, including nonpublic information to, or
entering into negotiations with, any Person that has indicated its willingness
to make an unsolicited bona fide Acquisition Proposal, if (x) in the good faith
judgment of the Company’s board of directors, taking into account the likelihood
of consummation and after consultation with its financial advisors, such
Acquisition Proposal is reasonably likely to result in a Superior Third Party
Offer and (y) the board of directors of the Company, after consultation with
its
outside legal counsel, determines in good faith that the failure to do so would
be inconsistent with its fiduciary obligations under applicable law. For
purposes of this Agreement, “Superior
Third Party Offer”
means
an unsolicited bona fide Acquisition Proposal made by a third party, which
proposal contains terms and conditions that are, in the reasonable judgment
of
the board of directors of the Company (based on, among other things, the advice
of its or their independent financial advisors and outside counsel), more
favorable to the Company than the terms and conditions of this Agreement, taking
into account, without limitation, terms with respect to payment of the total
consideration upon completion of the transaction and all legal, regulatory
and
other aspects of such Acquisition Proposal.
(c) Company
shall notify Parent promptly after receipt of any Acquisition Proposal or any
indication of interest in making an Acquisition Proposal after the date hereof,
which notice shall include the identity of the Person making such Acquisition
Proposal or indication and the material terms and conditions of such Acquisition
Proposal (including any subsequent material amendment or modification to such
terms and conditions). Company shall keep Parent informed in all material
respects of the status and details of any such Acquisition Proposal.
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(i) the
Company has not breached in any material respect its obligations under this
Section
7.2;
and
(ii) the
Company contemporaneously terminates this Agreement pursuant to Section
10.1(h).
7.3 Subsidiary
Spin Off
Prior
to
the Effective Time, the Company shall cause each of the Excluded Subsidiaries
to
either distributed to the Company’s shareholders, transferred to a third party
or liquidated, each in accordance with all applicable Laws, including all
applicable state and federal securities laws (the “Spin-Off”).
7.4 Further
Assurances
Each
party hereto agrees to use all reasonable efforts to obtain all consents and
approvals and to do all other things necessary for the consummation of the
transactions contemplated by this Agreement. The parties agree to take such
further action to deliver or cause to be delivered to each other at the Closing
and at such other times thereafter as shall be reasonably agreed by such
additional agreements or instruments as any of them may reasonably request
for
the purpose of carrying out this Agreement and the transactions contemplated
hereby. The parties shall afford each other access to all information,
documents, records and personnel who may be necessary for any party to comply
with laws or regulations (including the filing and payment of Taxes and handling
Tax Audits), to fulfill its obligations with respect to indemnification
hereunder or to defend itself against suits or claims of others. Parent and
Company shall duly preserve all files, records or any similar items of Parent
or
Company received or obtained as a result of the Merger with the same care and
for the same period of time as it would preserve its own similar
assets.
7.5 Cooperation
Subject
to compliance with applicable law, from the date hereof until the Effective
Time, each of the parties hereto shall confer on a regular and frequent basis
with one or more representatives of the other parties to report operational
matters of materiality and the general status of ongoing operations and shall
promptly provide the other party or its counsel with copies of all filings
made
by such party with any Governmental Authority in connection with this Agreement
and the transactions contemplated hereby.
7.6 Publicity
Neither
Company, Parent nor any of their respective affiliates shall issue or cause
the
publication of any press release or other announcement with respect to the
Merger, this Agreement or the other transactions contemplated hereby without
the
prior consultation of the other party, except as may be required by law or
by
the rules and regulations of any national securities exchange and will use
reasonable efforts to provide copies of such release or other announcement
to
the other party hereto, and give due consideration to such comments as such
other party may have, prior to such release.
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Subject
to the terms and conditions of this Agreement, each of the parties hereto agrees
to use all reasonable efforts to take, or cause to be taken, all action and
to
do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations, or to remove any injunctions or other
impediments or delays, to consummate and make effective the Merger and the
other
transactions contemplated by this Agreement, subject, however, to the
appropriate vote of the shareholders of Company.
7.8 Filings
Each
party hereto shall make all filings required to be made by such party in
connection herewith or desirable to achieve the purposes contemplated hereby,
and shall cooperate as needed with respect to any such filing by any other
party
hereto.
7.9 Section
16 Matters
Prior
to
the Closing, the board of directors of Company shall, by resolution duly adopted
by such board of directors or a duly authorized committee thereof, approve
and
adopt, for purposes of exemption from “short-swing” profit liability under
Section 16(b) of the Exchange Act, (i) the disposition and the conversion at
the
Effective Time of the shares of Company Common Stock held by officers, directors
and affiliates of Company into shares of Parent Common Stock as a result of
the
conversion of shares in the Merger, (ii) the assumption by Parent of the Company
Stock Options of the officers, directors and affiliates of Company, and (iii)
the deemed grant of options to purchase Parent Common Stock under the Company
Stock Options (as converted pursuant to Section
3.4)
for
purposes of Section 16(b) of the Exchange Act. Such resolution shall set forth
the name of applicable “insiders” for purposes of Section 16 of the Exchange Act
and, for each “insider,” the number of shares of Company Common Stock to be
converted into shares of Parent Common Stock at the Effective Time, the number
and material terms of the Company Stock Options to be assumed by Parent at
the
Effective Time, and that the approval is being granted to exempt the transaction
under Rule 16b-3 under the Exchange Act.
7.10 Shareholders
Meetings
Company
shall, as promptly as reasonably practicable after the date hereof (i) take
all
steps reasonably necessary to call, give notice of and hold either an annual
or
special meeting for the shareholders (the “Company
Shareholder Meeting”)
for
the purpose of securing the Company Shareholders’ Approval, (ii) distribute to
its shareholders the Proxy Statement/Prospectus in accordance with applicable
federal and state law and with its articles of incorporation and bylaws, (iii)
subject to applicable fiduciary duties, use all reasonable efforts to solicit
from its shareholders proxies in favor of the approval and adoption of this
Agreement and the transactions contemplated hereby and to secure the Company
Shareholders’ Approval, and (iv) cooperate and consult with Parent with respect
to each of the foregoing matters.
7.11 Preparation
of the Proxy Statement/Prospectus and Registration Statement
As
promptly as practicable after the execution of this Agreement, Parent and
Company shall prepare and file with the SEC a preliminary version of the Proxy
Statement/Prospectus and will use all reasonable efforts to respond to the
comments of the SEC in connection therewith and to furnish all information
required to prepare the definitive Proxy Statement/Prospectus. At any time
from
(and including) the initial filing with the SEC of the Proxy
Statement/Prospectus, Parent shall file with the SEC the Registration Statement
containing the Proxy Statement/Prospectus so long as Parent shall have provided
to Company a copy of the Registration Statement containing the Proxy
Statement/Prospectus at least ten days prior to any filing thereof and any
supplement or amendment at least two days prior to any filing thereof. Subject
to the foregoing sentence, the date that the Registration Statement is filed
with the SEC shall be determined jointly by Parent and Company. Each of Parent
and Company shall use all reasonable efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing. Parent shall also take any action (other than qualifying to do
business in any jurisdiction in which it is not now so qualified or filing
a
general consent to service of process in any jurisdiction) required to be taken
under any applicable state securities laws in connection with the issuance
of
Parent Common Stock in the Merger and Company shall furnish all information
concerning Company and the holders of shares of Company capital stock as may
be
reasonably requested in connection with any such action. Promptly after the
effectiveness of the Registration Statement, each of Parent and Company shall
cause the Proxy Statement/Prospectus to be mailed to its respective
shareholders, and if necessary, after the definitive Proxy Statement/Prospectus
shall have been mailed, promptly circulate amended, supplemented or supplemental
proxy materials and, if required in connection therewith, re-solicit proxies
or
written consents, as applicable. Parent shall advise Company and Company shall
advise Parent, as applicable, promptly after it receives notice thereof, of
the
time when the Registration Statement shall become effective or any supplement
or
amendment has been filed, the issuance of any stop order, the suspension of
the
qualification of the Parent Common Stock for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy Statement/
Prospectus or the Registration Statement or comments thereon and responses
thereto or requests by the SEC for additional information.
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Parent
shall use all reasonable efforts to cause the Parent Common Stock to be issued
in the Merger and to be issued upon the exercise of options and warrants to
purchase Parent Common Stock contemplated hereby to be approved for listing
on
the American Stock Exchange prior to the Effective Time, subject to official
notice of issuance.
7.13 Affiliate
Agreements
Company
shall identify in a letter to Parent all persons who are, on the date hereof
or
prior to the Effective Time, “affiliates” of Company, as such term is used in
Rule 145 under the Securities Act. Company shall use all reasonable efforts
to
cause its respective affiliates to deliver to Parent not later than five days
prior to the Effective Time, a written agreement substantially in the form
attached hereto as Exhibit
7.13.
7.14 Tax
Treatment
Each
party hereto shall use all reasonable efforts to cause the Merger to qualify,
and shall not take, and shall use all reasonable efforts to prevent any
subsidiary of such party from taking, any actions which could prevent the Merger
from qualifying, as a reorganization under the provisions of Section 368(a)
of
the Code.
7.15 Expenses
If
the
Closing occurs, all Expenses (as defined below) incurred by the parties hereto
shall be borne solely and entirely by the Company. If the Closing does not
occur, all Expenses incurred by the parties hereto shall be borne solely and
entirely by the party that has incurred such Expenses; provided that all
Expenses (excluding the fees and expenses of accountants, legal counsel and
investment bankers) related to preparing, printing, filing and mailing the
Registration Statement, the Proxy Statement/Prospectus and all SEC and other
regulatory filing fees incurred in connection with the Registration Statement,
Proxy Statement/Prospectus shall be borne equally by Parent and Company.
“Expenses”
as
used
in this Agreement shall include all reasonable out-of-pocket costs, fees and
expenses (including, without limitation, all reasonable fees and expenses of
counsel, accountants, investment bankers, financial advisors, experts and
consultants to a party hereto and its affiliates) incurred by a party or on
its
behalf in connection with, arising out of or related to this Agreement, the
Merger or the consummation of all of the transactions contemplated hereby
(including, without limitation, the preparation, printing, filing and mailing
of
the Registration Statement, the Proxy Statement/Prospectus and the solicitation
of shareholder approvals).
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CONDITIONS
TO CONSUMMATION OF THE MERGER
8.1 Conditions
to the Obligation of Each Party
The
respective obligations of each party to effect the Merger shall be subject
to
the fulfillment at or prior to the Effective Time of the following
conditions:
(a) The
Company Shareholders’ Approval shall have been obtained.
(b) No
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Merger shall be in effect;
provided, however, that prior to invoking this condition, each party shall
have
complied fully with its obligations under Section
7.7
and, in
addition, shall use all reasonable efforts to have any such decree, ruling,
injunction or order vacated, except as otherwise contemplated by this
Agreement.
(c) The
Registration Statement with respect to the issuance of all Parent Common Stock
in the Merger shall have become effective in accordance with the provisions
of
the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceeding for such purpose
shall be pending before or threatened by the SEC.
(d) All
permits, authorizations, consents, or approvals required to be obtained prior
to
the Effective Time from any Governmental Authority in connection with the
consummation of the transactions contemplated hereby by Parent, Merger Sub
or
Company shall have been made or obtained (as the case may be) except where
the
failure to obtain such permits, authorizations, consents, or approvals would
not
be reasonably likely to result in a Parent Material Adverse Effect (assuming
the
Merger has taken place).
8.2 Conditions
to the Obligations of Parent and Merger Sub
The
obligation of Parent and Merger Sub to effect the Merger is subject to the
satisfaction at or prior to the Effective Time of the following
conditions:
(a) Company
shall have performed in all material respects its obligations under this
Agreement required to be performed by it at or prior to the Effective Time,
and
Parent shall have received a certificate signed on behalf of Company by a duly
authorized officer of the Company to such effect.
(b) Each
of
the representations and warranties of Company contained in this Agreement
(without giving effect to any materiality qualifications or limitations therein
or any references therein to Company Material Adverse Effect), shall be true
and
correct, in each case as of the Effective Time as though made on and as of
the
Effective Time, except (i) for such failures, individually or in the aggregate,
to be true and correct that would not reasonably be expected to have a Company
Material Adverse Effect; (ii) that those representations and warranties that
address matters only as of a particular date shall remain true and correct
as of
such date, subject to the qualifications in (i) above; and (iii) for changes
expressly permitted as contemplated by the terms of this Agreement, and Parent
shall have received a certificate signed on behalf of Company by a duly
authorized officer of the Company to such effect.
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(c) From
the
date of this Agreement through the Effective Time, there (i) shall not have
occurred any change in the financial condition, business or operations of
Company and its Subsidiaries, taken as a whole, that would constitute a Company
Material Adverse Effect and (ii) shall not have occurred any change in the
capitalization of the Company from that set forth in Section 4.2, other than
as
required by the terms of this Agreement.
(d) Company
shall have provided to Parent on the Closing Date, documentation evidencing
Company’s compliance with its obligations set forth under Section
6.1(n).
(e) The
number of shares of Company Common Stock held by holders who either (i) have
exercised their right to dissent and obtain payment for their shares or (ii)
retain the ability to exercise such right to dissent and obtain payment shall
not exceed 1.0% of the outstanding shares of Company Common Stock.
8.3 Conditions
to the Obligations of Company
The
obligation of Company to effect the Merger is subject to the satisfaction at
or
prior to the Effective Time of the following conditions:
(a) Each
of
Parent and Merger Sub shall have performed in all material respects its
obligations under this Agreement required to be performed by it at or prior
to
the Effective Time, and Company shall have received a certificate signed on
behalf of Parent by a duly authorized officer of the Parent to such
effect.
(b) Each
of
the representations and warranties of Parent and Merger Sub contained in this
Agreement (without giving effect to any materiality qualifications or
limitations therein or any references therein to Parent Material Adverse Effect)
shall be true and correct, in each case as of the Effective Time as though
made
on and as of the Effective Time, except (i) for such failures, individually
or
in the aggregate, to be true and correct that would not reasonably be expected
to have a Parent Material Adverse Effect; (ii) that those representations and
warranties that address matters only as of a particular date shall remain true
and correct as of such date, subject to the qualifications in (i) above; and
(iii) for changes expressly permitted as contemplated by the terms of this
Agreement, and Company shall have received a certificate signed on behalf of
Parent by a duly authorized officer of the Parent to such effect.
(c) From
the
date of this Agreement through the Effective Time, there shall not have occurred
any change in the financial condition, business or operations of Parent and
its
Subsidiaries, taken as a whole, that would constitute a Parent Material Adverse
Effect.
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SURVIVAL
9.1 Survival
of Representations and Warranties
All
representations, warranties, covenants and agreements in this Agreement or
made
pursuant hereto shall survive the Effective Date, and any investigation thereof,
until the first anniversary of the Effective Date (the “Survival
Period”).
The
Indemnifying Party shall not have any liability under Article
XI
unless a
written claim for indemnification in accordance with Article
XI
is given
by the Indemnified Party to the Indemnifying Party with respect thereto within
the Survival Period.
9.2 Survival
of Covenants and Agreements
The
covenants and agreements of the parties to be performed after the Effective
Time
contained in this Agreement shall survive the Effective Time.
ARTICLE
X
TERMINATION,
AMENDMENT AND WAIVER
10.1 Termination
This
Agreement may be terminated and the Merger may be abandoned at any time prior
to
the Effective Time, whether before or after the Company Shareholders’ Approval
has been obtained:
(a) by
the
mutual written consent of Company and Parent;
(b) by
Parent, upon a breach of any representation, warranty, covenant, obligation
or
agreement on the part of Company set forth in this Agreement or if any
representation or warranty of Company is untrue, in either case such that the
conditions set forth in Section
8.2(a)
or
Section 8.2(b)
would
not be satisfied and such breach or untruth is not curable by Company or if
curable, is not cured within 30 days after notice thereof has been received
by
Company;
(c) by
Company, upon a breach of any representation, warranty, covenant, obligation
or
agreement on the part of Parent or Merger Sub set forth in this Agreement or
if
any representation or warranty of Parent or Merger Sub is untrue, in either
case
such that the conditions set forth in Section 8.3(a)
or
Section
8.3(b)
would
not be satisfied and such breach or untruth is not curable by Parent or Merger
Sub or, if curable, is not cured within 30 days after notice thereof has been
received by Parent;
(d) by
Parent
or Company, if any Governmental Authority or court of competent jurisdiction
shall have adopted any law or amendment to any law or issued any order, decree
or ruling or taken any other action (collectively, “Governmental
Order”)
permanently restraining, enjoining or otherwise prohibiting the Merger and
such
Governmental Order shall have become final and nonappealable, provided that
the
party seeking to terminate this Agreement shall have used all reasonable efforts
to remove or lift such Governmental Order;
(e) by
Parent
or Company, if the Merger has not been consummated on or before January 31,
2007 (the “Optional
Termination Date”);
provided,
however,
that
the right to terminate this Agreement pursuant to this Section 10.1(e)
shall
not be available to any party whose failure or whose Affiliates’ failure to
perform in all material respects any covenant, obligation or agreement hereunder
has been the cause of, or resulted in, the failure of the Merger to occur on
or
before such date;
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(f) by
Parent
or Company, if the Company Shareholders’ Approval is not obtained at the Company
Shareholder Meeting (including any adjournment or postponement
thereof);
(g) by
Parent, if the board of directors of Company (i) fails to recommend, or
withdraws, modifies or changes in any manner adverse to Parent its
recommendation of, this Agreement and the Merger to the shareholders of Company,
(ii) approves or recommends any Acquisition Proposal (other than an Acquisition
Proposal by Parent), (iii) has not sent to its shareholders pursuant to Rule
14e-2 promulgated under the Securities Act a statement disclosing that the
board
of directors of Company recommends rejection of any tender or exchange offer
relating to its securities that has been commenced by a Person unaffiliated
with
Parent within ten Business Days after such tender or exchange offer is first
published, sent or given or (iv) resolves to take any of the actions specified
in clause (i) or (ii) of this Section 10.1(g);
or
(h) by
Company, at any time prior to receipt of the Company Shareholders’ Approval,
upon 48 hours prior written notice to Parent, if (i) a Superior Third Party
Offer has been made and not been withdrawn, (ii) such Superior Third Party
Offer
did not result from a breach of Section 7.2,
and
(iii) Parent does not make, within 48 hours of receipt of Company’s written
notification of its intention to terminate this Agreement, a written offer
that
the board of directors of Company determines in good faith, is at least as
favorable, from a financial point of view, to the shareholders of Company as
such Superior Third Party Offer.
10.2 Effect
of Termination
Except
as
provided in Section 10.3,
if this
Agreement is terminated pursuant to Section 10.1,
this
Agreement shall forthwith become void, there shall be no liability on the part
of the parties hereto or any of their respective officers or directors to any
of
the other parties hereto and all rights and obligations of any party hereto
shall cease, except that (i) this Section 10.2 and Sections 10.3
and
12.8
and the
provisions of Article
XI
shall
survive such termination indefinitely. Notwithstanding the foregoing, neither
the termination of this Agreement nor anything herein will relieve any party
from liability for any willful misrepresentation or inaccuracy in any of its
representations or warranties or any material breach or non-performance of
any
of its covenants or agreements under this Agreement. If it shall be judicially
determined (and such determination shall have become final and nonappealable)
that termination of this Agreement was caused by a willful inaccuracy or breach
of this Agreement, then, in addition to any other remedies at law or equity
for
such inaccuracy or breach of this Agreement, the party so found to have
willfully caused such inaccuracy or breach shall indemnify and hold harmless
the
other parties for their Expenses. For the avoidance of doubt, the Company
Confidentiality Agreement shall survive any termination of this Agreement
pursuant to Section 10.1.
10.3 Fees,
Expenses and Other Payments
(a) Except
as
provided in Section 10.2,
(i) all
Expenses related to printing, filing and mailing the Registration Statement
and
the Proxy Statement/Prospectus and all SEC and other regulatory filing fees
and
solicitation costs incurred by Parent or Company in connection with the
Registration Statement and the Proxy Statement/Prospectus shall be shared
equally by Parent and Company and (ii) all other Expenses incurred by the
parties hereto shall be paid by the party incurring such Expenses.
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(b) If
this
Agreement is terminated pursuant to Section
10.1(b),
Section
10.1(f) or
Section
10.1(g)
and (i)
after the date of this Agreement and prior to such termination an Acquisition
Proposal was made or any proposal or expression of interest by a third Person
regarding an Acquisition Proposal was publicly disclosed in either case that
was
not withdrawn prior to the Company Shareholder Meeting and (ii) within 12 months
after the date of such termination, Company or any of its Subsidiaries enters
into any agreement for a Company Acquisition or consummates a transaction that
constitutes a Company Acquisition, resulting from an Acquisition Proposal
described in clause (i) above, then Company shall, upon consummation of such
a
transaction, pay $1.0 million to Parent by wire transfer in immediately
available funds to an account designated by Parent.
(c) If
this
Agreement is terminated by Parent pursuant to Section
10.1(b)
or
Section 10.1(g),
or by
either the Parent or the Company pursuant to Section
10.1(f),
then
Company shall, within fifteen Business Days following the later of Company’s
receipt of notice of such termination and Company’s receipt of a notice from
Parent setting forth in reasonable detail Parent’s Expenses incurred with
respect to the transaction contemplated by this Agreement, pay to Parent by
wire
transfer in immediately available funds to an account designated by Parent
funds
equal to Parent’s Expenses incurred with respect to the transaction contemplated
by this Agreement as set forth in the notice described above, provided that
in
no event shall Company be required to pay to Parent funds in excess of $1.0
million pursuant to this paragraph.
(d) If
this
Agreement is terminated by Company pursuant to Section 10.1(h),
then, as
a condition to terminating this Agreement, Company shall pay $1.0 million to
Parent by wire transfer in immediately available funds to an account designated
by Parent.
(e) If
either
party shall fail to pay the other party any fee or other amount due hereunder,
the failing party shall pay the costs and expenses (including legal fees and
expenses) of the other party in connection with any action, including the filing
of any lawsuit or other legal action, taken to collect payment, together with
interest on the amount of any unpaid fee or other amount at the publicly
announced prime interest rate of the Chase Manhattan Bank, in effect from time
to time, from the date such fee or other payment was required to be paid until
payment in full.
(f) “Company
Acquisition”
means
any acquisition by a third Person of businesses representing more than 50%
of
Company’s consolidated net revenues or assets representing more than 50% of
Company’s total assets on a consolidated basis, or more than 50% of Company’s
voting capital stock whether by way of merger, amalgamation, arrangement, tender
offer, share exchange, take-over bid, recapitalization, consolidation, sale
of
assets or otherwise or any transaction pursuant to which or as a result of
which
the shareholders of Company immediately preceding such transaction hold less
than 50% of the aggregate voting capital stock of the surviving or resulting
entity in such transaction.
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(g) “Expenses”
means
all reasonable out-of-pocket expenses (including all reasonable fees and
expenses of counsel, accountants, investment bankers, experts and consultants
to
a party hereto and its Affiliates) incurred by a party or on its behalf in
connection with or related to the authorization, preparation, negotiation,
execution and performance of this Agreement, the preparation, printing, filing
and mailing of the Registration Statement, the Proxy Statement/Prospectus,
the
solicitation of shareholder approvals and all other matters related to the
consummation of the transactions contemplated hereby.
INDEMNIFICATION
11.1 Indemnification
Subject
to the terms and conditions of this Article
XI,
Xxxxxxx
Xxxxx (the “Indemnifying
Party”)
agrees
to indemnify, defend and hold harmless Parent, Merger Sub and their respective
Representatives (including the Company) (the “Indemnitees”)
from
and against any and all losses (including diminution of value), liabilities,
obligations, damages (whether compensatory, special, exemplary or otherwise),
deficiencies and expenses (including court costs and reasonable attorneys’,
accountants’ and other experts’ fees and expenses and expenses in investigating,
preparing for and participating in any litigation or proceeding including all
appeals), interest, penalties, amounts paid in settlement, Taxes, fines,
judgments or assessments (“Damages”)
arising out of or resulting from:
(a) the
inaccuracy or breach of any representation or warranty of Company contained
herein or in any certificate or document executed and delivered pursuant to
this
Agreement; and
(b) the
nonfulfillment of any covenant or agreement on the part of Company under the
terms of this Agreement, except the non-fulfillment of any covenant or agreement
of the Company to pay Expenses, fees or other amount payable to Parent under
Article X.
11.2 Method
of Asserting Claims, Etc
A
person
claiming indemnification hereunder is sometimes referred to in this Article
XI
as an
“Indemnified
Party”
All
claims for indemnification by an Indemnified Party under Section
11.1
hereof
shall be asserted and resolved as follows:
(a) If
any
claim or demand for which an Indemnifying Party would be liable for Damages
to
an Indemnified Party hereunder is overtly asserted against or sought to be
collected from such Indemnified Party by a third party (a “Third
Party Claim”),
such
Indemnified Party shall with reasonable promptness (but in no event later than
thirty (30) days after the Third Party Claim is so asserted or sought against
the Indemnified Party) notify in writing the Indemnifying Party of such Third
Party Claim enclosing a copy of all papers served, if any, and specifying the
nature of and specific basis for such Third Party Claim and the amount or the
estimated amount thereof to the extent then feasible, which estimate shall
not
be conclusive of the final amount of such Third Party Claim (the “Claim
Notice”).
Notwithstanding the foregoing, the failure to send or delay in sending a Claim
Notice as provided above shall not relieve the Indemnifying Party from its
obligation to indemnify the Indemnified Party with respect to any such Third
Party Claim, except and only to the extent the Indemnifying Party is materially
prejudiced by such failure or delay. The Indemnified Party shall have the right
to defend all appropriate proceedings related to a Third Party Claim under
this
Article
XI,
including the hiring of counsel reasonably satisfactory to the Indemnifying
Party. The Indemnifying Party may participate in, but not control, any such
defense or settlement provided that it does so at its sole cost and expense.
The
Indemnified Party shall consult with the Indemnifying Party prior to any matter
under this Article
XI being
settled or otherwise compromised. The Indemnifying Party shall make available
to
the Indemnified Party or its Representatives all records and other materials
required by the Indemnified Party and in the possession or under the control
of
the Indemnifying Party, for the use of the Indemnified Party and its
Representatives in defending any such Third Party Clam, and shall in other
respects give reasonable cooperation in such defense.
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(b) If
any
Indemnified Party should have a claim against any Indemnifying Party under
this
Article
XI which
does not involve a Third Party Claim, the Indemnified Party shall, within thirty
(30) days of determining the existence of such claim, but in no event later
than
the expiration of the Survival Period, notify the Indemnifying Party of such
claim, specifying the nature of and specific basis for such claim and the amount
or the estimated amount of such claim (the “Indemnity
Notice”).
The
failure by any Indemnified Party so to notify the Indemnifying Party shall
not
relieve the Indemnifying Party from any liability which it may have to such
Indemnified Party under this Article
XI,
except
and only to the extent that the Indemnifying Party demonstrates that it has
been
actually materially prejudiced by such failure. If the Indemnifying Party does
not notify the Indemnified Party within thirty (30) days from delivery of the
Indemnity Notice that the Indemnifying Party disputes such claim, the amount
or
estimated amount of such claim specified by the Indemnified Party shall be
conclusively deemed a liability of the Indemnifying Party hereunder. If the
Indemnifying Party has timely disputed such claim, the Indemnifying Party and
the Indemnified Party shall proceed in good faith to negotiate a resolution
of
such dispute and, if not resolved through negotiations, such dispute shall
may
be submitted by either party to judicial resolution.
11.3 Satisfaction
of Claims from Escrow Shares.
(a) On
the
Closing Date, Parent, the Indemnifying Party and the Escrow Agent will enter
into an escrow agreement, substantially in the form attached hereto as Exhibit
A
(the “Escrow
Agreement”)
pursuant to which the Parent, on behalf of the Indemnifying Party, shall, at
the
Effective Time, deposit with Xxxx
Xxxx
Xxxx Xxxxxxxxxx & Xxxxxxxxx, P.C.
(the
“Escrow
Agent”)
550,000 shares of Parent Common Stock that would otherwise constitute Merger
Consideration issuable to the Indemnifying Party (the “Escrow
Shares”)
to
secure the Indemnifying Party’s indemnification obligations to Parent under this
Article
XI.
(b) The
indemnification obligations of the Indemnifying Party under this Article
XI
(including with respect to any Third Party Claims) shall be satisfied solely
by
delivery of Escrow Shares to Parent on behalf of the Indemnitee entitled to
indemnification hereunder.
(c) Pursuant
to the provisions of the Escrow Agreement, if Indemnifying Party is determined
have an indemnification obligation pursuant to this Article
XI,
then
the amount due the Indemnified Party hereunder shall be satisfied by the
delivery to Parent on behalf of such Indemnified Party pursuant to the Escrow
Agreement of Escrow Shares equal in value to the amount of the indemnification
obligation to be satisfied, and such obligation shall be deemed paid and
satisfied upon receipt by Parent of certificates representing such number of
Escrow Shares duly endorsed for transfer to Parent. The per share value of
the
Escrow Shares for purposes of this Article
XI
and the
Escrow Agreement shall be the Market Value of the Parent Common Stock on the
date of receipt by the Indemnifying Party of the Indemnity Notice (the
“Notice
Date”).
The
“Market
Value”
of
the
Parent Common Stock as of any such date shall be determined as follows: (i)
in
the event that the Parent Common Stock is listed on a securities exchange or
quoted on the American Stock Exchange, the Market Value of a share of Parent
Common Stock shall be equal to the average closing price for the Parent Common
Stock as quoted by such stock exchange or as reported by the American Stock
Exchange for the 20 business days prior to the Notice Date, (ii) in the event
that the Parent Common Stock is traded in the over-the-counter markets, the
Market Value of a share of Parent Common Stock shall be equal to the average
of
the closing bid and asked prices for a share of Parent Common Stock as reported
in such market for the 20 business days prior to the Notice Date, and (iii)
if
the Parent Common Stock is not traded on any such exchange or markets as of
such
date, then the Market Value of a share of Parent Common Stock shall be equal
to
the fair market value of a share of Parent Common Stock as determined in good
faith by the board of directors of Parent using a customary valuation
method.
Page
- 41
The
Indemnifying Party hereby covenants and agrees that at any time the Indemnifying
Party is obligated to indemnify a Indemnitee for Damages under this Article
XI
and such
Damages are to be paid out of the Escrow Shares, if requested by Parent,
Indemnifying Party shall execute and deliver to the Escrow Agent written
instructions pursuant to the Escrow Agreement to release to the Indemnitee
such
portion of the Indemnity Deposit as is necessary to indemnify the Indemnitee
for
such Damages.
11.5 No
Waiver Relating to Claims for Fraud/Willful Misconduct
The
liability of any party under this Article XI shall be in addition to, and not
exclusive of, any other liability that such party may have at law or in equity
based on such party’s (x) fraudulent acts or omissions or (y) willful
misconduct. None of the provisions set forth in this Agreement shall be deemed
a
waiver by any party to this Agreement of any right or remedy which such party
may have at law or in equity based on any other party’s fraudulent acts or
omissions or willful misconduct nor shall any such provisions limit, or be
deemed to limit, (i) the amounts of recovery sought or awarded in any such
claim
for fraud or willful misconduct, (ii) the time period during which a claim
for
fraud or willful misconduct may be brought, or (iii) the recourse which any
such
party may seek against another party with respect to a claim for fraud or
willful misconduct.
ARTICLE
XII
MISCELLANEOUS
12.1 Notices
All
notices or communications hereunder shall be in writing (including facsimile
or
similar writing) addressed as follows:
To
Parent
or Merger Sub:
Page
- 42
0
Xxxxxxxxx Xxxxx Xxxx
Xxxxx
000
Xxxxxxxxx,
XX 00000
Attention:
X. Xxxx Xxxxx
Facsimile
No.: (000) 000-0000
With
a
copy (which shall not constitute notice) to:
Xxxxxx
& Xxxxxx L.L.P.
0000
Xxxxxx Xx., Xxxxx 0000
Xxxxxxx,
XX 00000-0000
Attention:
Xxxxxx X. Xxxxxx
Facsimile
No.: (000) 000-0000
To
Company:
Brek
Energy Corporation
c/o
Xxxx
XxXxxxxx
0000
Xxxxxxxx Xxxxxx, Xxxxx 000
Xxxxxxxxx,
XX X0X A46
Facsimile
No.: x0 000 000 0000
With
a
copy (which shall not constitute notice) to:
Xxxxxxxxxx
& Xxxxx LLP
The
Chrysler Building
000
Xxxxxxxxx Xxxxxx
00xx
Xxxxx
Xxx
Xxxx
XX 00000
Attention:
Xxxxx Xxxxxxxx, Esq.
Facsimile
No.: (000) 000-0000
Any
such
notice or communication shall be deemed given (i) when made, if made by hand
delivery, and upon confirmation of receipt, if made by facsimile, (ii) one
Business Day after being deposited with a next-day courier, postage prepaid,
or
(iii) three Business Days after being sent certified or registered mail, return
receipt requested, postage prepaid, in each case addressed as above (or to
such
other address as such party may designate in writing from time to
time).
12.2 Separability
If
any
provision of this Agreement shall be declared to be invalid or unenforceable,
in
whole or in part, such invalidity or unenforceability shall not affect the
remaining provisions hereof which shall remain in full force and
effect.
12.3 Assignment
This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, legal representatives, successors, and assigns;
provided, however, that neither this Agreement nor any rights hereunder shall
be
assignable or otherwise subject to hypothecation and any assignment in violation
hereof shall be null and void.
Page
- 43
The
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this
Agreement.
12.5 Counterparts
This
Agreement may be executed in one or more counterparts, all of which shall be
considered one and the same Agreement, and shall become effective when one
or
more such counterparts have been signed by each of the parties and delivered
to
each party.
12.6 Entire
Agreement
This
Agreement (including the Company Disclosure Schedule), the Voting Agreement
and
the Confidentiality Agreement represent the entire Agreement of the parties
with
respect to the subject matter hereof and shall supersede any and all previous
contracts, arrangements or understandings between the parties hereto with
respect to the subject matter hereof.
12.7 Governing
Law
This
Agreement shall be construed, interpreted, and governed in accordance with
the
laws of Nevada, without reference to rules relating to conflicts of
law.
12.8 Attorneys’
Fees
If
any
action at law or equity, including an action for declaratory relief, is brought
to enforce or interpret any provision of this Agreement, the prevailing party
shall be entitled to recover reasonable attorneys’ fees and expenses from the
other party, which fees and expenses shall be in addition to any other relief
which may be awarded.
12.9 No
Third Party Beneficiaries
No
Person
other than the parties hereto is an intended beneficiary of this Agreement
or
any portion hereof.
12.10 Amendments
and Supplements
At
any
time before or after approval of the matters presented in connection with the
Merger by the shareholders of Company and prior to the Effective Time, this
Agreement may be amended or supplemented in writing by Parent and Company with
respect to any of the terms contained in this Agreement, except as otherwise
provided by law; provided, however, that following approval and adoption of
this
Agreement by the shareholders of Company there shall be no amendment or change
to the provisions without the further approval of the shareholders of Company
unless permitted by the NRS.
12.11 Extensions,
Waivers, Etc
At
any
time prior to the Effective Time, either party may:
(a) extend
the time for the performance of any of the obligations or acts of the other
party;
(b) waive
any
inaccuracies in the representations and warranties of the other party contained
herein or in any document delivered pursuant hereto; or
(c) subject
to the proviso of Section
12.10
waive
compliance with any of the agreements or conditions of the other party contained
herein.
Notwithstanding
the foregoing, no failure or delay by Parent or Company in exercising any right
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 hereunder. Any agreement on the part of a party hereto to
any
such extension or waiver shall be valid only if set forth in an instrument
in
writing signed on behalf of such party.
Page
- 44
IN
WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the
day and year first above written.
GASCO
ENERGY, INC.
By:
________________________
Name:
Xxxx X. Xxxxxxxx
Title:
President and Chief Executive Officer
GASCO
ACQUISITION, INC.
By:
________________________
Name:
Xxxx X. Xxxxxxxx
Title:
President
BREK
ENERGY CORPORATION
By:
________________________
Name:
Xxxxxxx X. Xxxxx
Title:
President, Chief Executive Officer and
Chief
Financial Officer
Page
- 45
Exhibit
7.13
Form
of Affiliate Agreement
Gasco
Energy, Inc.
0
Xxxxxxxxx Xxxxx Xxxx
Xxxxx
000
Xxxxxxxxx,
XX 00000
Gentlemen:
Reference
is made to the Agreement and Plan of Merger (the “Merger
Agreement”)
dated
as of September 20, 2006 by and among Gasco Energy, Inc., a Nevada corporation
(“Parent”),
Gasco
Acquisition, Inc., a Nevada corporation and a wholly-owned subsidiary of Parent
(“Merger
Sub”)
and
Brek Energy Corporation, a Nevada corporation (“Company”),
pursuant to which Parent will acquire Company through the merger of Merger
Sub
with and into Company. Capitalized terms used, but not otherwise defined herein,
shall have the meanings set forth in the Merger Agreement. Pursuant to the
terms
and conditions of the Merger Agreement, upon consummation of the transactions
contemplated thereby, each share of Common Stock, par value $.001 per share,
of
Company owned by the undersigned as of the Effective Time will be
converted into and exchangeable for Merger Consideration.
The
undersigned understands that he/she may be deemed to be an “affiliate” of
Company for purposes of Rule 145 promulgated under the Securities Act of 1933,
as amended (the “Act”).
The
undersigned is delivering this letter of undertaking and commitment pursuant
to
Section 7.14 of the Merger Agreement.
With
respect to such shares of Parent Common Stock as may be received by the
undersigned pursuant to the Merger Agreement (the “Shares”),
the
undersigned represents to and agrees with Parent that:
A. The
undersigned will not make any offer to sell or any sale or other disposition
of
all or any part of the Shares in violation of the Act or the rules and
regulations thereunder, including Rule 145, and will hold all the Shares subject
to all applicable provisions of the Act and the rules and regulations
thereunder.
B. The
undersigned has been advised that the offering, sale and delivery of the Shares
to the undersigned pursuant to the Merger Agreement will be registered under
the
Act on a Registration Statement on Form S-4. The undersigned has also been
advised, however, that, since the undersigned may be deemed an “affiliate” of
Company, any public reoffering or resale by the undersigned of any of the Shares
will, under current law, require either (i) the further registration under
the
Act of the Shares to be sold, (ii) compliance with Rule 145 promulgated under
the Act (permitting limited sales under certain circumstances) or (iii) the
availability of another exemption from registration under the Act.
Page
- 46
C. The
undersigned also understands that, if Parent should deem it necessary to comply
with the requirements of the Act, stop transfer instructions will be given
to
its transfer agents with respect to the Shares and that there will be placed
on
the certificates for the Shares, or any substitutions therefor, a legend stating
in substance:
“The
securities represented by this certificate were issued in a transaction under
Rule 145 promulgated under the Securities Act of 1933, as amended (the
“Act”),
and
may be sold, transferred or otherwise disposed of only upon receipt by the
Corporation of an opinion of counsel acceptable to it that the securities are
being sold in compliance with the limitations of Rule 145 or that some other
exemption from registration under the Act is available, or pursuant to a
registration statement under the Act.”
Execution
of this letter shall not be considered an admission on the part of the
undersigned that the undersigned is an “affiliate” of Company for purposes of
Rule 145 under the Act or as a waiver of any rights the undersigned may have
to
any claim that the undersigned is not such an affiliate on or after the date
of
this letter.
Very
truly yours,
________________________________
Signature
________________________________
Name
________________________________
Date
Page
- 47
GLOSSARY
OF DEFINED TERMS
| Acquisition Proposal |
29
|
Hazardous Substances |
15
|
| Agreement |
1
|
Hedging Transaction |
20
|
| Audit |
14
|
Hydrocarbons |
18,
26
|
| Business Day |
5
|
Liens |
11
|
| Closing |
7
|
Merger |
1
|
| Closing Date |
8
|
Merger Consideration |
3
|
| Code |
1
|
Merger Sub |
1
|
| Company |
1
|
Merger Sub Common Stock |
3
|
| Company Acquisition |
38
|
NRS |
1
|
| Company Common Stock |
3
|
Oil and Gas Interests |
18,
27
|
| Company Disclosure Schedule |
8
|
Optional Termination Date |
36
|
| Company Material Adverse Effect |
8
|
Parent |
1
|
| Company Payout Balances |
19
|
Parent Common Stock |
3
|
| Company Reserve Report |
18
|
Parent Disclosure Schedule |
21
|
| Company SEC Reports |
11
|
Prent
Market Price
|
7
|
| Company Shareholder Meeting |
31
|
Parent Material Adverse Effect |
21
|
| Company Shareholders’ Approval |
20
|
Parent SEC Reports |
24
|
| Company Stock Option Plans |
6
|
Permits |
17
|
| Company Stock Options |
6
|
Person |
6
|
| Confidentiality Agreement |
28
|
Registration Statement |
20
|
|
Effective
Time
|
1
|
SEC |
10,
11
|
| Enforceability Exception |
10
|
Securities Act |
11
|
| Environmental Laws |
15
|
Stock Certificate |
3
|
| ERISA |
15
|
Subsidiary |
8
|
| Exchange Act |
10
|
Substitute Option |
6
|
| Exchange Agent |
5
|
Substitute Warrant |
7
|
| Exchange Fund |
5
|
Superior Third Party Offer |
29
|
| Exchange Ratio |
3
|
Surviving Corporation |
1
|
| Expenses |
33,
38
|
Tax Authority |
14
|
| GAAP |
11
|
Tax Returns |
14
|
| Good and Marketable Title |
17
|
Taxes |
14
|
| Governmental Authority |
10
|
Voting Agreement |
1
|
| Governmental Order |
36
|
Warants
|
7
|
Page
- 48
FORM
OF
ESCROW
AGREEMENT
THIS
ESCROW AGREEMENT (this “Escrow Agreement”) is made effective as of ________,
2006 (the “Effective Date”) by and among Gasco Energy Inc., a Nevada corporation
(the “Parent”), Xxxxxxx X. Xxxxx (the “Indemnifying Party) and Xxxx Xxxx Xxxx
Xxxxxxxxxx & Xxxxxxxxx, P.C. (“Escrow Agent”).
R
E C I T A L S
WHEREAS,
Parent, Gasco Acquisition, Inc., a Nevada corporation (the “Merger
Sub”),
and
Brek Energy Corporation, a Nevada corporation (the “Company”),
are
parties to an Agreement and Plan of Merger dated September 20, 2006 (the
“Merger
Agreement”)
providing for, among other things, the merger of Merger Sub with and into
Company;
WHEREAS,
all shares of common stock of the Company, par value $0.001 per share, have
been
converted into shares of Parent’s Common Stock, par value $0.0001 per share (the
“Common
Stock”),
pursuant to the Merger Agreement;
WHEREAS,
the Merger Agreement sets forth certain general terms of the Indemnifying
Party’s indemnification of Parent, Merger Sub, and their respective
Representatives (including the Company) (the “Indemnified
Parties”);
WHEREAS,
pursuant to the Merger Agreement, Parent is authorized to withhold from the
shares of Parent’s Common Stock issuable to the Indemnifying Party in exchange
for its shares of the Company an aggregate of 550,000 such shares (the
“Escrow
Shares”)
and to
deliver the Escrow Shares to Escrow Agent issued in Escrow Agent’s or its
nominee’s name; and
WHEREAS,
Parent and the Indemnifying Party have requested the Escrow Agent to act in
the
capacity of escrow agent under this Escrow Agreement, and the Escrow Agent,
subject to the terms and conditions hereof, has agreed so to do.
NOW,
THEREFORE, for and in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the
parties hereto agree as follows:
T
E R M S OF E S C R O W A G R E E M E N T
1. Deposit
of Escrow Shares.
As
promptly as practicable after the Effective Date, Parent shall deliver the
Escrow Shares, registered in the name of the Escrow Agent, to the Escrow Agent
to be deposited, held and disbursed strictly in accordance with the terms of
this Escrow Agreement. Escrow Agent hereby agrees to accept the Escrow Shares
upon and subject to the terms and conditions hereof.
Page
- 49
2. Escrow
Account.
(a) The
Escrow Shares shall be held in an account (the “Escrow
Account”)
with
the Escrow Agent. If cash dividends or other cash distributions are paid with
respect to the Escrow Shares, Escrow
Agent shall invest and reinvest the cash in an interest bearing money market
account. The Escrow Agent or any of its affiliates may receive compensation
with
respect to any investment directed hereunder. It is expressly agreed and
understood by the parties hereto that Escrow Agent shall not in any way
whatsoever be liable for losses on any investments, including, but not limited
to, losses from market risks due to premature liquidation or resulting from
other actions taken pursuant to this Escrow Agreement. The
dividends and other cash distributions received in respect of the Escrow Shares,
together with all interest earned thereon are collectively referred to herein
as
the “Escrow
Funds”
and
shall become part of the Escrow Account. Any stock dividends, stock split shares
or other securities received in respect of, or in exchange for, the Escrow
Shares shall be deemed to also be “Escrow Shares” and a part of the Escrow
Account.
(b) The
Escrow Account shall be in the name of the Indemnifying Party.
(c) The
Escrow Account shall be under the sole control of the Escrow Agent (subject
to
the terms of this Escrow Agreement), and designated signers of Escrow Agent
shall have the sole and exclusive authority to transfer Escrow Shares, draw
checks or make withdrawals on the Escrow Account.
A
monthly
statement detailing the contents of, and transactions in, the Escrow Account
shall be sent to each of the Parent and the Indemnifying Party.
Receipt,
investment and reinvestment of the Escrow Funds shall be confirmed by Escrow
Agent as soon as practicable by account statement, and any discrepancies in
any
such account statement shall be noted by Parent and Indemnifying Party to Escrow
Agent within 30 calendar days after receipt thereof. Failure to inform Escrow
Agent in writing of any discrepancies in any such account statement within
said
30-day period shall conclusively be deemed confirmation of such account
statement in its entirety.
(d) Parent
shall not have any responsibility or liability for the security of any Escrow
Shares or Escrow Funds in the Escrow Account or for calculating, reporting,
or
paying any interest on the Escrow Account. Moreover, Parent shall not have
any
responsibility or liability for the amount of interest paid by the Escrow Agent
on the Escrow Account. Parent shall not have any responsibility or liability
for, or with respect to, any loss or damage resulting from any failure, refusal
or inability of the Escrow Agent to transfer the Escrow Shares or to disburse,
or allow for withdrawal of, the Escrow Funds upon proper authorization or
direction.
(e) Escrow
Agent may make transfers or disbursements from the Escrow Account without regard
to how the timing of such transfers or disbursements may affect the amount
of
interest paid on the Escrow Account.
(f) Until
the
Escrow Shares are distributed under this Escrow Agreement, the Indemnifying
Party shall be entitled to exercise all voting and consensual powers and rights
pertaining such Escrow Shares, or any part thereof, for all purposes not
inconsistent with the terms of this Escrow Agreement.
Page
- 50
(g) The
Escrow Shares shall be appropriately adjusted so as to take into account stock
splits, stock dividends, reverse stock splits and other similar changes
affecting the outstanding shares of Parent Common Stock.
3. Disbursement
of Escrow Shares and Escrow Funds.
The
Escrow Agent is hereby authorized to transfer the Escrow Shares and to release
and deliver the Escrow Funds, only as follows:
(a) If
Parent
and the Indemnifying Party instruct Escrow Agent jointly in writing, or if
Parent provides Escrow Agent with a copy of a written decision by arbitrators
of
the American Arbitration Association or a judgment, decree or order of a court
(whether or not appealable) awarding payment to the Parent, Escrow Agent shall
promptly transfer Escrow Shares and/or disburse Escrow Funds as so directed
or
ordered.
(b) If
Parent
believes it is entitled to transfer of Escrow Shares and/or disbursement from
the Escrow Funds pursuant to the Merger Agreement, Parent will submit prior
to
5:00 p.m. MDT on the day before the Distribution Date (as defined below) to
the
Indemnifying Party and the Escrow Agent an affidavit. The affidavit will be
executed by Parent setting forth: (i) the amount of Escrow Shares and/or Escrow
Funds to be transferred to Parent and (ii) the specific provision under the
Merger Agreement that entitles Parent to receive such amount of Escrow Shares
from the Escrow Account. The Escrow Agent shall transfer the Escrow Shares
and/or disburse the Escrow Funds from the Escrow Account as directed by Parent
on the eleventh (11th)
day
after receipt of the affidavit by Escrow Agent. Provided, however, if Escrow
Agent receives a notice from the Indemnifying Party prior to 5:00 p.m. MDT
on
the tenth (10
th)
day
after receipt of the affidavit by Escrow Agent that he intends to dispute the
claim for payment in the affidavit, Escrow Agent shall not pay any amount on
such claim until instructed jointly in writing by both Parent and the
Indemnifying Party or Parent provides Escrow Agent with a copy of a written
decision by arbitrators of the American Arbitration Association or a judgment,
decree or order of a court (whether or not appealable) awarding Parent such
payment.
(c) On
the
first anniversary of the Effective Date (the “Distribution
Date”),
Escrow Agent shall disburse to the Indemnifying Party all remaining Escrow
Shares and Escrow Funds less the total amount of any unresolved claim(s) as
to
which an affidavit has been provided under Section 3(b). Any Escrow Shares
and
Escrow Funds remaining in escrow after such claim(s) have been satisfied shall
be disbursed to the Indemnifying Party promptly after the time of
satisfaction.
(d) Whenever
this Section 3 requires disbursement to the Indemnifying Party, the Escrow
Agent
shall transfer Escrow Shares and/or disburse Escrow Funds to the Indemnifying
Party at the address provided herein.
(e) Whenever
this Escrow Agreement permits a disbursement from escrow of a certain sum and
Escrow Shares will be transferred in satisfaction thereof, the number of
Escrowed Shares to be disbursed in satisfaction shall equal the certain sum
divided by the per share value of the Escrowed Shares. The per share value
of
the Escrow Shares shall be the Market Value of the Parent Common Stock on the
date of receipt by the Indemnifying Party of the Indemnity Notice (the
“Notice
Date”).
The
“Market Value” of the Common Stock as of any such date shall be determined as
follows: (i) in the event that the Common Stock is listed on a securities
exchange or quoted on the American Stock Exchange, the Market Value of a share
of Common Stock shall be equal to the average closing price for the Common
Stock
as quoted by such stock exchange or as reported by the American Stock Exchange
for the 20 business days prior to the Notice Date, (ii) in the event that the
Common Stock is traded in the over-the-counter markets, the Market Value of
a
share of Common Stock shall be equal to the average of the closing bid and
asked
prices for a share of Common Stock as reported in such market for the 20
business days prior to the Notice Date, and (iii) if the Common Stock is not
traded on any such exchange or markets as of such date, then the Market Value
of
a share of Common Stock shall be equal to the fair market value of a share
of
Common Stock as determined in good faith by the board of directors of Parent
using a customary valuation method.
Page
- 51
4. Exculpation
Provisions for Escrow Agent.
(a) It
is
agreed that (i) Escrow Agent shall in no case or event be liable for any direct
or indirect damage caused by the exercise of Escrow Agent’s discretion in any
particular manner, or for any other reason, except gross negligence or a willful
breach with reference to its duties hereunder; (ii) Escrow Agent shall not
be
liable or responsible for the sufficiency or correctness as to form, manner
of
execution, or validity of any instrument tendered to Escrow Agent hereunder,
nor
as to identity, authority, or rights of any person executing the same; and
(iii)
Escrow Agent shall not be liable or responsible for Escrow Agent’s failure to
ascertain the terms or conditions, or to comply with any of the provisions
of
any agreement, contract or other documents other than its instructions contained
herein as amended from time to time in accordance with the terms
hereof.
(b) Parent
and Indemnifying Party hereby jointly and severally covenant and agree to
indemnify and hold Escrow Agent harmless from and against any and all losses,
costs, damages or expenses (including reasonable attorneys’ fees) it may sustain
by reason of its service as escrow agent hereunder, except if such loss, costs,
damages or expenses (including attorneys’ fees) are incurred by reason of a
willful breach of Escrow Agent’s obligations hereunder or gross negligence on
its part, and any such indemnification from the indemnifying parties shall
be
charged to and set-off and paid from the Escrow Fund.
(c) In
the
event of any disagreement between the parties to this Escrow Agreement resulting
in adverse claims or demands being made in connection with the Escrow Shares
or
the Escrow Funds, or in the event that Escrow Agent, in good faith, shall be
in
doubt as to what action it should take hereunder, Escrow Agent may, at its
option, refuse to comply with any requests, claims or demands relating to this
Escrow Agreement, so long as such disagreements continue or such doubt exists,
and in any such event, Escrow Agent shall be entitled to continue to refrain
from acting until (i) the rights to the Escrow Shares or the Escrow Funds shall
have been fully and finally adjudicated by a court of competent jurisdiction,
or
(ii) all differences shall have been adjusted and all doubt resolved by written
agreement among all of the persons making requests, claims or demands with
respect to the Escrow Shares or the Escrow Funds, and Escrow Agent shall have
been notified thereof in writing signed by all such persons. In connection
with
any such disagreement as aforesaid, Escrow Agent shall have the right to
institute a xxxx of interpleader, and any costs so incurred by Escrow Agent
may
be payable out of the Escrow Shares or the Escrow Funds. The rights of Escrow
Agent under this paragraph are cumulative of all other rights that it may have
by law or otherwise and shall survive the termination of this Escrow
Agreement.
Page
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5. Replacement
of Escrow Agent.
(a) At
any
time during the term of this Escrow Agreement, Escrow Agent may resign and
be
discharged of the obligations created by this Escrow Agreement by executing
and
delivering to Parent and the Indemnifying Party, at least forty-five (45) days’
advance written notice of its resignation as Escrow Agent and specifying the
date when such resignation is to take effect. Any resignation of Escrow Agent
shall not become effective until the earlier to occur of (a) acceptance of
appointment by the successor Escrow Agent or (b) 90 days after Escrow Agent’s
notice of resignation.
(b) Escrow
Agent may be removed at any time by Parent or the Indemnifying Party by a
written notice executed by one party to Escrow Agent and the other party,
whereupon a successor Escrow Agent shall be appointed pursuant to subparagraph
(d) below.
(c) If
Escrow
Agent shall otherwise be removed, or be dissolved, or if its property or affairs
shall be taken under the control of any state or federal court or administrative
body or agency because of insolvency or bankruptcy or for any other reason,
a
vacancy shall forthwith exist in the office of Escrow Agent, and a successor
shall be appointed pursuant to subparagraph (d) below.
(d) In
the
event of the removal or resignation of the Escrow Agent pursuant to
subparagraphs (a), (b) or (c) above, Parent and the Indemnifying Party shall
endeavor in good faith to agree upon a successor Escrow Agent to be appointed
by
written instrument, one copy of which instrument shall be delivered to the
predecessor Escrow Agent, the successor Escrow Agent, Parent and the
Indemnifying Party.
(e) Upon
the
acceptance of appointment by the successor Escrow Agent, the predecessor Escrow
Agent shall be compensated by Parent for any remaining reasonable out-of-pocket
expenses for which it has not been previously reimbursed, but shall not
thereafter be entitled to any further reimbursement or compensation for its
former duties as Escrow Agent hereunder.
(f) Any
successor Escrow Agent appointed hereunder shall execute, acknowledge and
deliver to Parent and the Indemnifying Party an instrument accepting such
appointment hereunder, and thereupon such successor Escrow Agent, without any
further act shall become duly vested with all of the property, rights, powers,
trusts, duties and obligations of its predecessor hereunder, with the same
effect as if originally named Escrow Agent.
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6. Miscellaneous.
(a) All
charges, fees and expenses of Escrow Agent incurred in connection with this
Escrow Agreement shall be paid by Parent. Parent agrees
to
pay Escrow Agent for its services hereunder and to pay all expenses incurred
by
Escrow Agent in connection with the performance of its duties and enforcement
of
its rights hereunder and otherwise in connection with the preparation,
operation, administration and enforcement of this Escrow Agreement, including,
without limitation, attorneys’ fees, brokerage costs and related expenses
incurred by Escrow Agent.
(b) Release
of the Escrow Funds pursuant to this Escrow Agreement shall not in any way
constitute a cure or waiver of any breach of representation, warranty or
covenant under the Merger Agreement or invalidate any act done pursuant to
any
notice of default or prejudice either Parent or the Indemnifying Party in the
exercise of any of their respective rights under the Merger Agreement or
applicable law. Parent and the Indemnifying Party further acknowledge and agree
that the rights and remedies of the parties under this Escrow Agreement are
in
addition to, and not in derogation of, the rights and remedies arising under
the
Merger Agreement.
(c) Any
notice or other communication required or permitted to be given under this
Escrow Agreement by any party hereto to any other party hereto shall be
considered as properly given if in writing and (a) delivered against receipt
therefor, (b) mailed by registered or certified mail, return receipt requested
and postage prepaid or (c) sent by telefax machine, in each case to the address
or telefax number, as the case may be, set forth below:
Parent: Gasco
Energy, Inc.
0
Xxxxxxxxx Xxxxx Xxxx
Xxxxx
000
Xxxxxxxxx,
XX 00000
Attention:
X. Xxxx Xxxxx
Facsimile
No.: (000) 000-0000
With
a
copy to: Xxxxxx
& Xxxxxx L.L.P.
0000
Xxxxxx Xx., Xxxxx 0000
Xxxxxxx,
XX 00000-0000
Attention:
Xxxxxx X. Xxxxxx
Facsimile
No.: (000) 000-0000
Indemnifying
Party: Xxxxxxx
X. Jeffs
xxxx@xxxxxxx.xxx
Phone:
x00 (0)00 0000 0000
x0
000
000 0000
c/o
Xxxx
XxXxxxxx
0000
Xxxxxxxx Xxxxxx, Xxxxx 000
Xxxxxxxxx,
XX X0X A46
Fax:
x0
000 000 0000
Page
- 54
With
a
copy to: Xxxxxxxxxx
& Xxxxx LLP
The
Chrysler Building
000
Xxxxxxxxx Xxxxxx
00xx
Xxxxx
Xxx
Xxxx
XX 00000
Attention:
Xxxxx Xxxxxxxx, Esq.
Facsimile
No.: (000) 000-0000
Escrow
Agent: Xxxx Xxxx Xxxx Xxxxxxxxxx & Xxxxxxxxx,
P.C.
000
Xxxxxxx Xxxxxx, Xxxxx
000
Xxxxxx,
XX 00000
Attention:
Xxx X. Xxxxxxxxx
Facsimile
No.: (000)
000-0000
(d) This
Escrow Agreement shall be governed by the laws of the State of Nevada.
(e) The
provisions of this Escrow Agreement may be amended only by a written agreement
signed by or on behalf of Parent, the Indemnifying Party and Escrow
Agent.
(f) All
obligations of the parties to this Escrow Agreement are performable in the
City
and County
of
Denver,
State
of Colorado.
Venue
of any litigation arising out of this Escrow Agreement shall be brought in
a
court of competent jurisdiction in the
District Court, City and County
of
Denver, Colorado or,
if
subject matter and personal jurisdiction exists, in the United States District
Court for
the
District
of Colorado.
All
parties hereto agree that the
City
and County
of
Denver, Colorado,
and the
aforesaid Federal Court bear a substantial relationship to the transaction
made
the subject of the Merger Agreement and to this Escrow Agreement, and that
specifying such County and State, and Federal Court, as the forum for any
litigation arising out of this Escrow Agreement comports with substantial
notions of justice and fair play, including but not limited to factors involved
in the Doctrine of Forum Non Conveniens.
(g) This
Escrow Agreement may be executed by the parties hereto in one or more separate
counterparts, each of which shall be deemed an original but all of which
together shall constitute but one agreement.
(h) This
Escrow Agreement evidences the entire agreement between the undersigned relating
to the manner of holding and the disbursement of the Escrow Shares and the
Escrow Funds and supersedes all prior agreements, understandings, negotiations
and discussions, oral or written, of the parties relating to such subject
matter.
(i) The
terms
of this Escrow Agreement shall be binding upon and shall inure to the benefit
of
Parent, the Indemnifying Party and Escrow Agent and their respective successors
and assigns, including any debtor in possession or bankruptcy trustee acting
for
any of said parties.
(j) Time
is
of the essence of this Escrow Agreement and all time periods
hereunder.
Page
- 55
(k) In
the
event of any litigation arising out of this Escrow Agreement, the losing party
agrees to indemnify and reimburse the prevailing party and Escrow Agent for
any
costs and expenses incurred in such litigation, including reasonable attorney’s
fees and costs of court.
(l) Upon
final disbursement of the Escrow Shares and the Escrow Funds in accordance
with
the terms hereof, this Escrow Agreement shall terminate and no parties hereunder
shall have any further rights or obligations hereunder;
provided,
however,
that in
the event all fees, expenses, costs and other amounts required to be paid to
Escrow Agent hereunder are not fully and finally paid prior to termination,
the
provisions of Section 4(b) and 6(a) hereof shall survive the termination hereof
until such amounts have been paid.
(m) This
Escrow Agreement may be executed in counterparts, each of which shall be deemed
an original, but all of which shall constitute the full and complete Escrow
Agreement. All signatures of the parties to this Escrow Agreement may be
transmitted by facsimile, and such facsimile will, for all purposes, be deemed
to be the original signature of such party whose signature it reproduces, and
will be binding upon such party.
(n) In
the
event funds transfer instructions are given (other than in writing at the time
of execution of the Escrow Agreement), whether in writing, by telefax, or
otherwise, the Escrow Agent is authorized to seek confirmation of such
instructions by telephone call-back to the person or person designated on
Schedule
I
hereto,
and the Escrow Agent may rely upon the confirmations of anyone purporting to
be
the person or persons so designated. The persons and telephone numbers for
call-backs may be changed only in writing actually received and acknowledged
by
the Escrow Agent. The parties to this Escrow Agreement acknowledge that such
security procedure is commercially reasonable.
It
is
understood that the Escrow Agent and the beneficiary’s bank in any funds
transfer may rely solely upon any account numbers or similar identifying number
provided by either of the other parties hereto to identify (i) the beneficiary,
(ii) the beneficiary’s bank, or (iii) an intermediary bank. The Escrow Agent may
apply any of the escrowed funds for any payment order it executes using any
such
identifying number, even where its use may result in a person other than the
beneficiary being paid, or the transfer of funds to a bank other than the
beneficiary’s bank or an intermediary bank, designated.
(o) The
Escrow Agent has acted as legal counsel for Parent, and may continue to act
as
legal counsel for Parent, from time to time, notwithstanding its duties as
Escrow Agent hereunder. Indemnifying Party consents to Escrow Agent in such
capacity as legal counsel for Parent and waives any claim that such
representation represents a conflict of interest on the part of Escrow Agent.
Indemnifying Party understands that Parent and Escrow Agent are relying
explicitly on the foregoing provision in entering into this Escrow
Agreement.
Page
- 56
IN
WITNESS WHEREOF, Parent, the Indemnifying Party and the Escrow Agent have
executed this Escrow Agreement to be effective as of ____________,
2006.
GASCO
ENERGY INC.
By:
________________________
Print
Name: Xxxx X. Xxxxxxxx
Title:
President and Chief Executive Officer
XXXXXXX
X. XXXXX
By: ________________________
Print
Name: Xxxxxxx X. Xxxxx
ESCROW
AGENT:
By: ________________________
Print
Name: Xxx X. Xxxxxxxxx
Title:
Authorized Officer
Page
- 57
